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.

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.

M&A is a complex, multi-stage process that involves many players both from the sell- and buy-side and requires a thorough planning.

According to Deloitte’s 2022 M&A Trends Survey, 47% of executives and 46% of private equity investors name an M&A strategy as a key element in achieving the deal’s success. And a well-thought-out M&A strategy is impossible without quality initial market research, skilled professionals involved, and, most importantly, proper project management. 

This article dwells on the basics of M&A project management and ways it can streamline the M&A process.

What is the M&A management process?

M&A project management is a process of implementing the best practices of classic project management during mergers and acquisitions. 

When one company purchases another or two companies consolidate, M&A project management handles all the organizational issues in each phase of the pre- and post-merger activities. 

Practically, M&A deal management means breaking each M&A activity into the main project management phases.

Note: According to PMI, there are 5 basic project management phases: initiation, planning, execution, monitoring, and closure.

In other words, M&A management defines the key roles and establishes the timelines, benchmarks, and targets of the main M&A activities.

Project management techniques can also be used in other M&A activities such as investment management M&A, asset management M&A, and M&A wealth management. 

The critical role of effective M&A management

Given the multifaceted nature of M&As, the fact that they consist of many stages, and that many parties are usually involved in a single transaction, a deal’s success largely depends on how all the processes are organized.
According to Statista’s 2021 survey conducted among M&A practitioners, 34% of respondents indicate unclear strategy and objectives as the main factor for M&A failure. At the same time, 25% blame unclear key performance metrics, and 22% say it was poor lifetime management that led to the deal’s failure.

Source: Statista. Main factors for failure of M&A deals according to M&A practitioners worldwide, 2021

All these issues could be solved if the companies involved applied decent M&A project management, which provides guidelines and helps structure the deal.

Let’s see how mergers and acquisitions management actually contributes to the improvement of the M&A process:

  • Better coordination

With the project management tools, all the M&A activities such as due diligence, negotiation, or integration and parties involved are better coordinated and thus more effective. M&A project managers ensure that all the objectives and tasks are timely completed.

  • Realistic pricing

M&A deal management ensures that the transaction creates value for the acquiring company and the target company since it helps to identify synergies and cost savings.

  • Improved communication

M&A management teams work on establishing a clear and effective cross-functional collaboration between shareholders, customers, responsible employees, auditors, executives, and all other parties involved in the transaction.

  • Specified roles and responsibilities

M&A deal management helps to clearly define who is responsible for what and at what stage of the M&A process, which helps everyone to stay effective and work on the deal’s success.

  • Tasks prioritization

Since merger and acquisition deals involve lots of tasks and processes, project management helps to correctly identify tasks’ priority and thus, ensure their timely and effective completion.

  • Risk management

Project management helps to avoid possible post-merger integration risks by timely identifying and addressing pain points during the M&A process.

What does an M&A project manager do?

An M&A project manager is a specialist responsible for managing the transaction who leads and coordinates all the activities of the deal throughout its main stages: sourcing, due diligence, deal negotiation, and post-merger integration.

An M&A project manager is responsible for:

  • Managing budgets and timelines to ensure the project stays within budget
  • Managing relationships between all the parties involved in the transaction: shareholders, executives, advisors, auditors, attorneys, responsible employees, etc.
  • Planning and objectives setting
  • Defining key roles and responsibilities
  • Prioritizing tasks and ensuring their timely completion
  • Integration planning
  • Overseeing and coordinating post-merger tasks

M&A project manager skill set

A good M&A project manager should have expertise in the following areas:

  • Governance

Deal project managers should know how to structure and lead teams and control processes and task execution to ensure a successful and effective deal process.

  • Finances

M&A project managers should have good financial knowledge to be able to perform financial planning and budget management.

  • Risk management

Project managers should be familiar with state, federal, and local laws, risk analysis, and legal considerations of the deal, such as regulatory compliance requirements. This is to be able to spot the potential risks and avoid financial losses.

  • Performance management

An M&A project manager develops metrics to reach the post-merger integration objectives and oversees their execution.

  • Work management

A project manager should know how to manage a team, establish a collaborative work environment, and create a productive workflow that will help to achieve the deal’s goals. It implies developing an efficient project management strategy and using certain project management tools and techniques. 

  • Information management

An M&A project manager knows how to manage large amounts of data, and especially how to handle highly confidential information shared during the due diligence process.

  • Quality assurance

An M&A project manager should know how to ensure all the parties involved in the deal adhere to the best practices to complete the deal successfully. Also, they should ensure that processes and approaches are documented so that they can be used to improve future transactions. 

  • Resourcing

An M&A project manager should know how much time, human capital, money, and other resources are needed to complete a particular M&A project/task at each stage of the M&A process. A project manager should allocate and manage these resources effectively across all the stages of the transaction.

Key components of successful M&A management

M&A project management during the transaction could be divided into two phases: pre-merger project management and post-merger project management. 

Pre-merger project management implies planning and organizing all the M&A activities before the closure. Post-merger project management involves organizing the integration process and executing post-merger tasks.  

