Poorly planned post-merger integration is a common reason for deal failure in mergers and acquisitions. According to one study, cultural differences between two companies that occur during the transition phase lead to deal failure in 41% of cases.

The solution to this challenge is to implement effective post-merger integration change management.

In this article, we focus on the basics of M&A change management and suggest best practices to carry out this process effectively. 

The essence of M&A change management

Change management is an important part of the post-merger integration phase. It’s the process that involves the implementation of certain tactics and approaches to manage the change the merging companies face.

Essentially, M&A integration change management is the process of ensuring a smooth transition after the transaction. It involves managing employees’ expectations, winning stakeholders’ buy-in, and orienting them through the transition. 

As stated by PwC’s 2023 M&A Integration Survey, Fortune 1000 management teams named the following elements as the key drivers of their change management programs: 

Source: PwC 2023 M&A Integration Survey

The function of change management in M&A

The key function of change management during M&A is to ensure that the acquiring and acquired companies successfully merge and achieve expected synergies. The process must consider factors such as existing cultures, operations, communications, and leadership structures.

A recent Deloitte survey found that effective change management was ranked as a critical factor for successful post-merger integration.

Source: Deloitte. Critical factors for effective post-merger integration

Mergers and acquisitions change management is an integral part of the post-merger integration plan as it helps to:

  • Minimize disruptions

A thorough change management plan enables a company to avoid the risk of disruptions in day-to-day operations, as well as the overall negative impact on employees’ productivity and morale.

  • Manage resistance

Employees can often be resistant to a new corporate culture or operating model, as the change can cause feelings of uncertainty. Change management helps to overcome this issue by including a resistance analysis that identifies potential problems and how to address them.

  • Preserve culture and values

During the transition process, there’s a risk for companies (often, the target company) to lose their unique culture or to have it diluted. Change management helps to prevent that by preserving and strengthening organizational culture and ensuring transparent communication at all levels.

  • Maintain customer satisfaction

The transition phase can disrupt or negatively impact customer service. Change management helps to preserve an uninterrupted customer experience and maintain general customer satisfaction and loyalty.

  • Ensure efficient integration

Change management provides a structured framework for planning, executing, and evaluating the integration process, making it more efficient and reducing problems.

Preparing for change in the main 6 steps

So, where to start with M&A change management? Let’s discuss the main preparatory steps to be taken before the process rolls out.

1. Define the change objectives

Transition planning starts with the understanding of what goals you want to achieve. This will help all the participants and responsible parties move in the same direction when managing change and have a clear vision of what results they have to achieve.

Define the objectives of the change management program, outline desired outcomes, and specify how success will be measured. 

2. Assess current state

To define the key areas for change, there first has to be a change readiness assessment. This is the process of evaluating how ready and prepared the entire organization is for change.

Additionally, the current state of the organization’s affairs should be assessed. This also helps determine what actions should be taken in each area of business operations to achieve desired change objectives.

3. Identify key stakeholders

A stakeholder analysis helps to identify all stakeholders that will be affected by the change. It includes employees, the senior leadership team, customers, suppliers, and all other relevant participants of the transition phase. 

To ensure a smooth integration and effective change management, you should understand their perspectives, concerns, and potential resistance to change. 

4. Communicate the need for change

All stakeholders should be aware of the upcoming changes, how they’re going to impact the current operations, and what to expect in the company’s future.

For this, create a comprehensive communication plan, that involves communication strategies, communication channels, and the list of stakeholders. Doing so will help to win stakeholders’ buy-in and minimize resistance. 

The main reason behind a well-developed communication plan is to inform all the relevant parties about the need for change, the purpose behind it, and its potential benefits. 

5. Establish a change management team

A change management team or integration management office is an assembled team of people who are responsible for overseeing the change management process.

The team typically consists of employees from different departments and levels within an organization to ensure that diverse perspectives are considered. It’s a mistake to put this responsibility solely on the HR department.

6. Develop a change management plan

Finally, develop a comprehensive change management plan that outlines the findings you have after conducting previous steps.

It should include specific steps, timelines, resources, and responsibilities associated with the change initiative. Additionally, it should address potential risks and conflict resolution strategies. Such a plan should provide all the parties involved with a clear vision of the direction they should move to, guiding the entire combined organization through the change process.  

Developing the right change management strategy: 6 main components

An effective change management strategy should address the following components: 

  1. Assessment and planning
  2. Communication plans
  3. Leadership alignment
  4. Employee engagement initiatives
  5. Training and development
  6. Measurement and evaluation

Let’s now take a closer look at what each of these components involves.

1. Assessment and planning

  • Conducting a thorough evaluation of the need for change, including the reasons behind it, potential risks, and expected outcomes.
  • Developing a detailed change management plan that outlines the scope, timelines, objectives, resources, and responsibilities for the change management process.

2. Communication plans

  • Creating a comprehensive communication plan that specifies how information about the change will be delivered to stakeholders and other relevant parties.
  • Identifying key messages, communication channels, and frequency of communication to keep stakeholders informed and engaged throughout the entire transition process.
  • Tailor communication strategies to different audiences: employee groups, customers, clients, suppliers, leadership teams, and other stakeholders.

3. Leadership alignment

  • Specifying the tactics that will help to ensure alignment among senior leadership teams and key decision-makers regarding the vision and objectives of the change management process.
  • Engaging leaders in the change management process and providing them with the necessary support, resources, and training to effectively lead their teams through the transition phase.
  • Fostering a culture of open communication among leadership teams to facilitate decision-making and problem-solving during the change management process.

4. Employee engagement initiatives

  • Ensuring employees’ engagement early in the change process by soliciting their feedback and ideas for improvement.
  • Providing employees with opportunities to engage in decision-making and contribute to the change management process at the relevant levels.
  • Implementing such employee engagement initiatives as town hall meetings, surveys, focus groups, and feedback mechanisms to ensure that all the change information is communicated, and employee concerns are heard and addressed.

5. Training and development

  • Identifying any skills gaps or training needs that might occur in the process of change and developing target training programs.
  • Providing employees with the necessary knowledge and resources to help them adapt to the new culture, processes, and operations.
  • Offering ongoing support and training to help employee groups navigate the change effectively. 

6. Progress measurement and evaluation

  • Defining the key performance indicators (KPIs) and metrics to measure the success of the change process.
  • Regularly monitoring and assessing the progress of KPI completion and making relevant adjustments if necessary.
  • Regularly collecting feedback from stakeholders to evaluate their perception of change and identify areas for improvement.

Note: To learn more about winning strategies for M&A read our dedicated article.

The role of effective communication during M&A change management

Transparent communication with employees during a transition period is among the most crucial factors for post-integration success.

According to Leadership IQ’s survey, only 15% of employees always understand the rationale behind their leaders’ strategy. Such findings can result in a loss of motivation among employees and cause some of them to leave the organization. This, in turn, can lead to a talent retention problem.

Note: Explore the general risks of mergers and acquisitions in our dedicated article.

The importance of effective communication is also proven by WTW’s research, which shows that very successful deals typically have one thing in common: they pay great attention to clear and effective communication with employees during the transition.

