Top 3 most common pitfalls in M&A transactions

Handshake A major topic in our Applied Corporate Finance & Valuation training courses is mergers and acquisitions (M&A). M&A transactions take place in every part of the world and are therefore of interest to all executives, managers, and other professionals. Yet, not many people know that there have been far more disasters in M&A transactions than success stories. So what causes so many M&A transactions to go wrong?

Well, experience shows that there are some key management failings which lead to problems and which result in huge monetary losses for companies. Here are just three examples:

A burning desire to grow the business at any cost

Many managements make the mistake of equating size with performance, long-term survival and job security. However, being large does not guarantee a company any of these things. Growing a company must make sense strategically, logically and financially. In our courses we demonstrate how to identify the right targets for takeover and how to avoid acquisitions that are unlikely to fit well with the company’s strategic goals or add value for shareholders.

Overpaying for an acquisition

This is a very common occurrence and the causes are often very clear. Management may get into a bidding war and not realise when to walk away. Management may not have worked out how they are going to use the acquisition to create value for shareholders and how much additional value they can create. Management may value the target incorrectly, which can then derail their subsequent calculations. In our courses we cover company valuation in depth. We also explain the fundamental equation that has to be used to work out how much additional value can be created. We also demonstrate how much of that yet-to-be-realised value can prudently be surrendered as a purchase premium.

Lack of proper due diligence

Due diligence is the process of thoroughly checking out a target company before committing irrevocably to the purchase. Many examples exist of acquirers having gone bust as a result of not carrying out proper due diligence. In our courses we emphasise that while due diligence often appears to be simply a matter of following a number of checklists, e.g. legal, financial, commercial, environmental, etc., a thorough understanding of the target’s business is critically important to successful due diligence. Also, as due diligence usually has to be completed within a very short space of time, proper planning and control of the exercise must be in place to ensure nothing important is overlooked.

Guest post by Ranjit Naik, trainer on the 5 Day MBA in Applied Corporate Finance & Valuation. To hear more from Ranjit and find out all you need to know about applied corporate finance and valuation, why not attend one of his courses:


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