Before describing the fundamentals of pre-merger and post-merger project management, let’s define the main steps a project manager should take during mergers and acquisitions:

  1. To start a project, an M&A project manager works on creating a project charter. This document defines the project objectives, scope, and responsibilities and is to be approved by the key project stakeholders. 
  2. The next step is to break the M&A project into tasks and subtasks, set due dates, allocate resources and human capital, estimate costs, and assess potential risks.
  3. After this, it’s time for project execution. An M&A project manager should organize the team, assign roles and responsibilities for each team member, and then coordinate the team’s efforts. The project manager also plans kick-off and status meetings, communicates with stakeholders, and tracks performance.
  4. Before the project closure, an M&A project manager records the processes and lessons learned. 
  5. After the project closure, an integration process starts and dedicated project managers ensure it’s smooth and all the objectives are met.

Now, let’s take a closer look at the fundamentals of pre- and post-merger project management.

8 pre-merger project management components

During the pre-merger phase of a transaction, project management is used to perform M&A tasks at each stage. Project managers define key roles and responsibilities for each stage, assign tasks, allocate resources, estimate time and costs, evaluate risks, and track progress. 

The pre-merger tasks where M&A project management is used are the following:

  1. Defining strategy. It’s about determining the expectations from the deal, ensuring that the reasoning is realistic, and confirming that it aligns with the acquiring or to-be-acquired company. 
  2. Screening. This phase involves establishing the criteria for potential targets (selling or acquiring companies), searching for candidates that match these criteria, and evaluating the most fitting targets. 
  3. Preparatory work. This phase is about getting ready for the deal initiation. If a target company is receptive to a deal, then potential acquiring firms sign a confidentiality agreement and review the target. In case the review results are favorable, a written offer is submitted. 
  4. Negotiations. This stage of the transaction is about both the acquirer and the seller negotiating the deal terms. When the consensus is reached and the price is agreed, both sides sign a letter of intent. 
  5. Due diligence. This phase is about performing a thorough investigation of the target’s background, financials, and other important documents. Due diligence is always about many tasks and people involved, that’s why proper project management is essential. 
  6. Contract drafting. In case of satisfactory due diligence results, both sides sign a final contract for the transaction. 
  7. Financing. This is a stage of financial management, when the acquiring company searches for ways of financing the transaction.
  8. Closure. The representative of the acquirer and the merged company sign the final contracts and close the deal.

6 post-merger project management components

The post-merger phase of a transaction starts after its closure. It focuses on the key activities of integration planning and implementation. 

Usually, a dedicated project management office (PMO) is hired to be in charge of all the post-merger activities. The PMO defines procedures, sets standards, defines key roles, assigns tasks, establishes workflow, communicates with stakeholders, monitors performance, and ensures that the project meets deadlines and stays on budget. Often, a PMO is also responsible for change management M&A. 

Among the post-merger tasks where M&A project management is used are the following: 

  1. Team planning. A project manager allocates required resources and assigns key roles and responsibilities. 
  2. Integration process. An M&A project manager plans the integration process by breaking it down into tasks and subtasks and assigning responsible people for their implementation.
  3. Creation of organizational structure. This phase of post-merger project management is about defining who is responsible for what, who reports to whom, and at what matter.
  4. Stakeholder updates. A project manager keeps in touch with stakeholders and informs them about all the project’s updates on time.
  5. Controlling performance. A project management team monitors the team’s performance, detects pain points, and timely addresses them.
  6. Achieving M&A goals. A project manager ensures all the post-merger integration objectives are met and that the project follows deadlines.

Best practices for streamlining M&A project management

Now, let’s take a look at the best practices to improve M&A project management during the pre- and post-merger phases.

Pre-merger project management tips

  • Consider outside expertise

In case you don’t have a lot of M&A expertise, it’s recommended to hire outside M&A experts who are closely related to the mergers and acquisitions field. This will ensure that all the aspects of the M&A process are properly addressed. 

  • Be especially careful with due diligence

Poor management of the due diligence process might lead to missing out on essential information and thus, impose reputational and financial risks on the deal.

  • Develop a project-specific workflow

Create a well-thought-out project workflow with clearly defined roles and responsibilities, that address the needs of a particular M&A phase. 

  • Engage the C-level executives

Ensure that senior management and board members are aware of the project’s progress and understand the M&A strategy.

  • Prioritize tasks and actions

Identify tasks that could bring an immediate payoff to the business and prioritize them to demonstrate ROI on the deal.  

  • Ensure clear communication through the team

At each stage of the M&A project management, ensure that every team member knows what’s going on, what to do, and what to avoid doing till the deal’s finalization.

  • Opt for M&A software tools

Dedicated software solutions, such as virtual data rooms, can immensely streamline the M&A process and, thus, accelerate decision-making. For example, VDRs are often used during the due diligence process since they allow for secure data storage and effective collaboration of all the parties involved.

Using a phase-gate process model

One of the practical project management tools often used during the pre-merger M&A phase is the phase-gate (or stage-gate) process model. 

A phase-gate model implies an obligatory review of each project stage before moving to the next one. It presupposes setting clear criteria that should be met at each stage of the M&A process. Without meeting that criteria, a team can’t proceed with the next project stage. 

In the pre-merger M&A project management, there are 3 main decision-making points, when the phase-gate model is used: 

  • Strategy approval

At this stage, you decide on whether a candidate can become a potential target based on the set criteria.