Source: WTW Global Pulse Survey. Common element successful transactions share

Best practices for leadership and culture alignment

Research by Culture Amp found that mergers and acquisitions negatively impact employees’ perception of decision-making, alignment, and motivation. 

At the same time, culture clashes are the reason for 30% of failed post-merger integrations, based on Deloitte’s findings. 

This shows the importance of ensuring leadership and culture alignment during the transition phase. To do so, consider the following recommendations.

Conduct one-on-one interviews and focus group sessions

This helps to bring a more human aspect to the whole transition process. 

Ensure that a responsible change manager  conducts one-on-one interviews with senior employees (or with particular focus groups) to assess their readiness to change and learn about their fears and worries. This will help to identify ways to address those concerns and mitigate potential resistance risks.

Carry out surveys

Another way to evaluate leadership and employee perception of the whole change process is to conduct surveys. 

Unlike one-on-one meetings, where employees might hesitate to share their thoughts openly, surveys allow for gathering honest feedback without putting a respondent under stress with face-to-face conversations.

Conduct a potential resistance analysis

Similar to one-on-one meetings, a potential resistance analysis helps to uncover how employees are feeling about change. The key focus here is to search for a “them and us” mentality, which prevents people from embracing change as a positive thing.

Present findings to stakeholders in a comprehensive report

The assessment’s findings should be presented in a well-drafted report, with key gaps and areas for improvement specified. 

What’s more, it has to include calls to action and responsibilities assigned to relevant stakeholders.

Note: Discover the overall M&A best practices in our dedicated article.

How to measure the success of change management initiatives?

Here’s how you track the progress of the change management initiatives and assess their effectiveness:

  • Ensure key KPIs are specified

Measuring success is only possible when there are clear KPIs in place. This way, you know what results are expected from the changed operating models. KPIs can include employee engagement levels, customer satisfaction levels, productivity, revenue growth, and cost savings.

  • Establish regular monitoring and tracking

Continuously monitor and track the identified KPIs throughout the change management process. This allows for real-time assessment of progress and early identification of any issues or challenges that may arise.

  • Collect feedback

Perform a change impact analysis and gather feedback from stakeholders and all the relevant parties to assess their perception of change and its impact. This can be done through surveys, focus group sessions, one-on-one meetings, and other feedback-sharing mechanisms.

  • Compare results to goals

With the results of the assessment ready, the change management team can then compare them with the predetermined KPIs and overall change objectives. This allows for identifying success areas and those where certain challenges or obstacles have been identified.

  • Conduct a root cause analysis

To understand the underlying factors contributing to the observed results, perform a root cause analysis. This helps to identify all the barriers and gaps that prevent the merging organizations from achieving predetermined change objectives.

  • Make adjustments

Based on the findings, make the necessary adjustments to the change management process. This could involve refining strategies, providing additional support or training, and revising timelines.

  • Communicate changes and progress

To ensure a transparent process, communicate all the changes and progress to stakeholders. This will keep them informed about changes or improvements and help to foster their trust and confidence in the change management process.

Key takeaways

  • M&A change management is the process of implementing certain tactics and approaches to ensure a smooth transition during the post-merger integration phase.
  • The key function of change management is to ensure that existing cultures, operations, communications, and leadership structures of two companies successfully merge in a way that helps the combined company achieve expected synergies.
  • The main components of the right change management strategy include assessment and planning, communication plans, leadership alignment, employee engagement initiatives, training and development, and measurement and evaluation.

A special purpose acquisition company (SPAC) is a shell company formed solely to raise capital through an initial public offering (IPO). The purpose is to acquire or merge with an existing private company, taking it public. Some market participants view SPAC transactions as providing private companies with greater certainty in pricing and control over deal terms, compared to a traditional IPO.

In April 2021, the Securities and Exchange Commission (SEC) issued staff statements on how SPACs were handling their warrants. It pointed out that many SPACs were incorrectly categorizing their warrants as stock. But, according to the SEC, these warrants should be considered liabilities in certain circumstances. Such increased regulatory scrutiny led to a decrease in SPAC issuances.

The article aims to demystify SPAC warrants by answering common questions, such as: What is a SPAC warrant? How do warrants work in a SPAC? How to exercise warrants? And how to trade SPAC warrants?

SPAC warrants explained

Investors in SPACs typically buy what are known as SPAC units. A SPAC unit consists of shares and warrants, or even fractional warrants, such as a quarter of a whole warrant (per unit).

Therefore, SPAC warrants can be defined as financial instruments issued by SPACs during IPOs. These are contracts that give investors the right to purchase a predetermined number of common shares of the SPAC at a certain price (the strike price) in the future, often a premium to the stock price at the time the warrant is issued.

Typically, SPAC warrants have a specified exercise period (often several years), during which investors can choose to exercise their warrants. If exercised, investors pay the strike price to the SPAC and receive the corresponding common shares. 

Warrants can be traded separately from the SPAC’s common stock, allowing investors to speculate on the future performance of the SPAC or hedge their investment risk.

There are public and private placement warrants, each with its peculiarities.

Public warrants:

  • Issued alongside SPAC shares during the IPO.
  • Typically have a strike price of $11.50 or higher (such price is chosen to encourage investors to buy the warrants by offering potential profit above the $10 initial offering price).
  • Subject to a lock-up period, often one year after issuance or after a merger or acquisition.

Private warrants:

  • Offered to SPAC sponsors or founders before the IPO (known as the “promote”).
  • Can have a purchase price significantly below the original SPAC share price.
  • May have cash and cashless exercise options or have no SPAC warrant redemption terms.
  • Redemption prices may fluctuate based on warrant terms and market conditions.

Additional reading: Explore reverse triangular mergers to learn how to utilize financial and legal mechanisms for efficient corporate acquisitions.

How do SPAC warrants work?

Overall, the SPAC lifecycle involves the formation of the SPAC, the IPO and capital raising process, the search for and acquisition of a target company, and the completion of the merger or acquisition.

Warrants are typically issued during the IPO stage of the SPAC lifecycle. Investors who participate in the IPO by purchasing SPAC units receive a combination of common stock and warrants. These warrants entitle holders to purchase additional shares of the SPAC at a predetermined price in the future.

Warrants can be a large contributor to total returns, as they often carry value beyond the share price alone. In a standard SPAC, where investors typically receive half a warrant with each purchased unit, the value of warrants is influenced by factors like current share price, volatility, and time to maturity. As share prices increase, so does the value of warrants, adding substantial percentage points to total returns. 

Source: Finews

To understand how SPAC warrants work, let’s use the example of the Cyxtera merger, with insights from Matt Frankel, a financial professional, who, in response to Cyxtera investor question, explains how and when to exercise the warrants:

  1. Warrant terms. Warrants typically grant investors the right to purchase shares of the company at a fixed price within a specified timeframe, often five years. In the case of Cyxtera, one warrant allows the holder to buy one share at $11.50 within the next five years.
  2. Forced exercise circumstances. There are circumstances where warrants can be forced to be exercised early. If the stock trades at $18 or more for 30 consecutive days, the company can redeem the warrants essentially for nothing.
  3. Staying informed. Investors need to closely monitor news alerts for any announcements regarding warrant redemption. This allows investors to stay informed and make timely decisions regarding whether to exercise, sell, or hold onto their warrants.
  4. Risk assessment in SPACs. If investors are uncomfortable with tracking news or potential warrant redemptions, they may choose to sell their warrants or focus solely on owning the stock. This ensures investors can mitigate the risk of being caught off guard by warrant redemptions.

