The broad rationale for acquisition activity is quite easy to define and usually includes one or a number of the following reasons:

• economies of scale  
• to obtain synergies
• increase products / services
• rationalisation of distribution channels
• gain domain knowledge and expertise
• technology acquisition
• increase customer base

Lack of a Clearly Defined M&A Rationale

Often when you start to dig deeper into some of the more comprehensive analyses around the facts of acquiring, you are likely to encounter some deafening silences and embarrassed rolling of eyes heavenwards.  It is this lack of deeper, insightful thinking around the rationale for acquiring that is a major factor in the high failure rates of acquisitions – That is, failure, in terms of the acquisition failing to meet its planned objective/s for the acquiring company.  When you take into consideration the fact that few CEO’s will be keen to draw attention to their failed acquisitions, the publicised 50%+ failure rate, gleaned from studies undertaken, is, in reality, probably much closer to 75%.

There is a plethora of reasons behind this high M&A failure rate and the parlous situation really comes as no big surprise. The three situations detailed below are just some of the major stumbling blocks to acquisition success but there are clearly many others:

Lack of Business Alignment

Alignment of M&A and corporate strategy / business planning is vital. Harding and Rovit conducted a study (2004) in which they examined the importance of aligning corporate strategy with planning for mergers and acquisitions. More than 1,700 mergers and acquisitions were reviewed and 250 Chief Executive Officers (CEO’s) were interviewed. It was found that less than one in three of the CEO’s interviewed had a clear, strategic rationale for M&A. Strategic rationale for a merger is of critical importance, as it will drive both pre- and post-merger behaviour.

Lack of a Clear Acquisition Objective

In the Harding and Rovit study mentioned above, it was also noted that a minority of CEO’s had a clear understanding of the contribution the deal would make to their company’s long-term, financial future. One of the steps that we discuss as we guide our clients through the creation of an M&A strategy, is to “Begin with the End in Mind”.  It is crucial that they clarify, right from the beginning, exactly what the acquisition needs to achieve for them, in order for it to ultimately be considered a success.

Culture Clashes

Culture clashes are a major, yet often unconsidered, cause for merger and acquisition failure.  Differences in culture between the companies about to merge are often not given any consideration in the M&A strategy plan – that is, if there is one. The consequences of this lack of foresight and planning can often be highly detrimental to the original aim of generating a competitive advantage via the acquisition.

Perceived Threat

Corporate culture is something that goes unremarked much of the time but, when making an acquisition, overlook it at your peril. When thrust into a merger situation, employees can become extremely protective of how they do things. Battle lines can be drawn, intransigent behaviour and stances can be taken towards “those on the other side” – the perceived threat. Worse, when employees feel threatened, their behaviour and performance will often decline as a perceived sense of vulnerability and fear take root.

As with any potential pitfalls, solutions to the above are available. However, unstinting attention to detail is required and the executive management team must all be in alignment and working towards the same ultimate goal or failure is likely to ensue.