  • Negotiation approval

At this stage, you decide on whether to proceed with the negotiation with a particular candidate based on the review of the target’s background and financials.

  • Deal approval

At this stage, you decide on whether to proceed with the deal and seek approval from the senior management and the board.

Note: M&A practitioners also often opt for the M&A pipeline management model, which helps to break down the whole process into separate stages. Just like with M&A management, creating an M&A pipeline model breaks the M&A process down into logical stages, which helps to ensure all the M&A tasks are fulfilled.

Post-merger project management tips

  • Thoroughly plan a post-merger integration project

You should plan every stage of the post-merger integration process: think of the milestones, key people to involve, tasks and responsibilities, deadlines, and lines of communication.

  • Ensure clear and regular communication

The communication through the post-merger integration phase should be impeccable. For this, maintain a single source of communication where all the issues will be discussed and tracked and ensure each team member gets timely updates on the progress. 

  • Allocate resources wisely

You should carefully work on the staff, time, and money estimates since the post-merger integration is a long and complex process. Additionally, think of involving third-party experts such as technical specialists.

  • Take care of people

To avoid culture clashes, assign a full-time project leader who will be responsible for a smooth transition of human resources from all core businesses into a single merged company. Clearly describe transition stages and assign key roles and responsibilities.

  • Plan Day One

Day One should celebrate the culmination of the deal process and the first day of the new organization. Set the milestones that should be achieved till Day One and plan the activities that should take place during the first day.

  • Plan the first 100 days

Set the post-integration objectives that should be achieved in the first 100 days of the new organization’s operations.

  • Regularly monitor the progress

Build a single data dashboard that will have all the stages, milestones, tasks, deadlines, and responsible people indicated.

Final words

M&A project management is an implementation of the best project management practices during the M&A process.

With proper project management, acquisitions and mergers are better organized and streamlined. It helps to achieve better coordination, productive communication, risk management, and realistic pricing. It also prioritizes tasks and clearly defines the roles and responsibilities of everyone involved in the transaction.

M&A project management is usually divided into two phases: pre-merger project management and post-merger project management. At each phase, a project manager applies project management techniques to streamline each M&A stage and achieve better and faster results.

In any M&A transaction, time is of the essence. According to Investopedia, a merger’s timeframe for completion is between six months to several years. When we talk specifically about the due diligence process the duration varies depending on the complexity and size of the M&A deal

Sri Malladi, founder of Athena Consulting Partners, a firm specializing in M&A and strategic finance advisory for corporate and private equity firms, has shared his view on the importance of accelerating due diligence and how it can help buyers save time (and money) in their M&A transactions.

The risks of a delayed due diligence

When an acquirer takes too long to conduct diligence and to close the deal, they risk the deal. Among the most common negative outcomes of a delayed due diligence:

  • Sellers becoming frustrated as prolonged due diligence creates uncertainty, and strains the seller financially and emotionally
  • Acquirers conveying hesitancy to do the deal through excessive information demands, eroding sellers’ trust in the process
  • Seeing the deal collapse due to exposure to market fluctuations or to competition jumping in when timelines are extended beyond the exclusivity period

How to save time and money for your M&A deal

Here’s a simple hypothesis-based approach that can help shorten this period and lead to quicker decision-making.

Step 1: Make a short list of hypotheses

Together with the P&L owner (deal sponsor) and the functional leads, develop a short list of hypotheses that the deal team needs to believe in for the acquisition to be successful. This needs to be done before going deep into the data room. These could be either sources of value or risks to be mitigated.

For example:

  1. Analysis of operational data will confirm a projected 15% reduction in combined supply chain costs post-close
  2. Customer satisfaction survey data indicates an 80% retention rate post-acquisition, with key accounts expressing commitment
  3. Market trend analysis will show a 12% annual growth in demand for the acquired entity’s niche technology solutions over the last three years
  4. Regulatory compliance audit will identify zero instances of non-compliance with industry-specific regulations in the last five years
  5. Historical customer churn data will demonstrate an average customer retention rate of 85% even during periods of market volatility

These hypotheses can be sourced from the valuation model drivers, and from the acquirer’s business unit leadership team.

Step 2: Validate the hypotheses

Validate or invalidate the hypothesis through the diligence process, based on the data room and conversations with the management team.

The results will be “pass” for some areas and “fail” for others.

Step 3: Double check the hypotheses with your team

Regroup after the validation process to check whether

  1. The deal team has reflected the results in the valuation model and, if that is the case, how; and
  2. The deal sponsor and functional leads have either become comfortable with the findings or consider them to be deal-blockers

Step 4: Analyze the results

At this point, all the hypotheses would have been either confirmed or invalidated.

There will of course be additional takeaways, but if the hypotheses were built right, the most important takeaways will bubble up to the top of the list.

It’s now clearer whether to pass on the deal, or go back to the target with the right revised valuation and deal structure.

Mergers and acquisitions (M&A) are one of the fastest ways for a company to achieve growth and enter new markets. More and more companies are choosing M&A as a transformational tool every year: in 2022 there were almost 50,000 M&A deals worldwide and about 28,000 M&A deals in H1 2023

However, not all deals end successfully. On the contrary, the number of failed deals is also striking. 

So, why do acquisitions fail sometimes, and what is a common reason for the failure of an acquisition? Let’s find out in this article.