Note: When a SPAC completes its initial business combination, the ticker symbols for the combined entity’s stocks and warrants change. Investors wishing to exercise their warrants should keep this in mind.

How to get started

Here’s what to do to start investing in SPAC warrants:

  1. Choose the right broker. Select a reputable broker like Webull, Robinhood, Fidelity, or Interactive Brokers that offers warrants on their platform. Consider factors such as trading features, fees, and customer support to ensure a smooth trading experience.
  2. Research and select SPAC warrants. Conduct thorough research on SPAC warrants available on a chosen broker’s platform. Look for warrants from trusted SPACs run by experienced professionals, and be cautious of cheap options. 
  3. Calculate the theoretical valuation of a warrant. Use online price calculators that allow you to input various factors and valuation metrics, such as implied volatility and the pricing model. This can help identify the fair value of a warrant. You might also be interested in reading our business valuation tutorial

Characteristics of SPAC warrants

SPAC warrants have certain features that differentiate them from other financial instruments. Here are some key characteristics:

  • Warrant exercise price

Warrants have a predetermined exercise price, which is the price at which the warrant holder can purchase the underlying common shares. This exercise price is set at the time of issuance and is typically at a premium to the SPAC’s IPO price. The exercise price is fixed and doesn’t change over the life of the warrant.

  • Limited investor rights

Warrant holders typically don’t have voting or dividend rights. This distinguishes them from common shareholders who have these privileges.

  • Correlation with the underlying stock

SPAC warrants’ prices generally move in tandem with the underlying stock prices. This makes warrants highly sensitive to market volatility.

  • Dependency on merger success

The value of SPAC warrants after the merger heavily relies on the merger’s success. In cases where a SPAC merger fails, warrant values may drop, sometimes to near-zero levels.

  • Dilution impact

When warrants are exercised, SPACs must issue new shares, resulting in dilution for existing shareholders. This dilution can impact earnings per share and share price.

  • Warrant expiry date

Just like in options trading, warrants have an expiration date, which is the deadline by which the warrant must be exercised. If the warrant isn’t exercised before the expiry date, it becomes worthless, and the holder loses the right to purchase the underlying shares. The expiry date is set at the time of issuance and is often up to five years after the acquisition or merger.

  • Early redemption features

Even though SPAC warrants theoretically have an expiration date of up to five years, the majority include early warrant redemption deal terms. For example, some may have conditions under which warrants must be redeemed within 30 days if the stock price remains above a certain level for a certain period.

Additional reading: Discover how to expand a business globally by reading our comprehensive article on the topic.

Value and risks of investing in SPAC warrants

Let’s take a look at the key advantages and disadvantages of investing in warrants.

Value

  • Potential for high returns

SPAC warrants offer unlimited profit potential if the performance of the underlying stock is strong.

  • Liquidity considerations

The warrant market is generally very liquid, allowing investors to easily buy and sell warrants on the stock exchange, providing flexibility in their investment strategies.

  • Diversification

Warrants can facilitate diversification as they often have a lower entry cost compared to buying the underlying asset outright, allowing investors to spread their investment across multiple assets.

  • Leverage

SPAC warrants can strengthen returns as they provide investors with the ability to control a larger position in the underlying stock with a smaller investment, potentially maximizing profits in a given period.

  • Smaller initial investment

Warrants typically require a smaller initial investment compared to buying common shares.

Risks

  • Complexity

Warrants are complex financial instruments and due to their complexity they may not be suitable for inexperienced investors.

  • Lack of standardization

Warrants often lack standardization across offerings, requiring investors to carefully analyze the terms and conditions of each warrant, which can increase the complexity of investing.

  • Bigger risks

While warrants offer leverage and potential for higher returns, they also come with bigger risks.

  • Discounted pricing

Warrants may trade at a discount relative to their equivalent common stock due to the risk of merger failure or other uncertainties, which could lead to losses if the warrant becomes worthless.

  • Regulatory risks

Regulatory changes, including those issued by agencies like the Securities and Exchange Commission, affect SPAC warrants and can change their value and how they trade.

Strategic considerations for investors

Strategic considerations for exercising warrants involve assessing various factors, including:

  1. Due diligence. When investing in a SPAC through an IPO, investors should conduct due diligence and ensure the SPAC is managed by experienced professionals. The success of the investment largely depends on whether a merger occurs, so trust in the SPAC’s management team is very important.
  2. Expiry date. Exercising warrants before the expiry date ensures that investors don’t lose the opportunity to convert SPAC warrants into underlying shares. However, exercising too early may not be optimal if the stock price has not yet reached a favorable level. Therefore, investors should wait for the optimal time.
  3. Specific terms. Understanding the terms and conditions of warrants is essential for building effective trading strategies. Investors should thoroughly review these terms before exercising warrants. For example, warrants may include clauses specifying conditions under which they must be redeemed early.
  4. Tax implications. Depending on the jurisdiction and individual circumstances, exercising warrants may trigger capital gains taxes or other tax liabilities. Investors should consult with tax advisors to understand the tax implications of exercising warrants and plan accordingly.
  5. Portfolio diversification. Investors should consider how exercising warrants fits into their overall investment strategy and portfolio diversification goals. For example, exercising warrants to acquire additional shares of a particular company may concentrate portfolio risk if the investor is already heavily invested in that company or sector.

Long-term vs short-term investment

Determining whether to treat SPAC warrants as a long-term growth potential investment or a short-term speculative opportunity requires careful consideration of various factors.

Key takeaways

  • Special purpose acquisition companies (SPACs) are companies with no commercial operations. They are created only to raise capital through initial public offerings to acquire or merge with an existing company.
  • SPAC warrants are financial instruments issued during IPOs that give investors the right to purchase common shares at a predetermined price, typically at a premium to the IPO price, offering the potential for high returns.
  • Investors should carefully review the terms and conditions of SPAC warrants, considering factors such as early redemption features, expiration dates, and dilution impact, to mitigate risks and optimize their investment outcomes.
  • Strategic considerations for investors include conducting thorough due diligence on SPAC management teams, evaluating market trends, understanding warrant terms, assessing tax implications, and aligning warrant exercise decisions with overall portfolio diversification goals.
  • The regulatory environment surrounding SPAC warrants is constantly changing, so staying informed about updates and developments is crucial for investors to navigate potential risks effectively.

The mergers and acquisitions process doesn’t end with the deal closure. Moreover, the post-merger integration process that happens after has even more impact on the deal’s success. 

The post-merger integration is the process of combining two businesses and their assets, people, resources, and technology into one in a way that creates the most value for the future of the company and accelerates synergy realization. Without having a post-merger integration phase well-planned and all the possible post-acquisition challenges addressed, a deal is at risk of failure. This is especially true considering the high rates of deal failure, which is up to 70%-90%, as stated in some resources.

