Finance executives shared their perspective recently in a joint research survey between the Financial Executives Research Foundation and Crowe Horwath LLP titled “Navigating the Risks of the Contemporary M&A Market.” In the survey research, financial executives shared their top 15 M&A deal risk factors. You can see the full list below.
As you look at this list, does anything stick out to you as an “Aha!” moment? No? Funny thing, me either.
These are your standard set of issues that can strike a deal that has transformational potential and instead makes the deal a shell of what it was intended to do for a company. What is a continued fascination for me is that we don’t go deep enough to understand these risk factors. Let’s take the #1 M&A deal risk factor as an example, overpaying for deals. This deal risk factor manifests itself in the obvious price that was paid to make the acquisition. This overpayment can be on a $5M or a $50B deal, it just depends. By paying too much for an acquisition, the acquirer runs the risk of crushing debt, inability to meet synergy targets or revenue goals and therefore force a write down on the total amount paid for the acquisition (Think of the Yahoo-Tumblr deal write down of over $732M) because frankly it wasn’t worth as much as what was paid for it. When this happens, deals are immediate failures.
In order to mitigate M&A deal risk factors, you have to treat the underlying leadership factor impacting the risk factor. For example, in the example above regarding overpaying for deals, the leadership skills judgment and financial acumen are what impacts the price that is paid. For everyone of these deal risk factors identified in the FERF/Crowe Horwath study, leadership skills are the baseline component creating the risk. This is driven by whether leaders are skilled or unskilled in how they apply the leadership skills they each have to use. Another example from this list is maintaining strategic clarity and focus. A leader that can utilize strategic thinking and drive for results influences this M&A deal risk factor.
Until companies start treating the underlying leadership symptoms of deal risk, they should expect to see deals continue to fail.
Change the mindset. Change the model. Change the outcome.
Dr. J. Keith Dunbar is founder and chief executive officer of Potentious. He can be found connecting and sharing knowledge about M&A leadership on Twitter and LinkedIn.
Top 15 M&A Deal Risk Factors
|1||Overpaying for deals||Deal valuation|
|2||Insufficient operational diligence||Operations team|
|3||Maintaining strategic clarity and focus||Operations team|
|4||Current valuations||Deal valuation|
|5||Culture assimilation challenges||People/culture issues|
|6||Fuzzy growth strategy or specific deal rationale||Deal valuation|
|7||Employee anxiety, morale, and/or engagement issues||People/culture issues|
|8||Limited access to target company||Deal valuation|
|9||Underestimation of time and resources required for synergy||Operations team|
|10||Insufficient financial due diligence rigor||Deal valuation|
|11||Underestimation of integration work||Operations team|
|12||Synergy capture not a priority for operating team||Operations team|
|13||Target company management team operating capability||Operations team|
|14||IT infrastructure capability, transition costs||Operations team|
|15||Inconsistent M&A planning and execution||Operations team|