Merger and Acquisition Success Rate - Ultimate Guide
Every now and then, you see bold headlines about an extravagant amount paid for a target company and instantly feel it’s the best time to sell your business.
But is this the right inspiration? How many of these deals prove their worth? What's the merger and acquisition success rate? There's more to such news than meets the eye!
Whether you are a business owner or founder looking to sell your business or buy another, understanding your odds for a successful acquisition or merger can make all the difference.
At Exitwise, we help business owners and founders manage their business exit strategy, sales, and financial plans and even maximize their exit profits through their dream M&A team.
Schedule a free consultation with one of our experts to help form an M&A team for a successful merger and acquisition at the best exit value possible.
Why Do Mergers and Acquisitions Fail?
Mergers and acquisitions are delicate matters, and even the slightest issue can derail a good deal before the stakeholders involved reap the benefits.
There are many reasons M&As fail.
Let's look at the most likely causes:
1. Poor Planning and Lack of Expertise
Most companies don't just have poor strategic planning; they have no plans at all. You are set up for failure when you lack a good motive for an M&A transaction.
For most businesses, the motive is to build an empire through a bigger market share. The rule of thumb is to be able to simply explain the motive.
If you can't, the transaction is likely going to fail. For example, you can't say you want to “become a visionary in the market” because that reason is too broad.
When it comes to expertise, most mid-sized businesses fail to prioritize M&A, meaning managers handle them as a passing responsibility. They lend fewer resources and expertise to the process, setting themselves up for failure.
Your company may also lack critical personnel with the skills to evaluate target companies or carry out effective post-M&A integration properly.
2. Incompatibility
Merging businesses can simply be incompatible in their values, operational strategies, business models, and cultures. These differences can go unnoticed. According to Deloitte, 30% of M&A integrations fail because of cultural clashes.
However, what matters most is finding a way to deal with the incompatibilities once the new entity takes effect. Such solutions usually fail and lead to the collapse of the whole deal.
3. Poor Post-Integration Processes
After the merger, the individual companies must integrate their operations to enjoy synergies. Problems arise because most companies take a long time to plan the integration process, which they should have actually scheduled before closing the transaction.
Ultimately, you end up with separate companies that can't work together effectively.
4. Lack of a People Inventory
Evaluating your key employees and planning to retain them post-acquisition can make the merger successful.
The handling of employees after an M&A transaction is always a significant concern. Most new entities fire the best employees of the target company, which often leads to total failure.
You can borrow a leaf from Cisco, the tech company that has completed over 200 acquisitions successfully and credits part of that to recognizing that human capital is crucial to acquisition success.
Up to 87% of the key employees from the acquired companies remain with the company for more than two years.
5. External Factors
Your market or industry may be on the decline or on the verge of collapsing. If that happens, you may suffer losses and total business shutdowns after a merger.
For example, the 2020 pandemic wasn't kind to hotel mergers and acquisitions because there wasn't enough tourism to generate cash flows for hotels.
How Many Mergers And Acquisitions Fail?
Historically, the M&A failure rate is 50-90%. The number is even higher for mid-sized and large businesses.
What is the Typical M&A Failure Rate?
According to the Harvard Business Review, the rate at which M&As fail to achieve their expected value stands at 70-90%.
What is the M&A Success Rate?
Going by the failure rates above, the historical success rate of mergers and acquisitions is 10-50%.
The success rate has improved recently. Bain & Company reports that nearly 70% of deals succeed since 2004.
The company attributes this improved rate to mastery of the art of integration and business and a robust M&A corporate strategy from the start.
5 Factors Influencing M&A Success Rate
The success of a merger and acquisition depends on the following factors:
1. Planning and Execution of the Integration Process
Companies that wait until after the merger to start planning how to integrate the separate entities are often doomed to fail.
It's best to plan how the different entities will integrate from the start to avoid the panic and confusion of realizing you need an integration strategy to be executed fast and diligently.
2. Effective Due Diligence
Effective due diligence improves each merging party's understanding of the other and increases the chances of a successful merger.
For example, it helps the acquiring company identify, evaluate, and settle on the best target companies.
3. Developing an M&A Strategy Early
Most founders and business owners wait for transition time to develop an exit strategy. However, it's better to have your exit in mind right from day one when you set up your business.
Such a mindset ensures that, during your company's lifetime, you make a series of decisions that can help you extract the maximum value from it.
Is it too late to form an M&A strategy? You can start your exit strategy today, especially if you plan on selling your business soon.
4. Identifying, Screening, and Prioritizing Targets Properly
As mentioned, some mergers and acquisitions are doomed to fail from early on because the target company the acquirer chooses isn't a good fit.
