Mergers and acquisitions (M&A) are complex processes that require aligning financial, strategic, operational, and cultural factors. While due diligence typically focuses on obvious risks, there are often unexpected issues that can emerge late in the process and jeopardize the success of a deal. Here are some surprising factors that can get in the way of an M&A, backed by research and case studies:
1. Unaddressed Cultural Differences
Issue: Cultural compatibility is one of the most overlooked aspects of M&A. Differences in company culture—ranging from management styles and decision-making processes to employee values and expectations—can create friction, undermine integration, and even lead to high employee turnover.
Example: The merger of Daimler-Benz and Chrysler in 1998 highlighted how cultural mismatch can derail an M&A. Daimler’s formal, hierarchical culture clashed with Chrysler’s more informal, entrepreneurial approach, resulting in a strained working relationship and eventual demerger in 2007.
Mitigation: Conduct cultural assessments early and develop integration plans that respect each organization’s unique culture. Establish clear communication channels and consider “cultural ambassadors” to bridge differences.
Reference: Weber, Y., & Camerer, C. F. (2003). Cultural differences in M&A success. International Business Review, 12(5), 667-684.
2. Hidden Liabilities in Intellectual Property (IP) and Data Privacy
Issue: Intellectual property and data privacy are often assumed to be straightforward assets, but unexamined IP rights, patent disputes, or data privacy liabilities can be unexpected deal-breakers. New regulations, especially around data privacy (such as GDPR or CCPA), can impose significant financial and operational burdens on the acquiring company.
Example: Facebook’s acquisition of WhatsApp faced scrutiny over data privacy concerns, leading to fines and regulatory issues in multiple countries. These issues not only increased costs but also put additional constraints on the integration.
Mitigation: Conduct thorough IP audits and privacy assessments during due diligence to uncover any hidden risks. Ensure compliance with data privacy laws in all jurisdictions where the target company operates.
Reference: PwC (2019). The Value of Intellectual Property in M&A. PwC Report.
3. Key Talent Attrition Risk
Issue: The loss of key employees can severely impact the success of an acquisition. Top talent may leave due to uncertainty, misalignment with the acquiring company’s culture, or lack of incentives to stay.
Example: When Microsoft acquired Nokia’s mobile division, a large number of Nokia’s senior engineers and executives left soon after the acquisition, taking valuable expertise with them and leading to a slower-than-expected integration process.
Mitigation: Identify and prioritize key talent during the M&A process. Implement retention bonuses, clarify roles, and involve key employees in the integration process to increase their buy-in.
Reference: Ranft, A. L., & Lord, M. D. (2000). Acquiring new knowledge: The role of retaining human capital in acquisitions of high-tech firms. The Journal of High Technology Management Research, 11(2), 295-319.
4. Overlapping Customer Bases and Brand Confusion
Issue: Overlapping customer bases or unclear branding strategies can lead to market confusion and reduced customer loyalty. If customers feel that the value of the product or service will change post-merger, they may consider switching to a competitor.
Example: When Sprint and Nextel merged in 2005, the overlapping customer base led to branding and service issues, causing many customers to switch to competitors. This loss of customer loyalty led to a significant decline in revenue and market share.
Mitigation: Conduct market research to understand customer sentiment before and after the merger. Develop a clear brand integration strategy that communicates value to customers and reduces ambiguity.
Reference: Lovallo, D., & Kahneman, D. (2003). Delusions of success: How optimism undermines executives’ decisions. Harvard Business Review.
5. Technology Incompatibility and Integration Challenges
Issue: Integrating IT systems, software, and digital infrastructure can be more challenging than expected, especially if the merging companies rely on incompatible or outdated technology. These issues can lead to inefficiencies, increased costs, and delays.
Example: The merger between America Online (AOL) and Time Warner in 2000 faced technical integration issues, as their infrastructures were incompatible. This led to a lengthy integration process and significantly reduced the anticipated synergies.
Mitigation: Assess technology compatibility as part of due diligence and allocate resources for potential integration challenges. Consider investing in a unified IT strategy early in the integration process to streamline operations.
Reference: Ellwood, S., & Garcia-Lorenzo, L. (2018). IT compatibility and merger performance. Journal of Business Research, 85, 243-252.
6. Regulatory and Antitrust Hurdles
Issue: Regulatory approvals can be delayed or denied due to antitrust concerns, particularly in industries where a merger may reduce competition or create monopolistic power. Regulatory scrutiny can impose additional requirements, leading to delays or even blocking a merger entirely.
