Đề tài 2 reasons for the failure of m&a

From acquiring a small company to expand its operations, to merging two large companies to create a new force, M&A is increasingly becoming an important tool in achieving mergers and acq

TRƯỜNG ĐẠI HỌC THƯƠNG MẠI

KHOA TIẾNG ANH -

-HỌC PHẦN: TIẾNG ANH THƯƠNG MẠI 1.4

ĐỀ TÀI 2: Reasons for the failure of M&A.

LIST OF MEMBERS

ST

Evaluation ( /10)

8 Lê Thị Thu

Prepare: Reasons for the failure of M&A

10 Trần Sách

Prepare: Some tips for

M&A Success

Prepare: Reasons for the failure of M&A

Prepare: Introduction and Conclusion

Summarize Word

TABLE OF CONTENT

LIST OF MEMBERS 2

ACKNOWLEDGEMENT 4

I INTRODUCTION 5

1 Definition of M&A 5

2 Types of M&A 5

II REASONS FOR THE FAILURE OF M&A 6

1 Strategy Missteps 6

2 Intergration Issues 7

3 Financial Problems 9

4 Other Contributing Factors 11

III TIPS FOR SUCCESSFUL MERGERS AND ACQUISITION 14

1 Identify strategic fit at the outset 14

2 Ensure clear communication throughout and value people 15

3 Circle in on the Target’s true value 15

4 Set your watch Timing is everything 16

IV CONCLUSION 16

V REFERENCES 17

First of all, our group would like to express our heartfelt appreciation to Ms Hoàng Thị Thúy We received your very dedicated and enthusiastic teaching and guidance

while learning and studying Business English 1.4 You assisted us in acquiring more interesting and useful knowledge We'd like to present what we've learned about the discussion sent to you based on the knowledge you shared

However, our understanding of the topic of "Topic 2: Reasons for the failure of M&A.” is still limited As a result, it is unavoidable that there will be flaws in the

process of concluding this discussion Please watch and leave comments to help us improve our group discussion

Wishing you happiness and continued success in your "people-growing" career I always wish for your good health so that you can continue to guide future generations of students to the shores of knowledge

We would like to express our heartfelt gratitude!

I INTRODUCTION

- In today's business world, M&A deals have become an indispensable part of companies' development strategies From acquiring a small company to expand its operations, to merging two large companies to create a new force, M&A is increasingly becoming an important tool in achieving mergers and acquisitions success and sustainable growth in a fiercely competitive market

1 Definition of M&A.

M&A stands for mergers and acquisitions It refers to business transactions where

companies combine or one company takes over another.There's a difference between a merger and an acquisition:

- Merger: Two companies join togethers to form a completely new company.

Think of it like combining two blobs of playdough into a new, bigger blob

company keeps its own name and structure, but it now owns the acquired company's assets and operations Imagine swallowing a smaller marble whole

Even though they're different, the term M&A is used for both mergers and

acquisitions because they both achieve the same goal: combining businesses

2 Types of M&A.

Based on the functions of companies and the nature of mergers and acquisitions,

M&A transactions can be divided into 3 types

2.1 Horizontal M&A.

It is a type of M&A in which two or more companies operating in the same

industry and offering similar products or services merge their operations In horizontal M&A, the merging companies are often direct competitors or operating in closely related market segments The main goal is to achieve synergistic value by eliminating competition, consolidating market share and achieving large economies of scale By consolidating, companies can reduce resource duplication, optimize operations and increase efficiency

- For example: a merger between two beverage companies, Coca-Cola and Pepsi

2.2 Vertical M&A.

It is a type of M&A in which two or more companies operate at different stages

of the value chain in the same industry In Vertical M&A, the merging companies

often engage in activities related to the production, supply and distribution of a specific industry The main goal is to take advantage of synergistic advantages through combining activities from above to below in the value chain By merging, companies can optimize supply chains, reduce costs, improve control and gain power over production and marketing

- A typical example of Vertical M&A is Amazon's acquisition of Whole Foods Market, combining e-commerce capabilities with traditional retail

2.3 Conglomerate M&A.

This type is different from Horizontal and Vertical M&A Conglomerate M&A is

a form of M&A that combines companies from different industries to create a new business model The purpose of Conglomerate M&A is to diversify the product portfolio and minimize the risks of only operating in a certain industry of the participating companies By M&A transactions with companies operating in different industries, Conglomerate M&A allows businesses to expand their scope of operations, reach new customers and take advantage of growth opportunities outside the industry its main area

