7 Top Challenges in Mergers & Acquisitions and How to Solve Them

Experience shows that M&A is a process fraught with challenges.

Even otherwise highly competent CXOs at S&P 100 companies are prone to destroying billions in value in dealmaking. It doesn’t need to be like this.

This article will show how new technologies and methodologies are changing the game fo M&A practitioners.

Overview of the M&A landscape

Although most historians agree that M&A has a history going back at least as far as the mid-1800s, the first great merger wave occurred between 1893 and 1904. This wave was dominated by horizontal mergers (insert link) in the transportation and manufacturing sectors, where economies of scale gave merging companies a competitive advantage. From these relatively small beginnings, M&A grew into a global phenomenon.

By the beginning of the 21st century, M&A was already in the fifth wave, that of the ‘mega deals,’ large multi-billion dollar deals, many of which remain among the biggest to this day. Deals were always conducted in-person, the cloud still hadn’t been conceived, and due diligence involved scanning physical copies of documents, or for the more sophisticated, hawking heavy hard disks around.

The sheer inconvenience of this process tended to stifle the due diligence process. Once technology moved on, however, it wasn’t just convenience that received a boost. With enhanced technology such as faster processors, more sophisticated software, and cloud storage, the efficacy of due diligence moved to a new level. High-level challenges solved for the M&A process in the last 15 years alone include:

• Increased visibility of deals and intermediaries through online dealmaking platforms, reducing the challenge of deal origination;
• Widespread use of the cloud, enabling instantaneous sharing of big data across geographical boundaries;
• Far more accurate and up-to-date market information, reducing the risks of only using yearly annual reports;
• Enhanced cross-cultural collaboration, reducing the numerous cultural challenges of working on cross-border deals;
• Better valuation methodologies, as newer generations have better insights into the life cycle of technology firms than existed 15 years ago.

Challenges in M&A

The scale of M&A deals means that, where challenges aren’t overcome, billions of dollars in value can be destroyed within a short period of time.

One Harvard Business Review paper states that between 70% and 90% of acquisitions fail.

If this seems high, it’s worth remembering how many metrics on which a large deal can be measured.

Experience shows that the 5 largest challenges of M&A are:

1. Inability to identify a deal’s value drivers
2. Inability to measure synergies between two or more companies
3. Failure to address cultural differences at the integration phase
4. Inadequate due diligence
5. Underestimating small details

When M&A industry analysts talk about ‘value destruction’ because of poorly executed deals, they’re referring to the value of a company reduced as a direct consequence of a deal (deals only exist to generate value, after all).

The challenges above are among the most common. Aside from the massive financial problems caused by poor execution, there are also issues such as decreased morale within companies, stifled innovation, friction at board level, and more.

Identifying these challenges is not the same as addressing them, however.

Traditional M&A processes - the methods of ‘doing it the way it’s always been done’- are often the hidden snag in a process that involves several phases and thousands of pages of documents.

Additionally, this claim is further supported by Accenture's M&A success factor analysis:

This reality - that deals could be executed better and therefore should be executed better, led to the development of the Agile M&A concept.

Addressing the 5 Major Challenges in M&A

1. Inability to identify a deal’s value drivers

Microsoft’s $7.9 billion acquisition of Nokia in 2014 provides a case book study of failing to see at the outset why a deal is doomed.

Although hindsight is 20-20 vision, Microsoft’s then CEO Steve Ballmer has subsequently admitted that the deal was focused almost entirely on bringing hardware (Nokia handsets) together with software (Microsoft Windows).

Clearly, that underestimates a range of factors such as the importance of carriers working with the phone maker, the exponential growth of apps at that time, Nokia’s dismal performance in emerging markets, and that Google OS was already dominating handset operating systems in a way that mimicked Microsoft Windows in the 1980s and 1990s.

There were murmurs within Microsoft that the deal was not a good idea from the outset. But if those voices had taken a more holistic approach, showing where deal value would be made and lost, the rational voices in the room may have been heard.

This is one of the strengths of a system like Agile M&A – the data, rather than the big personalities in the room, does the talking.

2. Inability to measure synergies between two or more companies

An often-cited piece of McKinsey research (health warning: the research is from 2004) notes that 70% of deals fail to achieve their predicted synergies. While a good proportion of this can be put down to CXOs overstating the synergies of a deal to justify it to shareholders and market analysts, even the most well intended synergies have a habit of not being recognized.

The reason depends on the deal, but as always, it comes down to details. Synergies do not form in the ether – they need to be worked out by both sides.

While traditional M&A set a 12 to 36-month period to achieve the synergies, it is now recognized as being too rigid to account for two companies, both of which cannot slow down to find the synergies without destroying value.

By recognizing exactly where the synergies will be found, even before a deal closes – as with Agile M&A – practitioners can identify and differentiate between the low-hanging fruit synergies and those that are more likely to take time to eke out, thus enabling them to put a flexible plan in place.

