Golden rules to avoid M&A failures

M&A Failures of Thomas Cook

History is inundated with M&A failures. For instance, Thomas Cook – A leading player in the travel business that was in existence for nearly 180 years collapsed last month.The root cause behind this collapse is not Brexit as widely speculated by the markets.
Thomas Cook merged with MyTravel in 2007 and this transaction sowed the seeds for the company’s downfall. In the last financial results announced by the company, it was observed that the company had written off 1.1 billion pounds after revaluing Mytravel.At the same time, the company also reported a 1.5 billion pounds loss.
From shareholders perspective, most mergers and acquisitions have destroyed value.One of the big reason is that the target business is often overvalued.
There are five main factors which actually contributes to overvaluing a target business.

M&A Failures reason 1 – Relying on seller’s financial projections for valuation

  • The acquirer should not rely on seller’s proforma income statement and balance sheet to arrive at valuation of the target company. At any time prior to close of the deal, the seller will have more knowledge about their company than buyer.Hence there is every chance that the seller will inflate their projections to realize a higher valuation.The buyer should validate each assumption of the seller and not accept any numbers at face value.
  • Companies should have an inhouse team to develop valuation models. The company should not rely on investment bankers for valuations as banker work on fee based model. There is every chance they will provide an attractive value so that the deal can be consummated.

M&A Failures reason 2 – Doing Strategic Deals

  • In this digital era, most deals are undertaken for strategic reasons. Strategy is a very hollow word if it does not make any financial sense.
  • We see many companies acquiring niche digital startups which have not yet turned profitable. Acquirers justify such transactions as strategic.
  • Acquirers must address three questions before proceeding forward with an acquisition.These are 1)Why should we acquire this target company? 2)Why do it now? 3)Is acquisition the only option to add value? The answers to these questions must take financial sense.

M&A Failures reason 3 – Deal team and Integration team is different

  • In all M&A transactions, the deal team who identify the deal synergies are not involved in implementing the synergies during the integration. The target founders also quit the company once they receive their earnouts and retention bonuses. The integration team implementing the synergies invariably does not have any clue about the deal and hence fail in delivering the synergies targets.
  • To address this issue, acquirers should assign the same team members to every phase of the transaction including integration.If that is not possible, atleast the business leader responsible for meeting the synergies targets should be involved before the deal is closed. A coherent and well managed process is critical to the integration success.

M&A Failures reason 4 – Not having a price range

  • The acquirer should put himself in a financial investor position and set a purchase price range for the target business beyond which they should be ready to walk away from the deal.
  • The acquirer should not get emotionally attached to the deal.Overpaying a target business is one of the primary reason for a M&A disaster.
  • Acquirers can avoid overpaying by setting up a cross functional team who can put a check on confirmation biases and impulsiveness of the deal leader.Another way is to get a fairness opinion on the value of the deal from third party to get an outsider view and perspective.

M&A Failures reason 5 – Delaying the deal

  • M&A deals cause uncertainty especially for target company’s employees and customers.Uncertainty is the biggest enemy.So proper communication channels is needed to share the deal updates with target company’s employees and customers.
  • For employees, Bad news is better than no news.Hence acquirers should be ready to answer all questions of employees honestly and display transparency.
  • Speed is also equally important to communications when integrating the acquisition.The acquirer should be ready with the Integration strategy and with a detailed integration plan before the deal is closed.They should be ready to tackle the integration challenges without disrupting the day to day operations.


The five rules provided above can prevent M&A failures and maximize the odds of M&A success. It also helps the deal teams from the acquirer side to steer away from value destroying deals.

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