The stark reality: The high failure rate

According to research conducted by McKinsey & Company, about 10% of all large mergers and acquisitions are canceled every year. This number is quite significant, considering that about 450 of such deals are announced annually. 

However, the number might be even higher, considering the information presented by Roger L. Martin in the June 2016 issue of the Harvard Business Review, according to whom “M&A is a mug’s game, in which typically 70–90% of deals fail.” 

Indeed, mergers and acquisitions quite often fail, no matter the size of the transaction. For example, one of the most famous business mergers and the biggest M&A failure in history was the $165 billion deal between AOL and Time Warner. Among the main reasons for failure, M&A practitioners indicate a lack of vision of post-integration steps, cultural clashes, and misreading of the current market state. All of those issues could be solved with proper prior analysis.

Why proper analysis matters

To put it briefly, an adequate M&A analysis allows an acquiring company to assess the potential of the target company. Financial and performance analysis allows for finding the weak spots that could impact the transaction, as well as strong points that could bring potential benefits to the companies combined.

Thus, M&A analysis is a powerful risk assessment tool that helps two companies evaluate the transaction’s potential and build a strong business model based on gained insights. 

Top 11 reasons why mergers and acquisitions fail most often

Now, let’s get to the point and review the most common reasons for the failure of mergers and acquisitions.

1. Unclear goals and timelines

According to a survey conducted by Statista in 2021, most respondents indicate that a clear M&A strategy is the most important factor for achieving a successful M&A in the U.S.

Source: Statista

Thus, lack of proper strategic planning is the most common reason why most mergers and acquisitions fail. 

Sometimes, companies rush an M&A deal when there’s an opportunity to acquire a competitor or to gain a bigger market share. However, rushing often results in unrealistic expectations and, thus, a failed transaction. Before entering into a transaction, both companies should clearly understand the acquisition objectives and assess the potential synergies it can bring.

2. Poor due diligence

Sloppy or careless due diligence processes is another common reason why the majority of mergers and acquisitions fail.

According to Bain’s 2020 Global Corporate M&A Report, more than 60% of executives indicate that poor due diligence is the main reason for deal failure.

Due diligence is an integral part of the M&A process that allows an acquiring company to investigate the documentation, legal aspects, and internal processes of the to-be-acquired company to help avoid surprises. On the other hand, due diligence is also a great chance for target companies to ensure they’re fully prepared for the acquisition.

Proper due diligence ensures a smooth transaction by minimizing possible risks. Conversely, lax due diligence may result in the deal failure and great financial losses.

3. Overpaying

The McKinsey & Company analysis of about 2,500 deals conducted between 2013 and 2018 showed that the larger the transaction, the more likely it is to fail.

Source: McKinsey & Company

Often, companies become too focused on the potential benefits a deal may bring and overlook its real value. This often results in a failed transaction and financial loss.

One of the clearest and infamous examples of an overpaid and failed M&A transaction is the historic and already-mentioned $165 billion deal between AOL and Time Warner.

4. Lack of proper communication

This relates to poor communication both between the two companies engaging in the deal and between the senior management and key team members. 

Communication breakdowns between the sell- and buy-side lead to different visions of the deal objectives. Additionally, poorly communicated deal objectives by the senior executives leaves key team members confused and might lead to misunderstanding of the combined company’s goals. This, in turn, results in executing the wrong goals.

5. Cultural clashes

When two companies have completely different cultures, it might be difficult to gain a cultural fit during post-merger integration.  

Different cultures, values, and operational styles lead to confrontations among company staff. This results in poor cooperation and impacts the overall company’s performance.

According to Deloitte, cultural differences are the reason for 30% of failed integrations. This was one of the main reasons for the failure of the $35 billion deal between Sprint and Nextel in 2005. Sprint had a more bureaucratic style of management, while Nextel had a more entrepreneurial spirit. The incompatibility of the two companies was also evidently manifested by the fact that they kept two separate headquarters.

6. Operational difficulties

Just like with culture, the operational styles of two companies entering a transaction also matter. 

When two companies have different approaches to operations, it can lead to operational inefficiencies and M&A challenges.

Operational differences can include challenges related to integrating different corporate processes, technologies, and management styles. These differences can contribute to the failure of M&A deals by causing disruptions, decreasing employee morale, and affecting the overall performance of the merged entity.

7. Lack of management involvement

Often, company senior managers and leadership teams choose to let professional advisors oversee the transaction and address the deal issues.

However, management involvement helps a company to close a deal successfully. This is because company owners and senior managers have a better understanding of the deal objectives and, thus, build an atmosphere of trust throughout the company teams actively engaged in the integration process.

8. Regulatory issues

McKinsey & Company research shows that out of 345 large M&A deals announced between 2013 and 2020, 47 of them (14%) were canceled because of antitrust or regulatory reasons. As of 2023, there were 3 merger complaints filed due to the antitrust laws so far, according to Bloomberg.

These are the external factors that greatly impact a deal’s success. However, thorough due diligence and prior analysis help to avoid regulatory difficulties.

9. Poor post-merger integration 

After a deal’s closure, the integration process begins. Often, companies underestimate the importance of post-merger integration, which results in poor post-acquisition management and poor execution of the deal’s objectives.