Properly identifying, screening, and prioritizing targets will increase the chances of settling for the most eligible company.
To improve your chances of picking the right targets, have an M&A team at hand to continuously research the market and scout for ideal companies you can acquire or merge with.
Merger and Acquisition Strategies for a Higher Success Rate
Improving your chances of a successful merger and acquisition can be easy if you know what measures to take long before you decide to sell your company.
Here are some strategies to try:
1. Map Key Employees
When selling your business, mark its key employees or opinion leaders well-suited to handle the transformation and integration.
Each acquisition and merger raises concerns about the welfare of employees before and after the integration, which is why it's crucial to inform your employees about the pending transformation in good time.
You can count on the knowledge and expertise of key employees to integrate the businesses successfully. Additionally, you can tap into their strong informal or formal networks and influencing power in the industry.
2. Conduct thorough Due Diligence
Effective due diligence can help you understand how to best select the final targets and how much to pay for them.
Through due diligence, you can easily differentiate between a deal that will improve your current operations and one that will strategically change your company's growth potential.
Besides, due diligence also helps all the merging businesses understand each other in terms of operational efficiency, underlying risks, cultures, and market share potentiality.
3. Having an M&A Strategy from the Start
Business owners, founders, and other executives can set themselves up for exceptional mergers and acquisitions performance. One way to do this is to establish, from the very beginning, a dedicated team to manage the deal from the beginning to the end.
It's also essential to have a full-time business development team constantly seeking to fill strategic gaps in your capabilities or assets through mergers and acquisitions.
Without a good M&A team, your efforts become hurried, reactive, and disconnected from your financial and strategic plans.
4. Seeking External Expertise to Supplement Internal Resources
Outsourced M&A experts can help you run a deal successfully from the beginning to the end. They can help you identify potential targets, secure the best ones, and facilitate the transition or integration.
At Exitwise, we help founders and business owners interview, recruit, and manage a team of M&A experts to help them with business sales and integrations.
Reach out to us today to start the process of hiring and managing your dream M&A team to get you the best sale price and a smooth integration.
How to Measure M&A Success
Traditionally, we measured the success rate of M&A deals using financial metrics only. The practice has since been expanded to consider non-financial aspects. Here’s the modern way to measure success:
Consider Financial Metrics
Check financial aspects such as sales, revenues, profits, losses, return on investments, and return on assets. You can also consider market share, cash flows, earnings per share, and operational cost synergies.
Compare these metrics with your projections before the deal, competitors’ performances, and industry standards to see if you attained your financial goals and how you can optimize.
Consider Non-financial Aspects
Customer retention, client complaints, levels of employee stress, and the quality of new clients are good pointers to a deal's success. For example, retaining most customers can be a good sign because customers embrace the new entity.
Case Studies of Successful Mergers and Acquisitions
Here are three examples of successful M&A deals for some inspiration:
1. Google's Acquisition of YouTube
In 2005, YouTube was distressed before receiving Google's financial and expertise support. Google got YouTube’s user data, which helped with its targeted advertising and increased its revenues through a broader audience reach. The deal acquisition still holds water today.
2. Johnson and Johnson's Acquisition of Synthes
Synthes had expertise in orthopedic instruments and implants. Its robust international reach opened up Johnson and Johnson to new geographical markets. The transaction improved cost savings, distribution, research, and manufacturing synergies.
3. Microsoft’s Acquisition of LinkedIn
Microsoft tapped into LinkedIn’s professional network and expanded its customer base, while the integrations with Microsoft’s Dynamic 365 and Office 365 improved users’ collaboration capacities and productivity.
Microsoft's revenues also increased through recruitment solutions, subscription services, and advertising.
Frequently Asked Questions (FAQs)
Let's check out the answers to common questions about M&A success.
How Long Does the M&A Process Typically Take?
The M&A process can take between one and twelve months, depending on how well-prepared each stakeholder is. If you factor in the integration part, the duration can increase by up to 12 months.
Can Small Businesses Benefit from M&A?
Like large and mid-sized businesses, small businesses can benefit from M&A. For example, an M&A team can help you determine the best time to sell your company.
When you work with Exitwise, we can help you hire and manage an exceptional M&A team that works with you to ensure you get the best deal possible.
Conclusion
When the time comes to exit your company, understanding the typical mergers and acquisitions success rate can help you make informed decisions and ensure a successful exit.
A low general success rate shouldn't discourage you—the rate might be much higher in your specific industry. Additionally, you learn from previous transactions and avoid critical mistakes that could ruin your deal.
To make things easier, you can work with an M&A team. We at Exitwise help you hire and manage your dream M&A team. Reach out to us today to get help hiring and managing the team that will ensure you successfully get the best deal possible.