So what are the key challenges of post-merger integration, and how can they be addressed? We’ll figure it out in this article.

Top 8 common post-merger integration challenges

Let’s review 8 most common post-merger integration issues and challenges and possible ways to mitigate them:

  1. Cultural differences
  2. Technology integration
  3. Operational alignment
  4. Organizational restructuring
  5. Talent retention
  6. Leadership issues
  7. Communication challenges
  8. Customer retention

1. Cultural differences

Cultural integration is one of the most critical parts of the successful integration process. To be precise, difficulties in cultural alignment are the reason for 30% of failed deals. This is because employees of both companies have different work styles, communication methods, and general values. And ruining them for one of the sides could lead to overall employee concerns and result in a huge loss of talent. 

Combining two distinct corporate cultures into one is a complex task and requires particular attention from integration teams. That’s exactly why 60% of businesses already make a cultural assessment an essential part of the due diligence process.

Interesting fact: One of the biggest M&A deals in history, the $350-billion AOL and Time Warner merger, failed due to huge cultural differences.

How to mitigate?

  1. Conduct a thorough cultural assessment of both companies before the deal to detect similarities and differences in corporate cultures.
  2. Assemble a dedicated integration team that will be responsible for managing the cultural integration process.
  3. Ensure transparent and timely communication across employees during each transition stage.

2. Technology integration

The process of combining two companies into one also includes IT systems consolidation.

Both the acquirer and acquired company use different tools and have different IT processes built. For successful integration, all these services should be carefully merged into one without loss of efficiency and disruptions in operations.

Interesting fact: Technology integration issues are one of the reasons why the eBay and Skype merger failed in 2009 since Skype’s technology wasn’t compatible with eBay systems.

How to mitigate?

  1. Conduct a thorough IT due diligence, assess all the available IT systems, and decide which ones you’re going to keep or implement.
  2. Have a dedicated IT integration team assigned, with core IT leaders defined.
  3. Create a detailed IT implementation roadmap with key goals described.

3. Operational alignment

Just like with IT systems, merging companies also differ in operational styles. It concerns different supply chain management, customer service, manufacturing practices, and other types of operations within a business.

Not addressing these post-merger challenges can lead to customer dissatisfaction, disruptions in operations, and other problems that could negatively impact operational synergy.

How to mitigate?

  1. Perform a thorough operation due diligence, assessing the operations of both companies and defining what aspects to keep and what to omit.
  2. Develop a comprehensive integration strategy with key operational strategic objectives defined. 
  3. Have a dedicated operation integration team assembled, with key roles and responsibilities assigned.

Pro tip: For a better understanding of post-merger integration objectives and addressing the most common challenges, develop a detailed post-merger integration playbook.

4. Organizational restructuring

The transition of two business entities into one presupposes combining their organizational structures into one as well. This comes with lots of peculiarities and challenges, since all the reporting lines, decision-making processes, as well as roles and responsibilities should be aligned. 

Failure to address this integration issue can lead to confusion among the employees, which, in turn, can significantly impact the overall staff effectiveness and even cause a pause in operations.

How to mitigate?

  1. Before the deal closure, assess the organizational structures of both companies, define areas that overlap and those that don’t, and think of possible improvements.
  2. Create a streamlined organizational structure for the new entity, with all the reporting lines described. 
  3. Ensure clear and transparent communication about the organizational structure among all employees so that everyone understands their responsibilities and objectives. 

5. Talent retention

Key talent retention is one of the biggest M&A integration challenges. First of all, massive layoffs are always a part of the M&A process. For example, as a result of the $44 billion Elon Musk’s acquisition of Twitter (now X Corp.), about 6,000 people were laid off, while only 1,500 employees were kept. What’s more, rough statistics state that about 30% of employees are deemed redundant when two businesses in the same industry merge.

Additionally, the integration process is sometimes stressful for employees due to the number of changes that take place during the merger. This can also impact their motivation and lead to resignation.

How to mitigate?

  1. Ensure transparent communication among all employees during each stage of the transition. Everyone should clearly understand their responsibilities and opportunities when achieving overall company goals.
  2. Develop comprehensive talent merger and acquisition strategies that define all the key roles that should be kept and also suggest incentives for hiring new talents.
  3. Offer development opportunities and training that will help employees with adaptation to the changing environment and develop the required skills for the company to achieve expected synergies.

6. Leadership issues

For companies to successfully undergo the integration period, a strong and reliable leadership team is required.

A leader, or senior management, is responsible not only for defining key goals and strategic objectives but also for driving change and establishing the desired motivation among all the employees. 

Leadership challenges can result in a loss of momentum and wrongly defined objectives, which, in turn, can lead to deal failure. 

How to mitigate?

  1. Have a structured steering committee defined, with the key roles assigned and responsibilities described.
  2. Clearly describe reporting lines and ensure a steering committee has regular meetings for discussing integration updates.
  3. Ensure key stakeholders’ engagement.

7. Communication challenges

Based on PwC’s 2023 M&A Integration Survey, 59% of respondents indicate communication as the main driver of the change management program in the M&A integration. Indeed, poor communication during the transition can lead to massive confusion and uncertainty among the employees. This, in turn, can result in the loss of motivation, an effectiveness decrease, and even a pause in the company’s operations.

How to mitigate?

  1. Establish clear and transparent communication with all employees at all levels. 
  2. Ensure that all managers have regular meetings with their teams that help to keep staff informed about all the essential processes and check their state.
  3. Have a dedicated human resources team assembled that will be responsible for maintaining clear communication among the organization during all the transition stages.

8. Customer retention

The PwC’s survey on the consumers’ satisfaction with companies that undergo M&A shows that 17% of customers do less business with a company that’s in the merging process or even stop any business with it. This speaks volumes about the importance of customer retention during the integration process. 

Such a rollback in the number of customers directly impacts the company’s revenue, and thus, merger success.

How to mitigate?

  1. Keep all the customers informed about the ongoing and planned changes and establish clear communication at each transition stage.
  2. Maintain an excellent customer service team that will manage customer experience.
  3. Assess the products and services of both companies, define what to keep, what to improve, and what new to implement to preserve current customers and attract new ones.

Note: Learn about the main risks of mergers and acquisitions in our dedicated article.

Maintaining employee morale during integration

Culture Amp’s research on how M&A impacts the employee experience reveals that both mergers and acquisitions negatively impact employee’s perception of decision-making, motivation, and alignment. At the same time, employees feel more negatively when undergoing an acquisition rather than a merger.

This is because during an acquisition, an acquirer absorbs the target company, and it ceases to exist. And because of such a process, employees from the target company can often lose their sense of connection to the current company (as it’s soon to be dissolved into the new company), and thus, lose motivation to contribute to the new company operations.

Naturally, such a loss of motivation and uncertainty can lead to a significant drop in staff effectiveness, which, in turn, impacts overall company operations and thus, post-acquisition integration success.

So, how to change that?