Instead, an acquiring firm and a target company should have a clear integration plan, which specifies how the companies’ workforce, projects, products, and internal processes will be distributed and shared.

10. High recovery costs

The complexity of the post-merger integration process typically leads to high recovery costs, which are sometimes beyond the companies’ capacity. As a result, the deal fails. 

When assessing the transaction and building a strategy, companies should take into account the post-merger integration period and the costs it might incur. This is because a newly formed company might need to invest in new processes or systems. Additionally, there might also be layoffs that could lead to higher costs.

11. Synergy overestimation

Overestimated synergies go together with overpaying and are what leads to the latter. 

Often, companies become too focused on the potential synergies a deal can bring without proper analysis and, thus, might not notice certain issues a target company lacks. This results in overpaying and possible deal failure.

Summing up

Despite being a powerful transformation tool for companies, M&A is not always successful. Moreover, the numbers prove M&A deals quite often fail: about 10% of all large transactions are canceled every year. Mergers and acquisitions often fail because of many factors. This article has addressed the following: 

  1. Unclear goals and timelines
  2. Poor due diligence
  3. Overpaying
  4. Lack of proper communication
  5. Cultural clashes
  6. Operational difficulties
  7. Lack of management involvement
  8. Regulatory issues
  9. Poor post-merger integration
  10. High recovery costs
  11. Synergy overestimation

Keep up with the M&A Community blog to learn how to close a deal successfully and avoid failure.

In 2017, there were 3.5 billion consumers in the world, a number set to surge to 5.6 billion by 2030. Remarkably, 88% of the next billion consumers will be from Asia. Thus, for companies oriented towards growth and long-term success, seizing the opportunities presented by global markets is no longer just an option — it’s a must.

In this article, we explore why to expand business internationally, discover key challenges of global expansion, provide solutions to overcome these obstacles, and shed light on what strategy to choose to enter a new international market.

6 reasons to expand business internationally

In today’s interconnected world, the majority of consumers reside beyond domestic borders. For example, as reported by the International Trade Administration, American businesses have access to more than 95% of the world’s consumer base outside of the United States. With this vast global audience in mind, the advantages of global market entry are undeniable. They include:

  1. Global talent. The international expansion allows access to a large talent pool. Hiring employees with diverse skills and cultural backgrounds helps a business engage with a global customer base more effectively. Additionally, multilingual staff is also valuable in this regard.
  2. Cost reduction. International expansion can often be more cost-efficient than expanding locally. Lower labor and material costs in some countries make it beneficial to consider moving core operational functions or outsourcing back-office functions to new countries. Notably, labor costs are ranked as the most important site selection factor by corporate executives. However, it’s essential to consider taxation consequences when expanding globally.
  3. Risk diversification. Relying solely on one market makes a business vulnerable to economic downturns. Expanding internationally brings new revenue streams and spreads the risk across multiple locations, so a downturn in one country is balanced by growth in another. This enhances overall business stability.
  4. Global branding and positioning. Overseas expansion enhances a brand’s recognition and reputation on a global scale. By establishing a presence in foreign markets and gaining international customers, the brand becomes more credible and respected. This is crucial for a business, as, statistically, 60% of global online shoppers value trustworthiness and transparency most in brands.
  5. Competitive advantage. Being first or one of the early entrants in a new market helps establish a brand as an innovative leader. This competitive advantage is invaluable in gaining market share and building a strong presence before competitors catch up.
  6. Tax benefits. Countries like Ireland, Hungary, or Cyprus offer more competitive corporate tax rates for international businesses, attracting foreign investment and expansion. However, navigating international tax obligations can be complex, so it’s crucial to seek professional advice to ensure compliance and avoid tax implications.

Statistics from the Equinix Global Tech Trends Survey support these reasons, with 72% of 2,900 surveyed IT leaders indicating plans for expansion.

Assessing business global expansion readiness

How to prepare your business to expand internationally? First, assess its readiness for expansion. The process involves evaluating both internal factors within an organization and external factors related to the target markets.

Internal assessment

Internal assessment is crucial during global expansion because it allows a company to evaluate its current capabilities, financial resources, and strategic goals. This assessment also helps identify areas where the company may have gaps, which need to be addressed before entering new markets.

For example, in the case of Skin Authority, this evaluation process led to a critical realization. Specifically, it became apparent that expanding domestically first, leveraging existing success, and then venturing into international markets was a more cost-effective and sustainable approach.

Here’s what a company planning expansion needs to assess first of all:

  • Company objectives and strategy

Begin by clearly defining your global expansion goals and ensuring they align with your overall business strategy. Understand why you want to expand globally and what you hope to achieve.

  • Financial readiness

Assess your financial health and determine the budget available for international expansion. Consider the cost of market entry, operational expenses, and potential currency exchange risks. Ensure you have access to adequate capital.

  • Management team

Evaluate the capabilities and experience of your leadership team in managing international operations. Identify gaps in expertise and consider hiring or providing training to equip your team for global challenges.

  • Legal and regulatory compliance

Ensure your business complies with all relevant local laws and regulations. Identify any legal barriers that impact your entry into specific markets.

  • Intellectual property protection

Determine the status of your intellectual property rights (patents, trademarks) and how they apply internationally. Make sure the intellectual property protection strategy is carefully planned.