- An example of a successful Hybrid M&A deal is when General Electric acquired NBC Universal, combining a manufacturing conglomerate with a media and entertainment company

1 Strategy missteps

1.1 Overpaying for the target

 This is probably the most common reason for transaction failure Most attractive target companies operate under the assumption that "everything is for sale at the right price" It effectively translates to "the business is always for sale when a buyer is willing to overpay"

 In publicly listed companies, this usually means a premium over the share price and there is little reason to doubt it’s any different in small, privately-held companies

 Buyers must set a limit before negotiations start and stick to it to minimize the risk of overpayment

 Acquirers may also fall into the trap of overpaying for the target company, which can lead to financial stress and lower returns on investment To avoid overpaying, it is important to conduct a thorough valuation of the target company and compare it to similar transactions within the industry Acquirers should also consider the potential synergies and cost savings that could be realized through the acquisition

1.2 Lack of strategic clarity

 A good "why" is an essential component of all successful transactions Without

a good motive for a transaction, it is doomed to failure from the outset

 The academic literature on M&A is replete with studies of managers engaging

in "empire building" through M&A, and research into how is a common trend

in M&A

 They drew a good rule of thumb here is that if a transaction's motive can't be easily explained, the more likely it is to be a failure

 The following will be a significant example: The acquisition of BigBank by MegaCorp, MegaCorp only focuses on the short-term gain of expanding its market share without a clear vision for how BigBank's services will integrate with its existing tech offerings

1.3 Negative effects of strategy missteps.

 These missteps often trigger a domino effect It can create financial strain, making it harder to invest in integration planning and address challenges arising from a culture clash Moreover, it also further exacerbates these issues

by obscuring the true value of the acquisition and failing to identify potential synergies

2 Intergration issues

II.1 Poor intergration planning

 The next common mistake buyers make in M&A transactions is poor integration planning Integration is the process of combining the operations, systems, and cultures of the acquirer and target company Poor integration planning can lead to a lack of synergy, decreased productivity, and employee turnover

 To avoid a poor integration planning, acquirers should develop a detailed integration plan that includes a timeline, key milestones, and specific goals for each department Acquirers should also communicate the integration plan to employees and stakeholders and provide training and support to ensure a smooth transition

 Another pitfall in M&A transactions is poor integration planning If the acquirer doesn't have a clear plan for integrating the target company, it can lead to operational inefficiencies, employee confusion, and lower morale To avoid this pitfall, the acquirer should develop a detailed integration plan that outlines the key steps, timelines, and responsibilities of each team

 M&A transactions can be challenging, but by avoiding these common pitfalls, acquirers can increase their chances of success By conducting thorough due diligence, assessing cultural fit, avoiding overpaying, and developing a detailed integration plan, acquirers can mitigate risks and pave the way for a successful acquisition

II.2 Culture clash

 Another common pitfall in M&A transactions is cultural misalignment When two companies merge, their cultures can clash, leading to employee disengagement, lower productivity, and higher turnover rates To avoid this pitfall, it's important to conduct a cultural assessment of both companies before the acquisition This will help the acquirer identify any cultural differences and develop a plan for integrating the two cultures

 Microsoft-Nokia acquisition: the acquisition of Nokia's mobile phone business

by Microsoft in 2014 is an interesting case study of cultural clash The acquisition aimed to combine Nokia's hardware expertise with Microsoft's software capabilities However, the clash between the Finnish and American cultures proved to be a significant challenge Nokia's hierarchical and consensus-driven culture clashed with Microsoft's more competitive and individualistic culture

II.3 The consequences of intergration issues:

II.3.1 Financial consequences.

 Increased costs: unforeseen challenges during integration can lead to cost overruns Duplication of efforts, inefficiencies, and delays can drain resources

 Reduced revenue: disruptions to operations and customer dissatisfaction can lead to lost sales and revenue decline

 Debt burden: the financial strain of integration can make it harder to service debt incurred during the acquisition

II.3.2 Operational consequences.