  1. Communicate. Establish transparent communication with employees during each transition stage, hold regular one-on-one and general meetings, explain company-wide and inside-team decisions, clarify general objectives, and ask for feedback. In short, involve employees in the post-merger integration support process.
  2. Recognize. It’s also essential to notice all the efforts and each employee’s input in the integration process. Provide regular feedback, reward good work, and ensure a culture of collaboration at all levels.
  3. Empower. Establish an atmosphere of trust within the organization. It’s crucial that every employee feels a sense of belonging and that they’re an essential part of the organization. Provide a certain level of autonomy for everyone and ensure the manager’s support of goals.
  4. Train. For employees to feel needed and have the required skills for achieving expected merger synergies, roll out regular training sessions and draft a development plan for each role. This also helps in managing expectations of the post-integration process outcomes.

Key takeaways

  • Post-merger integration is a process of combining two businesses and their assets, resources, people, and technology into one business entity in a way that creates the most value for the future company and helps to realize expected synergies.
  • The most significant challenges of post-acquisition integration include cultural differences, technology integration, operational alignment, organizational restructuring, talent retention, leadership issues, communication challenges, and customer retention.
  • Post-merger integration also has a huge impact on employee’s morale and motivation. To maintain high morale and productivity, deal-makers should ensure clear communication across all the teams, recognize everyone’s efforts and input, establish a certain level of autonomy for each specialist, and ensure quality training and development plans for all roles.

The key difference between merger and acquisition

Dealmakers often opt for mergers and acquisitions (M&A) when searching for growth or restructuring methods. As of H1 2023, there were 27,003 deals globally, according to PwC. Despite a 9% decline year-over-year (YOY), the volumes still demonstrate businesses’ willingness to develop by means of M&A.

However, getting involved in dealmaking, it’s essential to understand the difference between acquisition and merger. This article clarifies the mergers and acquisitions definition and the major differences between them.

What is a merger?

A merger occurs when two or more companies combine their operations to form a new legal entity. This new organization gets a new name, management structure, and ownership, while two previous organizations are dissolved. Companies that merge are usually equal in terms of size and scale of operations.

The main reasons behind a merger are usually companies’ desire to increase revenues, reduce operating costs, enter new markets, or expand the market share. Typically, mergers are friendlier by nature.

Note: Learn how to expand business internationally in our dedicated article.

Merger types

There are 5 main types of mergers:

  • Horizontal

In a horizontal merger, both companies operate in the same industry, offer the same services or products to the same customers, and are direct competitors.

  • Vertical

A vertical merger takes place when two companies operate at different levels of the same supply chain, do not offer the same services or products, and are not direct competitors. Learn more about vertical merger vs. horizontal merger differences in our dedicated article.

  • Conglomerate

A conglomerate merger occurs between two companies that operate in different industries and locations and are not direct competitors.

  • Market extension

A merger that aims at market extension takes place between two companies that offer similar products and services but are competitors in different markets. 

  • Product extension

A merger that aims at product extension occurs between two companies selling products that complement each other. Such companies are indirect competitors but in the same market.

Merger example: Raytheon and United Technologies

One of the recent merger examples is the deal between Raytheon and United Technologies, which can be classified as the market extension type of merger. In April 2020, Raytheon and United Technologies merged and formed a new entity: Raytheon Technologies.

The main reason behind the deal was to achieve improved economies of scale by combining their defense and commercial aerospace operations.

This is how Tom Kennedy, Executive Chairman of Raytheon Technologies, described the expectations from this merger of equals:

Our platform-agnostic, diversified portfolio brings together the best of commercial and military technology, enabling the creation of new opportunities across aerospace and defense for decades to come.

What is an acquisition?

An acquisition takes place when one company (acquiring company or purchasing company) acquires another (target company). As a result of an acquisition, an acquiring company absorbs the target, and an acquired company often ceases to exist or continues its operations under the name of the acquirer.

An acquisition usually occurs between companies that are not equal by operations: a financially strong company (an acquirer) purchases a smaller target company that is also relatively weaker by the scale of operations. By nature, acquisitions are not always friendly.

Just like with a merger, the main reason behind an acquisition is to gain a better competitive advantage. An acquirer aims at reducing the expenses of buying from a supplier, lowering its operation costs, expanding offered production or services, or acquiring important assets that will help to grow in the future.

Acquisition types

There are 2 main types of acquisitions:

  • Friendly

In a friendly acquisition, target companies agree on being acquired. It means that shareholders and management on both sides are in agreement with the acquisition. One company, known as a surviving one, acquires shares and assets of another company following the approval of the directors and shareholders. The other company, an acquired one, ceases to exist as a legal entity, and shareholders of the disappearing company receive shares in a surviving company.

  • Hostile

In a hostile takeover, a target company doesn’t want to be acquired. It means that the board of directors of the target company does not side with the acquiring company’s directors. However, in this case, the acquiring company can pay the target company’s shareholders for their shares (this is also known as a “tender offer”). This way, when having enough shares purchased, an acquiring company can prove an acquisition on its own or appoint its own officers and directors to run the target company as a subsidiary.

Acquisition example: Disney and Pixar 

One of the successful acquisitions examples is the deal between Disney and Pixar. In January 2006, Disney announced it was about to acquire Pixar in a $7.4 billion deal. After the deal’s completion, Pixar became a subsidiary of Walt Disney Studios.

The main reason behind this acquisition was Disney’s desire to benefit from Pixar’s animation expertise.

This is what Bob Iger, Disney’s CEO, said about their deal with Pixar:

I’m proud of a lot of the decisions that were made. Certainly, the acquisitions — I’d say of all of them — Pixar because it was the first. And it put us on the path to achieving what I wanted to achieve, which is scale when it comes to storytelling. That was probably the best.

What’s the difference between a merger and an acquisition?

The comparable table below shows how mergers and acquisitions differ in terms of 9 given categories.

CategoryMergerAcquisition
1 ProcedureIn a merger, two organizations join forces to form an entirely new entityIn an acquisition, one company takes complete control of the operations of another company
2 NatureA merger is considered to be friendly by nature and planned by both parties involvedAn acquisition is considered to be hostile and sometimes even involuntary
3 Company’s nameA merged company gets a new nameTypically, an acquired company operates under the name of the parent company. However, sometimes an acquired company can continue operations under its name if an acquirer allows it
4 Comparative statureBoth companies involved in a merger are typically equal in size, stature, and scale of operationsAn acquiring company is usually a larger and financially stronger entity that purchases a smaller company
5 NegotiationsMerger negotiations primarily center around deciding how many shares each company will have in a newly formed entityIn an acquisition, negotiations usually focus on a purchase price
6 Power and authorityIn a merger, both parties involved have equal power and authority in the dealAn acquiring company typically has complete power over an acquired one
7 ManagementIn mergers, the management of the merged company is usually replaced by the new oneIn acquisitions, the management may remain the same after the deal’s completion
8 SharesIn mergers, the merged company issues new shares that are proportionally distributed among existing shareholders of both parent companiesIn acquisitions, no new shares are issued
9 Benefiting partyBoth merging companies can equally benefit from a mergerIn acquisitions, a purchasing company benefits from the deal more, while the target company either ceases to exist or operates under the acquirer’s name

Choosing between merger or acquisition based on the company’s strategic goals

When considering what strategy to choose for business growth (acquisition vs. merger) it’s essential to proceed from your company’s strategic goals and objectives your company wants to reach with the deal.