You might find this business valuation guide helpful in assessing your company’s readiness for global expansion.

Market research

The Starbucks example in Australia illustrates the consequences of inadequate market research: despite its global dominance, the company faced substantial losses due to overexpansion and a lack of alignment with local coffee preferences, leading to the closure of 61 out of 85 stores.

Market research includes:

  1. Market selection. Choose key markets based on factors like market size, growth potential, competitive landscape, and regulatory environment. Prioritize markets that align with your product or service offering and strategic objectives.
  2. Market demand. Conduct thorough market research to assess demand for your products or services in the target market. Analyze consumer behavior, preferences, and emerging trends to tailor your offerings.
  3. Competitive analysis. Analyze the competitive landscape in the target market. Identify key competitors, their strengths and weaknesses, and determine how your offerings can stand out.
  4. Market entry strategy. Determine the most suitable market entry strategy, considering options such as exporting, franchising, joint ventures, or acquisitions. 
  5. Risk assessment. Identify potential risks and challenges specific to each target market, including political instability, currency fluctuations, cultural differences, and legal complexities. Develop comprehensive risk mitigation strategies.
  6. Cultural and consumer insights. Conduct cultural research to understand local customs, values, and consumer behavior. This knowledge helps you adapt your marketing and product strategies to resonate with the local audience.
  7. Market entry costs. Estimate the costs associated with market entry, including legal fees, licenses, permits, and marketing expenses, and make any necessary adjustments to your operations.

Choosing the right strategy for entering international markets 

Here are seven key strategies to expand business internationally.

1. Exporting

  • What it is

Exporting involves selling products or services to foreign markets from your home market. It can be done directly to customers or through intermediaries like distributors and agents. Begin by identifying target markets, adapting products or services to meet local needs, and establishing distribution channels.

  • Best for

Both small businesses and established companies can start with exporting. It’s particularly suitable for manufacturers, wholesalers, and businesses with tangible products.

2. Franchising

  • What it is

This global expansion strategy allows businesses to grant individuals or entities (franchisees) the right to operate under their brand and system in exchange for royalties. It offers a rapid and relatively low-cost way to expand while leveraging local expertise.

  • Best for

Businesses with established and replicable concepts, such as retail, food, and service industries.

3. Joint ventures and partnerships

  • What it is

Partnering with local companies provides access to their local resources and an established customer base. Joint ventures involve creating a new entity with shared ownership, while partnerships can be more flexible arrangements.

  • Best for

Businesses seeking local expertise, distribution networks, or market knowledge. It’s often used in industries like manufacturing and technology.

4. Direct investment

  • What it is

Another strategy to expand business internationally is direct investment. It involves establishing subsidiaries, branches, or offices in global markets. It provides complete control but also requires substantial financial and managerial commitment. Choose it when you aim for a significant presence and have a long-term growth strategy.

  • Best for

Large corporations with substantial resources, such as multinational corporations. Industries like manufacturing, technology, and finance often employ direct investment.

5. E-commerce and online expansion

  • What it is

E-commerce and online expansion involve leveraging digital platforms to reach new customers. Businesses optimize their websites for global audiences, address currency and language considerations, and establish efficient logistics and shipping solutions.

  • Best for

Both established and smaller businesses with digital products, retail, and consumer goods.

6. Mergers and acquisitions

  • What it is

This strategy involves purchasing or merging with existing businesses in the target market. This approach allows companies to gain immediate market share, access a customer base, or acquire specific technologies. However, M&A is complex, involving due diligence, legal and regulatory differences, and post-merger integration efforts.

  • Best for

Businesses looking for rapid market entry and expansion. It’s common in industries like pharmaceuticals, finance, and technology.

Interested in financing business acquisition? Read our article for valuable insights.

7. Strategic alliances

  • What it is

Expand your business internationally by forming partnerships or alliances with other businesses, either domestically or internationally. This allows businesses to pool resources, share expertise, and enter foreign markets collectively.

  • Best for

Businesses looking to share resources, collaborate on projects, or access new markets. It’s suitable for various industries.

Adapting business products or services for international expansion

Product adaptation is a critical strategy for businesses seeking to enter foreign markets successfully. It involves tailoring products or services to align with local regulations, cultural differences, and consumer preferences.

Product adaptation takes various forms to cater to different aspects of the target market:

  • Tangible adaptation

This involves physical changes to the product, such as altering its design, size, packaging, or ingredients to align with local preferences and standards. For example, menu items in restaurants may vary to suit local tastes.

Example: McDonald’s is known for adapting its menu to cater to local tastes in various countries. For instance, in India, where beef consumption is limited due to cultural and religious reasons, McDonald’s offers a range of vegetarian options. Also, people can enjoy McSpaghetti in the Philippines and macarons in France.

  • Intangible adaptation

This involves changes in non-physical attributes, such as translations, slogans, or brand positioning, to ensure they are culturally appropriate and resonate with local consumers.

Example: Toyota has adapted car names for the European market to make them more appealing and culturally relevant. One notable example is the transformation of the Carina E into the Toyota Avensis. Another example is the Toyota Yaris, known in Japan as the Vitz. 

