Acquiring another business can be an exciting prospect for any company, offering a range of potential benefits including increased market share, expanded product offerings, and access to new talent and technology. However, acquisitions can also be risky endeavors, with many potential pitfalls that can lead to failed deals. In fact, according to research from Harvard Business Review, between 70-90% of mergers and acquisitions fail to achieve their desired outcomes. In this article, we will explore some of the common pitfalls in the acquisition process and offer insights on how to avoid them, drawing on lessons learned from failed deals in business.

1. Lack of Strategic Fit
One of the main reasons for failed acquisitions is a lack of strategic fit between the two companies. This occurs when the acquirer fails to thoroughly analyze and understand the target company’s business, culture, and goals. Without a strong alignment between the two organizations, it becomes difficult to integrate and achieve the desired synergies.

Practical example: In 2016, the multinational food company Kraft Heinz attempted to acquire the consumer goods giant Unilever, a deal that would have created one of the largest consumer goods companies in the world. However, the deal failed due to a lack of strategic fit, with Unilever’s leadership citing concerns over the cultural differences and potential job losses as the main reasons for rejecting the acquisition.

Lesson: It is critical for companies to conduct extensive due diligence before pursuing an acquisition. This includes not only financial and legal assessments but also a thorough examination of cultural compatibility and strategic alignment. Companies should also be prepared to walk away from a deal if the fit is not right.

2. Overpaying for the Target Company
Another common pitfall in the acquisition process is overpaying for the target company. This can occur due to various factors, such as pressure to grow quickly, competition from other buyers, or simply a lack of experience in deal-making. Overpaying can lead to significant financial losses for the acquirer and erode shareholder value.

Practical example: In 2015, pharmaceutical company Valeant acquired Salix Pharmaceuticals for $15.8 billion, a steep premium of over 40% above the company’s market value. However, Salix’s sales and profits began to decline, leading to a write-down of $2.6 billion for Valeant and a significant decrease in shareholder value.

Lesson: It is crucial for the acquirer to accurately value the target company and resist the temptation to overpay. This requires a thorough understanding of the target company’s financials, market position, and growth potential. Companies should also consider alternative and less costly growth strategies, such as joint ventures or partnerships.

3. Integration Challenges
One of the most crucial stages of an acquisition is the integration process. Successfully integrating the two companies’ operations, processes, and cultures is critical to achieving the desired synergies and realizing the deal’s full potential. However, integration can be complex and challenging, and many deals fail due to poor execution.

Practical example: In 1998, the merger between car manufacturers Daimler and Chrysler was lauded as a “merger of equals” that would create a global automotive leader. However, the integration process proved difficult and ultimately led to the deal’s failure. The two companies had significant cultural differences, leading to internal conflicts and conflicting priorities which impeded the integration efforts.

Lesson: Integration planning should begin well before the deal is finalized, and involve input from both companies’ leadership and employees. Companies should also identify and resolve potential cultural clashes early on and develop a detailed integration plan that outlines specific goals, timelines, and responsibilities.

4. Poor Communication
Effective communication is essential for success in any business endeavor, and acquisitions are no exception. Poor communication throughout the acquisition process can lead to misunderstandings, lack of trust, and ultimately, failed deals. It is crucial for both companies to communicate openly and transparently to ensure a smooth transition.

Practical example: In 2005, the French conglomerate Vivendi acquired media company Universal, with the aim of diversifying its business. However, poor communication and cultural clashes between the French and American employees led to a breakdown in the integration process. The deal ultimately failed, with Vivendi selling its majority stake in Universal within a year.

Lesson: Companies should prioritize clear and open communication between not only leadership but also employees at all levels. This includes regular updates on the progress of the integration, as well as opportunities for employees to voice their concerns and ask questions. Additionally, establishing common goals and values can help bridge any cultural gaps and foster collaboration.

Conclusion
Acquisitions can be an effective growth strategy for companies, but they can also be risky endeavors. It is crucial for companies to carefully consider and address potential pitfalls in the acquisition process before pursuing a deal. By conducting thorough due diligence, accurately valuing the target company, effectively integrating operations, and maintaining open communication, companies can avoid the common pitfalls and increase their chances of success in the acquisition process.