For example, if your company is seeking to expand market share, access new technology, or diversify its business, a merger would probably be helpful. And if your business wants to eliminate competition, an acquisition is likely to be the choice.

Other considerations to take into account when choosing between a merger and acquisition strategy are market analysis, resource assessment, cultural fit, financial evaluation, and legal issues.

Note: Read more about different types of synergies in mergers and acquisitions in our dedicated article.

Acquisition versus merger: Cultural and organizational differences

Culture clashes are the reason for 30% of failed post-deal integrations, no matter the type of the deal (merger or acquisition), according to Deloitte.

However, the way staff and organizational structure are managed during a merger and acquisition differs.

During a merger, the management of the company and redundant specialists are often laid off.

During an acquisition, the management of the company and specialists can remain the same or experience certain restructuring if an acquiring company allows that.

Insight: According to the research conducted by Culture Amp, employees feel more negatively when a company undergoes acquisitions than a merger. 

Final words

Though mergers and acquisitions are often used interchangeably, it’s essential to understand the primary merger and acquisition difference.

Mergers refer to the joining forces of two or more companies that form a new company. Acquisitions, in turn, refer to the process when one company purchases another company and gains full power over its operations. In acquisitions, an acquired company typically ceases to exist, which does not happen in mergers.

When choosing between a merger and acquisition strategy for a company’s growth, it’s important to understand the outcomes a merger and acquisition brings to business operations.

Since 2000, the number of M&A transactions has been steadily rising. For example, in 2000, there were 31,000 deals, and by 2010, that figure grew to 45,000. In 2022, this number reached 50,000. This trend demonstrates the increasing significance of mergers and acquisitions due to the numerous advantages they offer to companies.

This article provides insights into these key benefits and explains how specific industries leverage M&A for strategic business growth.

Strategic benefits of mergers and acquisitions

So, what are the benefits of mergers and acquisitions? Let’s explore the seven most important.  

1. Synergies

When a transaction has synergy, it means that the combined value and performance of two companies are greater than the sum of their individual values and performances. Achieving financial synergies is one of the key M&A benefits and objectives. 

Proper planning and utilization of financial resources may result in two types of synergies:

  • Cost synergies

They happen due to reduced costs achieved through shared marketing budgets, shared technology, supply chain optimization, facilities consolidation, increased purchasing power, and staff reductions. 

  • Revenue synergies

They occur when two businesses combine resources. This can involve cross-selling products, leveraging each other’s customer base, and accessing each other’s patents or other intellectual property. This creates more competitive products and leads to increased sales and revenue.

Read our article to learn how to calculate synergies in M&A.

2. Economies of scale

The improved economic scale in mergers and acquisitions often becomes the main goal of the transaction. Economies of scale refer to the cost advantages that arise when the scale of production, operation, or distribution increases. In short, the larger the business, the more the cost savings.

Key economic benefits of mergers and acquisitions include:

  • Lower costs

Through mergers and acquisitions, companies can produce goods or services at a larger scale, leading to lower average costs per unit. This cost efficiency results from spreading fixed expenses over more units.

  • Increased access to capital

Mergers and acquisitions boost the credibility of the combined company, making it easier to secure funds from investors or through loans. This financial strength allows the merged entity to invest in important areas like expansion, innovation, and strategic projects.

  • Better bargaining power

The larger merged entity provides stronger negotiating power, especially in dealings with suppliers. This advantage enables the company to secure more favorable terms and pricing structures, leading to cost savings.

Economies of scale don’t merely stem from a company’s growth. They’re also the result of strategic decisions from M&A management. Take, for instance, the implementation of advanced technologies, streamlined production processes, and bulk purchasing practices. These proactive measures are key in realizing the efficiencies and cost advantages.

3. Market expansion

Among the most important benefits of mergers and acquisitions is the ability to expand internally and externally. Merging with or buying an existing and established business in a market the company wants to reach can be much quicker and cheaper than starting from scratch.

Cross-border acquisition benefits are especially evident as going into foreign markets can be challenging because of unfamiliar regulatory frameworks, cultural differences, and language barriers.

Here’s what companies get from international, regional, or national growth:

  • Increased diversification

If one market faces challenges, success in others can help avoid negative impacts. For example, in 2017, Amazon acquired Whole Foods and diversified its business into the grocery industry, which helped mitigate risks associated with fluctuations in the e-commerce market. 

  • Enhanced distribution capacities

When a business reaches new markets, it increases its ability to distribute products and services to more people. For example, the acquisition of TNT Express by FedEx in 2016 strengthened its presence in Europe.

  • Greater brand recognition

Corporate expansion enhances the credibility of a business, leading to better brand recognition. When more people know and trust a brand, sales and revenue increase. For example, Walt Disney’s acquisition of Marvel in 2009 improved Disney’s recognition in the superhero genre, attracting a broader audience.

  • New market tax benefits

Acquiring companies in a location with a lower tax base and relocating operations there can reduce costs significantly. For example, in 2015, American medical device maker Medtronic acquired Irish-based Covidien, partly motivated by the desire to benefit from Ireland’s lower tax rate: the acquisition was expected to deliver $850 million of annual pretax savings.

Tip: When reaching new markets, conduct thorough due diligence on foreign countries’ tax regimes to avoid M&A tax implications.

4. Increased market share

When two firms become one, the new larger company gets a bigger market share than each previously had separately. It, in turn, can lead to:

  • A competitive edge

Dominating a larger part of the market gives the company a competitive edge. It can influence industry trends, set standards, and attract more customers, further improving its position.

  • Increased revenue

Even though a company can increase revenue through organic growth, acquiring a business that operates in the same sector may be a faster and easier option.

Tip: Our article on the best books on mergers and acquisitions guides executives on what to read to learn more about the nuances of M&A, including consolidation benefits.

5. Risk diversification

One of the most obvious benefits of M&A is risk diversification. Here are a few examples of how it works:

  • Industry diversification

Expanding into a new industry reduces reliance on a single sector. If economic conditions impact one industry negatively, the diversified portfolio allows the company to rely on the performance of other industries.

  • Product and services diversification

When acquiring a target business, new products and services become accessible for integration into a company’s own distribution channels. This creates opportunities for new revenue streams. If one revenue stream faces difficulties, a company can spread risk using its alternatives.

Make sure to create an effective diversification strategy, align it with the existing business plan, and continually reassess its performance. Initiate the process during the early stages of M&A planning; otherwise, the transaction may face challenges post-merger.

Read our article Why mergers and acquisitions fail to learn how to avoid common pitfalls that jeopardize a deal’s success.

6. Competitive advantage

Competitive edge through M&A is another reason why businesses consolidate their strengths. The thing is, larger companies are usually harder to compete with. Thus, M&A is a great option for firms that want to avoid high levels of competition.

To reap the competitive benefits of acquisitions and mergers to the full extent, McKinsey recommends following these steps:

  • Manage the acquiring company’s reputation

Buyers should consider how they are perceived by target businesses and work on presenting themselves as bold, collaborative, and able to provide mentorship.