3. Failure to address cultural differences at the integration phase

It should not surprise anyone that cultural differences is still a factor that tends to destroy value in deals.

In fact, each of the deals mentioned in this section failed to address culture to varying degrees. Culture is at the heart of generating value in M&A, and yet it is continuously trivialized by CXOs.

Culture is also at the heart of Agile M&A, which encourages participants in a deal to find the best solution for finding harmony between two newly merged entities.

4. Inadequate due diligence

In Power Failure: The Rise and Fall of an American Icon, author Willian D. Cohan outlines how General Electric, one of America’s most prolific acquirers in the second half of the 20^th century, failed to conduct adequate due diligence when acquiring investment bank Kidder Peabody for a fee of $600 million in 1986.

Bizarrely, this included not even seeing Kidder Peabody’s balance sheet. In Agile M&A, the software flags issues like these (albeit, far more detailed aspects than missing the target’s balance sheet). Inevitably, the deal for Kidder Peabody ended up costing GE more than $1.5 billion.

The lesson: Cutting corners on due diligence is going to come back and haunt you, regardless of your experience in M&A. By applying Agile M&A and leveraging technology, these oversights are far less likely to occur.

5. Underestimating small details

In M&A, there is a tendency to confuse “small details” with “insignificant details.”

There is a very important distinction to be made.

Small details can quickly become very important details indeed. When US heavy equipment manufacturer Caterpillar acquired Chinese firm ERA in June 2012, the seemingly small details came back to haunt it very quickly.

Among them? A $50 million payment by Caterpillar before the deal closed to provide liquidity. Target companies that require $50 million payments upfront for working capital are rarely worth the $653 million that Caterpillar paid.

In most deals, it won’t be as clearcut: It could be something like a component of Intellectual Property or some pensions liabilities at the target company. The point remains that underestimating seemingly small can be fatal to a deal’s success, and using analytical tools which help deal participants to value each component of the deal accurately helps to avoid such outcomes.

Introducing Agile M&A

Agile M&A is a technology-led pivot from traditional ways of getting deals done.

The concept was developed by an experienced investment banker, Kison Patel, who had seen at first hand the clunky process that most investment banks worked with during each phase of a transaction.

These phases are characterized by several inefficiencies, with information bottlenecks (i.e., poor version control and excruciating email chains) being the most glaring one.

Agile was already a well-known concept in technology by the time it was applied to M&A. In the M&A context, it was based on two premises:

1. Traditional approaches to project management fail within the context of M&A. The informational needs are too complex and the environmental factors too unpredictable for orthodox programmatic approaches to succeed.
2. Many of the major pain points and obstacles present during the M&A process can be identified and overcome with the right combination of process, tools, training, and project management approach.

In short, this means that, while traditional M&A processes are based on there being sequential and repetitive steps to produce consistent results.

But as any modern practitioner of M&A will admit, this just isn’t how it works.

“If everybody is thinking about the checklist, then nobody is thinking about what is not on the checklist.”
^{James Harris, Principal, Corporate Development Integration at Google}

While having a concrete set of steps to follow and cross-team interdependencies are still applicable, other aspects of traditional project management, such as static project goals and timelines are not.

This set of realizations led Kison Patel to found DealRoom, a leading M&A technology platform which is based on the principles of Agile M&A. Rather than obeying the traditional stop-start M&A workflows, it enables all participants in the process to work simultaneously, uploading task requests that can be tagged, viewed and accessed instantaneously.

The result is a much more responsive M&A process.

This in turn creates an environment in which buyers can become truly immersed. Rather than the traditional email format with a range of (usually unstructured) questions, DealRoom allows the buyer to send requests within the platform.

Everyone involved in due diligence can instantly see what’s required and what remains outstanding.

Issues are flagged faster, and there’s none of the ‘who should I ask about that’ which previously dogged the process.

Agile's Impact throughout the M&A Process

How does agile M&A work on a phase-by-phase basis? Below, we look at each phase of the typical M&A process in detail, and how Agile M&A makes an impact.

Pre-Merger Planning

• Organization, and thus planning, are at the heart of what Agile M&A helps practitioners to do improve. For example, Agile M&A's emphasis is on continuous alignment with strategic objectives.
• The extensive research and data analytics tools offered by DealRoom empower its users to use broader and more flexible criteria for target identification. These data analytics tools can also be used to ensure synergies are not overestimated.
  

Due Diligence

• Agile M&A introduces a prioritized and iterative due diligence process that can adapt to new information. The DealRoom platform has been designed to offer a streamlined due diligence management system, enhancing collaboration and efficiency.
• DealRoom’s platform provides encrypted document management, ensuring data privacy. The principles of Agile M&A encourage transparent yet responsible information sharing, balancing openness with security.
  

Negotiation and Deal Structuring

• Agile M&A advocates for flexible and iterative valuation discussions, accommodating new insights and information. DealRoom’s tools enhance communication, allowing transparent information sharing to support valuation discussions.
• The collaborative platform offered by DealRoom fosters a collaborative environment for deal participants, enabling offers to be made based on accurate and up-to-date information.
  