Example: The proposed merger between AT&T and T-Mobile in 2011 was blocked by the U.S. Department of Justice over antitrust concerns, resulting in AT&T paying T-Mobile a substantial termination fee and missing out on potential synergies.
Mitigation: Engage legal experts early to evaluate the regulatory landscape and potential antitrust issues. Consider structuring the deal in a way that mitigates competitive concerns.
Reference: Department of Justice (2011). DOJ Statement on the AT&T and T-Mobile Merger. DOJ Press Release.
7. Cultural Impact on Customer and Community Relations
Issue: Local customers and communities may be apprehensive about mergers that disrupt familiar practices or perceived brand values. If the target company has a strong local brand identity, an acquisition by an outsider can create resistance or reputational risks.
Example: Kraft’s acquisition of Cadbury in 2010 faced backlash in the UK due to concerns about protecting the Cadbury brand and maintaining local manufacturing practices. The acquisition initially led to negative publicity and damaged Kraft’s reputation in the UK market.
Mitigation: Develop a public relations strategy that addresses community concerns and communicates the value of the acquisition to local stakeholders. Respect the acquired brand’s identity and maintain local operations if possible to preserve goodwill.
Reference: Thomson, S. (2011). Kraft’s Cadbury takeover: Lessons in stakeholder management. The Guardian.
8. Legacy Liabilities and Legal Risks
Issue: Acquiring a company often means inheriting its legal liabilities, including pending lawsuits, regulatory penalties, or unresolved claims. Undisclosed liabilities can become expensive, unanticipated burdens that threaten the merger's financial viability.
Example: When Bayer acquired Monsanto in 2018, it inherited significant legal risks associated with Monsanto’s glyphosate-based weedkiller, Roundup. Subsequent lawsuits cost Bayer billions in settlements, overshadowing the expected benefits of the acquisition.
Mitigation: Conduct thorough legal due diligence to uncover potential liabilities and negotiate indemnity clauses to protect the acquiring company from unknown risks.
Reference: Kaiser, L., & Moon, K. (2020). M&A and legacy liabilities: Lessons from Bayer’s Monsanto acquisition. Corporate Compliance Insights.
9. Board and Leadership Team Egos: Resistance to Losing Influence or Brand Identity
Issue: Ego and personal identity can significantly influence M&A dynamics. Board members and executives may resist mergers that threaten their position, reduce their influence, or alter the name and legacy of the company. This resistance can slow down or completely derail negotiations, especially if leaders fear losing status, seats, or control in the newly formed entity.
Example: When the merger between British Airways and KLM was proposed in the 1990s, the deal ultimately failed, partly due to disagreements over leadership roles and a reluctance to give up individual corporate identities. The leaders of both airlines resisted changes to their influence and brand image, which led to a breakdown in negotiations.
Mitigation: To address potential ego-related issues, establish open, transparent communication with leadership and board members early in the M&A process. Highlight the mutual benefits of the merger, including enhanced growth, market position, and future opportunities for personal influence within the new structure. Encourage a focus on shared goals and consider offering key roles to individuals in both organizations to foster alignment and reduce fears of loss of status or legacy.
Reference: Jemison, D. B., & Sitkin, S. B. (1986). Corporate acquisitions: A process perspective. Academy of Management Review, 11(1), 145-163.
Conclusion: Navigating the Human Element in M&A Success
While financial, operational, and strategic factors are critical to M&A, the human element—particularly leadership egos, personal legacy, and identity—is often a surprising obstacle to successful integration. Proactively engaging board members and executives, addressing cultural and brand identity concerns, and creating a path for influential roles in the combined entity can help to smooth the way forward. By taking these steps, leadership teams can ensure that individual identities and egos do not stand in the way of organizational growth and success.
This comprehensive approach to addressing the unexpected challenges of M&A can strengthen strategic alignment and improve the chances of a successful outcome for all parties involved.
At EF International Advisors, we empower organizations at pivotal moments, turning challenges into opportunities with actionable insights and tailored strategies. For over 30 years, we’ve combined the agility of a boutique firm with deep expertise across finance, real estate, education, media, insurance, and technology.
Our practical, results-focused methods emphasize team alignment, motivation, and measurable success. Learn more about how we drive lasting impact at www.efinternationaladvisors.com.
Comments