  • Confirm the strategic vision

Many companies focus on financial, legal, tax, and operations due diligence and forget about the strategy behind the acquisition. That’s why buyers are advised to adopt a fact-based approach, involving key stakeholders from various departments to assess the advantages and potential challenges of a deal.

  • Reassess synergy targets

Businesses involved should reassess synergy objectives throughout the deal, even after it closes, to ensure that expectations align with the real potential of the deal and capture opportunities for value creation in mergers and acquisitions.

Sell-side M&A should proactively approach the deal, clearly communicating its unique value proposition to potential acquirers and ensuring them that together, they can achieve a competitive edge.

7. Talent acquisition

The recruitment industry goes through hard times: the research indicates that about 75% of companies struggle to recruit effectively. Thus, obtaining quality staff and other business intelligence becomes one of the key M&A advantages for the acquiring company. Here’s why it’s beneficial:

  • Access to specialized skills

In some industries, like tech or healthcare, specific skills are particularly valuable. With M&A, the buyer gets direct access to the target company’s talent pool, which not only helps fill crucial skill gaps but can also put the combined company in a prime position for innovation.

  • Talent attraction

A financially robust and larger business is often perceived as offering greater stability and growth potential, making it an attractive employer for skilled professionals.

  • Better recruitment

The acquired company may have better-organized human resource processes and negotiation tactics. By adopting these best practices, the acquiring company also improves its recruitment strategies.

Business types and tailored M&A benefits

Mergers and acquisitions offer benefits tailored to different business models and industries. For example:

  1. Tech companies. They leverage M&A to acquire startups, gaining access to cutting-edge technologies, new intellectual property, and talent for rapid growth and advancement. For example, Facebook’s acquisition of Instagram in 2012 allowed the social media giant to incorporate Instagram’s popular photo-sharing features, expanding its user base.
  2. Manufacturing companies. They use M&A to expand their supply chains and get better production or distribution facilities. For example, in 2015, German manufacturing giant Bayer acquired Monsanto to expand its product portfolio and integrate Monsanto’s global supply chain.
  3. Pharmaceutical companies. They use M&A to speed up their research and development. They do this by acquiring smaller biotech firms that have promising new drugs in development. This helps the larger company offer more effective treatments. For example, Johnson & Johnson’s acquisition of Actelion in 2017 enabled it to enhance its portfolio in pulmonary arterial hypertension treatments.
  4. Retail companies. They focus on market penetration through acquisitions of regional retail chains, strengthening their brand presence and attracting diverse customer segments. For example, Walmart’s acquisition of Jet.com in 2016 aimed to improve its e-commerce presence and reach a wider online customer base.
  5. Financial institutions. They enhance their service portfolios by acquiring fintech startups. This allows them to stay competitive through the integration of digital banking solutions and innovative financial services. For example, JPMorgan Chase’s acquisition of WePay in 2017 allowed the bank to enhance its payment processing capabilities, integrating WePay’s technology into its services.
  6. Startups. They grow rapidly by acquiring established businesses instead of building them from scratch. With M&A, they can access new markets, customer bases, and experienced teams in a matter of months. For example, when Airbnb acquired HotelTonight in 2019, it quickly expanded its offerings to include last-minute hotel bookings, tapping into a new segment of travelers.
  7. Large corporations. They streamline operations through consolidation, eliminating competition and achieving economies of scale. They also diversify into new markets to reduce dependency on specific sectors. For example, the merger of Dow Chemical and DuPont in 2017 resulted in DowDuPont, creating a chemical giant with diverse product lines.

Key takeaways

M&A integration offers a variety of benefits, including:

  • Synergies

They are achieved through cost reduction and revenue enhancement.

  • Economies of scale

It’s achieved through large-scale production, access to capital, and enhanced bargaining power.

  • Market expansion

M&A facilitates internal and external growth, offering diversification, expanded distribution capacities, greater brand recognition, and potential tax benefits in new markets.

  • Increased market share

Merging companies in the same industry result in a larger market share, leading to increased revenue and a competitive edge.

  • Risk diversification

M&A allows for industry and product/service diversification, spreading risk across different sectors and revenue streams.

  • Competitive edge

Consolidation through M&A reduces competitive threats.

  • Talent acquisition

M&A enables access to specialized skills, attracts top talent, and improves recruitment strategies.

About 10% of large mergers and acquisitions that are worth more than €1 billion are canceled every year, McKinsey states. This is truly a significant number considering that 460 of such deals are announced yearly. 

Among the most common reasons for failure are poor cultural fit, lack of management involvement, unclear strategy, and inadequate due diligence, based on the Statista survey. However, there are many more risks that could significantly impact the deal’s success.

This article focuses on the main M&A risk factors that could ruin the deal and provides helpful tips on how to mitigate each type of M&A risk.

9 types of risks in M&A

Let’s take a closer look at the main risk factors of mergers and acquisitions and ways to reduce them. 

1. Inadequate due diligence 

Results of the Bain & Company survey show that 60% of executives attribute the deal failure to poor due diligence.

Due diligence is an integral part of the mergers and acquisitions process and the buyer’s chance to thoroughly investigate all the aspects of the target company’s operations to ensure it is worth investing. At the same time, inadequate due diligence can lead to unforeseen liabilities, missed critical financial issues, and operational challenges.

Note: Read more about mergers and acquisitions in investment banking in our dedicated article.

How to mitigate?

For poor due diligence risk mitigation, follow these simple recommendations: 

  • Assemble an expert team

To be able to notice and timely react to potentially risky issues in the documentation of the target company, you’ll need a team of professionals in many areas, such as finance, law, or audit.

  • Establish a comprehensive due diligence process

Due diligence is adequate when it’s thoroughly planned, has a clear structure, and responsible people are defined.

2. Cyber risk 

Based on the IBM report, the global average cost of data breach in 2023 was $4.45 million, which is a 15% increase over 3 years. What’s more, Forescout Technologies’ survey among more than 2,700 business decision-makers demonstrates that 53% of respondents experienced certain cybersecurity issues during an M&A deal that put the whole transaction at risk.

Indeed, cyber security is among the main concerns of deal-makers during mergers and acquisitions. This is what Pawel Wilczynski, a Cybersecurity Manager at Baker Newman Noyes, says about the possible consequences cyber issues can have for the deal and business in general:

Cyber threats can have severe consequences for businesses. A successful cyber attack could potentially lead to the theft of valuable intellectual property, exposure of confidential information related to the M&A transaction, monetary loss, damage to brand reputation, and legal liabilities. These consequences can be devastating for businesses, especially in the context of an M&A transaction. A cyber breach during the M&A process can derail the transaction, leading to significant financial losses and damage to the reputations of all involved.

How to mitigate?

This is how dealmakers can approach cyber risk issues: 

  • Forensic analysis

Companies can perform forensic analysis of the cyber risk accompanying an M&A transaction with the help of various bog-data tools. Such an analysis focuses on reputation and reliability and helps to detect risks that are typically not detected during standard due diligence.

  • Insurance policies

Dealmakers can adopt certain insurance policies to lean on during the transaction that help to ensure a company will not be affected by any risky issues found during the deal. 

  • Virtual data rooms

To address breach risk, modern dealmakers often opt for using virtual data room solutions during due diligence. Virtual data rooms ensure the secure storage and distribution of highly sensitive or confidential data.