 Loss of productivity: employee confusion, morale problems, and difficulty adapting to new processes can lead to a decline in productivity

 Supply chain disruptions: integrating different supply chains can be complex and lead to disruptions in production and delivery schedules

 Customer dissatisfaction: changes in service quality, brand confusion, and communication breakdowns can alienate customers

II.3.3 Strategic consequences.

 Failure to achieve synergy: the combined value of the merged companies falls short of expectations due to problems capitalizing on potential benefits

 Missed opportunities: the focus on integration can distract management from the core business and lead to missed opportunities for growth

 Loss of market share: the combined company may lose market share to competitors who can operate more effectively

3 Financial Problems

3.1 Overestimating Synergies.

 Overpaying for an acquisition can indeed be a critical factor leading to the failure of M&A deals When an acquiring company invests too much for a target company, it can create several challenges that undermine the success of the merger or acquisition Overpaying can strain the financial resources of the acquiring company, reducing its ability to invest in future growth initiatives or meet debt obligations Additionally, it can create unrealistic expectations for the performance of the combined entity, leading to disappointment among shareholders if projected synergies and financial benefits fail to materialize Moreover, overpayment may result in difficulties in achieving the desired return on investment, ultimately eroding shareholder value and causing long-term financial repercussions for the acquiring company Therefore, avoiding

overpayment is crucial for M&A success, requiring careful valuation, thorough due diligence, and disciplined negotiation strategies to ensure that the deal creates value for all stakeholders involved

 An analysis looking at 2500 deals between 2013 and 2018 resulted that the larger the transaction, it will most likely fail Another interesting observation was that mixed deals, including both cash and stock, were also more likely to result in a failed business

 A classic overpaying example happened in 2001, between America Online and Time Warner Due to the extreme rush of leadership to get into the market of new media, they largely overpaid Just after a year, this deal resulted in the biggest annual net loss ever reported

 Generally, brokers tend to push to close such great deals “just to get things done”, even if the investors’ deal does not make sense for the organization as a whole This leads to excessive amounts spent on acquisition while the transaction will not deliver the expected benefits

3.2 Hidden Liabilities.

 Hidden liabilities can indeed be a significant threat to the success of mergers and acquisitions (M&A) transactions These liabilities, which may not be immediately apparent during the due diligence phase, can emerge post-transaction and wreak havoc on the financial health and operational efficiency of the combined entity

3.2.1 Financial Impact:

 Hidden liabilities can have a substantial financial impact on the acquiring company These liabilities may include undisclosed debts, pending lawsuits, tax liabilities, or regulatory fines If the acquiring company becomes responsible for these liabilities post-transaction, it can strain financial resources and lead to unexpected costs that erode the anticipated benefits of the deal

3.2.2 Legal and Regulatory Consequences.

 Hidden liabilities can also expose the acquiring company to legal and regulatory risks For example, undisclosed legal disputes or regulatory

non-compliance issues can result in costly litigation, fines, or reputational damage Failure to identify and address these liabilities during due diligence can leave the acquiring company vulnerable to legal and regulatory consequences that hinder its ability to achieve its strategic objectives

3.2.3 Operational Disruption.

 Hidden liabilities can disrupt the smooth integration of the two companies, leading to operational inefficiencies and performance setbacks For instance, if undisclosed environmental liabilities require significant remediation efforts, it can divert resources and attention away from core business activities, delaying integration timelines and impeding the realization of synergies

 Hidden liabilities pose a significant risk to the success of M&A transactions, highlighting the importance of thorough due diligence and risk assessment throughout the deal-making process Acquiring companies must conduct comprehensive investigations to uncover and evaluate potential liabilities, mitigate risks, and ensure that they have a clear understanding of the financial and operational implications of the transaction Failure to adequately address hidden liabilities can lead to M&A failures, jeopardizing the achievement of strategic objectives and value creation goals

4 Other Contributing Factors.

4.1 Lack of Communication.

- The lack of communication problem is one of the biggest affairs that lead to the M&A’s failures, however it also includes many elements:

 Employee Morale and Retention

 Lack of Cultural fit

 Customer Confusion and Loss

 Shareholder Discontent

4.1.1 Employee Morale and Retention

 Uncertainty about the future direction of the company and potential job redundancies can cause anxiety and dissatisfaction among employees Without clear communication about roles, responsibilities, and the vision for the combined entity, talented employees may leave, leading to a loss of institutional knowledge and hindered productivity