  • Promotional adaptation

Adaptation in marketing and advertising methods, where local culture influences the choice of platforms, imagery, or product representation to create more effective campaigns.

Example: Coca-Cola tailors its marketing and advertising campaigns to resonate with local cultures. In various countries, Coca-Cola commercials may feature local traditions, festivals, and celebrities to create a more culturally relevant message.

  • Price adaptation

Another important element of adaptation is adjusting product pricing to local market expectations. This may involve altering product sizes, packaging, or quantities to meet acceptable price points for consumers in the target market.

Example: Netflix varies its subscription pricing across countries. In some markets, like Pakistan, India, and Egypt, they offer lower-priced plans to make the service more affordable for a broader audience, considering the local economic conditions.

Overcoming potential challenges

There are several global business risks, but there are also strategic solutions to address each one.

Language barriers and cultural considerations

  • Challenge

Operating in different countries often means encountering diverse cultures and languages. Misunderstandings, miscommunication, and cultural differences hinder effective operations, marketing, and customer relations.

  • Solution

Providing cultural training for employees and hiring local talent who understand the culture and language.

Global supply chain management

  • Challenge

Navigating global supply chains and cross-border trade can be challenging due to longer distances, customs, import and export procedures, and potential disruptions caused by geopolitical events, natural disasters, or labor strikes.

  • Solution

Diversify suppliers, leverage international trade agreements, and implement real-time supply chain monitoring to minimize disruptions.

Intellectual property risks 

  • Challenge

Protecting intellectual property in a foreign market can be complex and costly. For instance, IP theft and infringement may pose risks to a company’s innovations, brands, and proprietary information.

  • Solution

Register and protect intellectual property locally and enforce strict confidentiality agreements.

Products and services adaptation

  • Challenge

Adapting products, services, marketing tactics, and strategies to suit local preferences and customs is time-consuming and may require product modifications or additional expenses.

  • Solution

Conduct extensive research to understand the target market preferences and seek local partnerships for better adaptation.

Tax and regulatory compliance

  • Challenge

Each country has its own set of business regulations, tax codes, and legal requirements. Navigating and complying with these diverse regulations can be complex and costly, often requiring specialized legal and financial expertise.

  • Solution

Hire local legal experts well-versed in local regulations, international trade laws, and international business licenses. 

Examples of successful and unsuccessful global expansion

  • Apple

Applecertainly knows how to expand business internationally, establishing a strong presence in key international markets. China, in particular, has become the largest consumer of iPhones. However, Apple’s global expansion extends beyond sales: its global supply chain involves components from 50+ countries. For example, while the final assembly of iPhones occurs in China, Germany manufactures components like accelerators. 

  • Coca-Cola

Coca-Cola is another example of a successful business whose brand is recognized in over 200 countries. However, it had to deal with a number of challenges, including the growing health-conscious trend leading to declining sales of sugary drinks. To address this, Coca-Cola introduced healthier beverage options. Environmental concerns also posed challenges, prompting the company to invest in sustainable packaging and recycling initiatives.

  • Walmart

Despite its global success, Walmart faced notable failures when expanding into certain countries. In Germany and Japan, its big-store, low-price strategy clashed with local preferences for smaller shops and deals, leading to substantial losses: $1 billion and $1.6 billion, respectively. 

  • Tesco

Telcos expansion into the United States was also challenging. Unlike in Germany and Japan, where consumers favored smaller shops, American shopping habits revolved around large stores for stocking up groceries for weeks. This misalignment, coupled with strategic missteps, resulted in substantial losses of nearly $2 billion and, ultimately, Tesco’s exit from the U.S. market.

Key takeaways

Here are the key points to know about the global expansion process:

  • International expansion offers several benefits, including growth opportunities, access to global talent, cost reduction, risk diversification, enhanced branding, competitive advantage, and potential tax benefits.
  • Assess your business’s readiness for global expansion by evaluating internal factors like objectives, financial readiness, management team, legal compliance, and intellectual property protection. Also, conduct thorough market research to select the right target markets.
  • To expand business internationally, consider various strategies, such as exporting, licensing, franchising, joint ventures, direct investment, e-commerce, mergers and acquisitions, and strategic alliances.
  • Overcoming challenges in global expansion involves addressing language barriers, managing global supply chains, protecting intellectual property, adapting products and services, ensuring tax and regulatory compliance, navigating cultural etiquette, and dealing with different time zones.
  • Successful examples of global expansion include Apple’s and Coca-Cola’s strong presence in key markets like China, while unsuccessful attempts, such as Walmart’s ventures in Germany and Japan and Tesco’s entry into the U.S. market, highlight the importance of aligning strategies with local preferences and market conditions.

A merger describes the process of two privately held companies or public companies uniting into one completely new entity to face strong prospects in the industry or conquer new markets. These two companies are of comparable size and have similar growth goals. A new legal entity gets unique branding, and a new stock price is formed.

Dealmakers opt for mergers and acquisitions for many different reasons: it might be to grow the business, to diversify, to avail of tax benefits, to achieve revenue synergies and more. Consequently, the M&A deals scenario presents itself as miscellaneous with many types of deals reflecting the needs of dealmakers.

This article discusses horizontal and vertical merger as the main types of mergers and acquisitions. Read on to learn the difference between a horizontal vs vertical merger and explore real-life examples of horizontal mergers and vertical mergers.