3. Target company’s overvaluation 

Results of the survey by Statista show that 36% of corporate investors and 43% of private investors named deal valuation one of the leading factors in achieving M&A success in the United States. 

Determining the fair value of the company is truly essential since the overvaluation of the target company can lead to overpayment and reduced return on investment (ROI).
In fact, the analysis of about 2,500 deals by McKinsey & Company between 2013 and 2018 shows that the larger the transaction, the more likely it is to fail.

Source: McKinsey & Company

How to mitigate?

To reduce the risk of M&A overvaluation, and, as a result, overpayment, follow these two simple recommendations: 

  • Use different valuation methods

To mitigate valuation risks, consider using several valuation methods simultaneously, such as discounted cash flow analysis, precedent transaction analysis, or comparable company analysis. 

  • Engage external specialists

To eliminate the risk of poor valuation practices, it’s recommended to engage external financial advisors. They can provide an unbiased perspective and reduce the risk of overpaying.

4. Integration challenges 

Integration risk M&A is often underestimated. However, it’s among the top factors for M&A deal failure. Statista’s survey among M&A practitioners in 2021 shows that 41% of deals failed because of a lack of post-merger integration, including poor cultural understanding and a lack of trust between the buyer and the seller.

Merging two different corporate cultures, operational processes, and management styles can lead to conflicts, inefficiencies, staff turnover, and failure to meet the deal’s objectives.

How to mitigate?

To ensure a smooth post-merger integration, follow these recommendations: 

  • Create a detailed integration plan

At the early stages of the M&A process, create a post-merger integration plan with all the objectives, stages, and responsible parties clearly defined. It should cover everything from employee onboarding to financial reporting and IT systems. Explore how to create an acquisition integration playbook in our dedicated article.

  • Get stakeholders involved

Assure robust communication between stakeholders from the buy- and sell-side, set realistic expectations, and communicate all the integration stages and timelines clearly.

5. Intellectual property risk 

The World Intellectual Property Organization states that 2022 was a record year for patent activity: about 3.46 million patent applications were submitted around the world, which is a 1.7% growth compared to 2021.

The intellectual property valuation represents a potentially catastrophic risk in any M&A deal. Lewis Lee, a Global Head at Aon Intellectual Property Solutions, states that one of the biggest mistakes a company can make is to consider its intellectual property a legal instrument instead of thinking of it as a core asset to the business.

How to mitigate?

For intellectual property risk management, follow these recommendations:

  • Conduct intellectual property due diligence

Intellectual property (IP) due diligence allows for assessing the quantity and quality of the target’s intellectual property assets, which, in turn, helps to set a fair deal value and potential.

  • Engage external specialists

For a successful IP due diligence, it’s also recommended to engage third-party professionals in the field of intellectual property who have relevant expertise.

6. Tax risk 

Ernst & Young’s 2019 M&A survey demonstrates that tax issues were cited as the primary reason for deal failure by 33% of respondents. The tax insurance market is now evolving to address the liability associated with a company’s uncertain tax position.

The deal-making is heavily influenced by changes in the tax environment that should be timely detected and addressed.

How to mitigate?

This is what the sell- and buy-side can do to mitigate the tax risk of mergers and acquisitions:

  • Seller’s perspective

Tax issues can be reduced by the seller’s proper preparation of tax documents. Before approaching prospective investors, the selling company should also be aware of the tax burden that will be imposed on them as a result of the sale.

  • Buyer’s perspective

An acquiring company should ensure thorough tax due diligence with responsible internal and external experts involved that will ensure the seller has all the taxes in order and regulatory compliance in place.

7. Unexpected extra costs 

Often, the estimated deal value can substantially grow in the process of the deal. This is because of various extra costs that appear during the transaction, such as legal fees, advisor fees, investment banking costs, or regulatory penalties. For example, in 2022 alone, companies paid about $6.4 billion in penalties under 760 non-compliance lawsuits, according to the SEC.

How to mitigate?

To eliminate the risk of the deal’s value increase, follow these recommendations:

  • Ensure quality planning

The best way to decrease unexpected extra costs is to perform comprehensive financial planning beforehand that will include all the possible costs that can appear during the M&A process.

  • Opt for digital solutions

Usage of such digital tools as virtual data rooms can significantly reduce the risk of extra legal fees, as VDRs provide a highly secure space for confidential data storage and sharing.

8. Litigation risk 

When a target company is facing existing or threatened litigation, it can not only bring potentially catastrophic damages to the buyer but also prevent a deal from happening at all.

This is what Elliot Konopko, former Senior Managing Director at Aon Litigation Risk Group, says about litigation risk in mergers and acquisitions:

Many buyers are not willing to take on this type of potentially catastrophic risk and sellers are looking to walk away cleanly. In the past two years, we’ve identified a substantial market for what we call judgments-only catastrophic insurance.

How to mitigate?

This is what matters in mitigating the litigation risk during M&A:

  • Thorough due diligence

An in-depth and quality due diligence of financial statements and other documentation helps to identify whether the target company faces pending or possible litigation and thus, assess its impact on the future merger or acquisition.

  • External expert engagement 

Hiring external law and financial experts can significantly improve the due diligence process, and thus, help to mitigate the litigation risk. 

9. Synergy overestimation 

Miscalculating synergy risks also often puts risks on the deal’s success. Bain’s survey demonstrates that 55% of executives attribute disappointment in the deal’s outcomes to overestimated synergies. This is because companies often enter the deal with overly optimistic expectations without conducting a proper analysis.

How to mitigate?

To eliminate the possibility of synergies risk appearance during the M&A process, follow these recommendations:

  • Perform a thorough synergy analysis

A comprehensive synergy analysis during due diligence helps to identify areas where operation improvements, cost savings, and revenue boosts can appear. 

  • Outline clear goals and milestones for synergy realization

This way, all deal participants will have a clear vision of what outcomes to expect from the deal, in what period of time, and what actions should be performed by every responsible person.

General risk mitigation tips

Besides the core recommendations on how to mitigate potential risks during mergers and acquisitions mentioned above, there are also several general tips for risk assessment:

  • Opt for project management platforms

There are various digital risk mitigation tools that help plan and execute due diligence and other stages of the M&A deal. For example, virtual data room software offers a secure space for effective data sharing, collaboration, and project execution.

  • Engage external experts

Often, the external expertise of third-party professionals is of great use. This way, you ensure that all the aspects of the deal such as legal, intellectual property, or financial are fully covered and addressed. 

  • Focus on planning

Comprehensive planning of the deal process is one of the keys to the deal’s success. Ensure all the goals, milestones, timelines, and responsibilities are clearly defined and communicated.

Final words

During the M&A deal, the sell-side and buy-side can face various M&A risks that can significantly impact the deal outcomes.

The most common types of M&A risks include inadequate due diligence, cyber risk, target company’s overvaluation, integration challenges, intellectual property risk, tax risk, unexpected extra costs, litigation risk, and synergy overestimation.

General recommendations for risk arbitrage in mergers and acquisitions include developing a comprehensive deal plan, engaging external experts, and using project management platforms.