Agile M&A versus Traditional M&A

Project management has its roots in the 1950s, when companies in manufacturing, construction, and the extraction industries, applied the philosophy to their management practices.

It was a revolution that fueled much of the growth in these industries in the second half of the century.

It was also taken on by other industries, including investment banking and M&A. This is what we refer to as ‘traditional M&A’ - traditional project management philosophy applied to M&A.

The parameters of Traditional M&A are as follows:

Seller-driven

The seller provides information, usually collected on a one-fits-all basis, and provides it to the buyer through a virtual data room. The buyer, in turn, becomes overwhelmed by information they haven’t necessarily asked for.

Long timelines

The reality of the back-and-forth we associate with traditional M&A is much longer timelines. Email chains become cluttered with irrelevant content (including but limited to out-of-office responses), and the process is highly fragmented.

Rigid plans

Traditional project management is linear and rigid in its nature; while this may have been advantageous for its intended audiences (mid-20th century manufacturing), it’s not suitable for 21st century information-based processes.

Parallel Workflows

In traditional M&A, different functions work in silos, each function overseeing the information requests that fall under their responsibility. There is little cross-team dialogue and alignment is periodic.

Fragmented (and inferior) Information

This whole process is inefficient. It leads to information being fragmented - and regularly duplicated - as well as being obsolete or irrelevant to the context of the transaction.

This is not to say that the traditional M&A process does not work. It works well enough. It just doesn’t work as well as it should. A word processor from the late 1980s could just as easily write a document as one from the 21st century, but the distinction between the two is quite clear.

Now, turning to agile M&A, let’s look its characteristics and how they pivot away from those of traditional M&A. Agile M&A is:

Buyer-driven

The buyer can create requests, along with the level of urgency. These requests can be tagged for user and/or function (i.e., marketing, finance, HR), giving them control over the process.

Shorter timelines

The fact that Agile M&A is more responsive and flexible also leads to it have shorter timelines. There is none of the stop-start dynamic that previously characterized traditional M&A.

Flexibility

Agile M&A enables participants in the M&A process to adapt to changes quickly. For example, if a team member on the seller side is occupied, they can quickly tag a team member to take over a task, ensuring a seamless process.

Real-time collaborative workflow

Through a single, integrated platform, everyone is working in tandem, providing feedback, and even finishing tasks left undone when there’s an opportunity to do so.

Centralized information with high visibility

Bringing all of the information into one channel provides the buyer with an instant bird’s eye-view of the company, and also where information gaps may still exist.

‍Benefits of Agile M&A

Until now, we’ve discussed how the Agile M&A methods differ from those of traditional M&A. Now, we look at the benefits of putting these methods into practice. These include:

Greater efficiency

Agile M&A can improve the time taken to close a deal significantly, and enhances the quality of the process in doing so. There is none of the ‘whatever drags gets dirty’ philosophy that existed in due diligence in traditional M&A.

Increased Deal Success

Better information means better deals. By providing ongoing access to relevant information on a deal in a buyer-led process, transactions in Agile M&A should generate more value for participants.

Improved Cultural Integration

In the case of mergers, Agile M&A gives both sides faster access to and oversight of the touch points that are crucial in swift cultural integration, including easier collaboration between both teams.

Long-term focus

Bringing all of these advantages together creates an environment in which there is a long-term strategic focus rather than the short-term financial focus that charaterized traditional M&A.

DealRoom is a technology platform that supports the Agile M&A methodology.

It offers secure document management, real-time analytics, and a series of collaborative tools that underpin and complement the Agile methodology.

Everything within the DealRoom platform was designed with Agile M&A top of mind, enabling practitioners who aren’t familiar with the discipline to become adept in Agile M&A within hours.

The Future of M&A: Technology and Agile Methodology

The recent arrival of ChatGPT is a warning bell for anybody that takes the ‘way we’ve always done it’ approach.

But it’s easy to forget that technology has been doing this since the beginning of time. When the first hydraulic crane was invented in 1838, it’s probable that millions of laborers across the globe lamented the end of their careers as the heavy lifters.

Here’s the thing: they found other jobs and let the technology do the heavy lifting.

In M&A, access to quality information on companies is critical.

In the information age, where ‘every company is a data company’ this will become increasingly true. Interpreting the data and making good decisions is at the heart of Agile Methodology.

In the future, we believe that AI will work in tandem with the Agile Methodology to interpret ever larger swathes of information for decision makers in the M&A process.

Conclusion

M&A is a process fraught with challenges that repeat themselves in different guises. By applying a highly structured, yet rigid and unadaptive approach like traditional project management, practitioners simply cannot answer the challenges posed by complex M&A projects.

By contrast, Agile M&A seeks to answer this dilemma by providing the best information, fostering collaboration, and providing an adaptable framework to ensure value creation.