What is a horizontal merger?

A horizontal merger occurs when two or more companies operating in the same industry merge into one combined company. A horizontal merger is also often called a horizontal acquisition.

Such a merger in one company helps two different companies from the same or similar industry to eliminate the competition in their market and gain a larger market share.

For example, if two companies sell similar products, their combined horizontal merger helps to increase market share. Or, when one company sells complementary products to the other, the merged company can then offer a wider range of products to customers and thus diversify its offerings and explore new markets.

Horizontal mergers are usually strictly monitored by governments to keep fair competition. This is because such mergers can create monopolies in the market.

Reasons for horizontal mergers

The main purpose of a horizontal merger is to create value. A successful horizontal merger should create value, where combining two companies are worth more than when each company operates individually. In other words, “1+1” should be bigger than “2.”

Other reasons for horizontal mergers include:

  • Reducing competition in the market
  • Increasing market share and market power
  • Reducing costs
  • Achieving economies of scale
  • Enhancing diversification
  • Benefiting from combining complementary skills and resources

What is a vertical merger?

Unlike horizontal mergers, a vertical merger occurs when two or more companies operating at different stages of production merge. In other words, the acquiring company and target company operate in one broad industry but at different stages of the same supply chain.

Vertical mergers take place when, for example, a manufacturer acquires a supplier, and together, they become a combined company that operates in one supply chain for a certain item’s production.

Reasons for vertical mergers

Just like with horizontal mergers, the key purpose of vertical acquisitions is to create value. The merger is considered successful when a single company formed from separate entities is worth more than the combined companies are worth together. In other words, “1+1” should be bigger than “2,” again.

Other common reasons for vertical mergers include the following:

  • Increasing efficiency
  • Reducing costs
  • Increasing profits 
  • Gaining merger synergy (operational, financial, and managerial)
  • Ensuring greater quality control
  • Ensuring better flow and control of information alongside the supply chain

Note: Learn how to calculate synergies in M&A in our dedicated article.

Examples of vertical and horizontal mergers

Let’s briefly review some of the most famous examples of vertical vs. horizontal merger.

Horizontal merger

One of the most famous examples of a horizontal merger is the deal between Walt Disney and Pixar, announced by the Walt Disney Company on January 24, 2006, signed on May 5, 2006, and worth $7.4 billion.

Disney is a mass media and entertainment company, and Pixar is a notorious computer animation studio. At the time of the merger announcement, Disney’s own animation films were failing, while Pixar’s animation production was successful. The main purpose of the merger was Disney’s desire to improve the quality of its products and reduce the competition in the market.

The deal is still considered one of the most profitable mergers, with the incredible success of such animated movies as Cars 2, Toy Story 2, or Up.

Vertical merger

One of the most prominent examples of a vertical merger is the deal between eBay and PayPal, announced by eBay in August 2002, signed on October 3, 2002, and worth $1.5 billion.

This is a classic example of a vertical merger. eBay is an online shopping platform, and PayPal is an online money-transferring service that allows customers to make payments.

With this acquisition, eBay wanted to gain control over a popular payment service and increase the number of online payments via eBay. However, despite the temporary positive outcomes, PayPal became an independent company after eBay spun it off to shareholders in 2015.

Pros and cons of horizontal and vertical mergers 

Now, let’s take a closer look at how exactly companies can benefit from horizontal and vertical mergers and the downsides of such integrations.

Pros of horizontal mergers

  • Reduced competition
  • Faster inorganic growth
  • Expanded business segments
  • Increased production
  • Business diversification
  • Economies of scale
  • Increased market share 

Cons of horizontal mergers

  • Post-merger integration plan challenges
  • Tighter governmental control
  • Challenges with different management styles
  • Certain product’s elimination

Pros of vertical mergers

  • Enhanced efficiency
  • Efficient quality control
  • Operational cost reduction
  • Improved management and administrative functioning
  • Stronger production and distribution channels

Cons of vertical mergers

  • Additional costs for maintaining adequate control
  • Risk of losing key personnel
  • Possible corporate culture clashes

Differences between a vertical and a horizontal merger

Horizontal and vertical mergers mainly differ in three concepts: nature, purpose, and independence.


  • A horizontal merger takes place when two similar companies operating in the same or similar market and direct competitors merge into one company.
  • A vertical merger occurs when two companies that operate in the same supply chain but provide different products or business services and are not competitors merge.


  • The key reason for a horizontal merger is to increase market share and eliminate the existing competition.
  • On the other hand, the main reason for a vertical merger is to reduce costs and improve the current functioning of a supply chain.


  • After a horizontal merger, the combined company doesn’t become independent in its operations. It still depends on other service providers when completing the supply chain.
  • Whereas after a vertical merger, a combined company might become fully independent in its operations. This is possible because two entities that are at different levels of the supply chain merge and fill each other’s needs.

How to understand which merger is suitable for you?

Knowing what type of merger best suits the needs of your business is essential. This is because after you’ve determined the merger you need, you can start searching for the most appropriate candidate in the market.

At the same time, the choice of merger solely depends on your business needs.

For example, horizontal mergers are more recommended in case you seek an increase in market share and the possibility to reduce the competition.

On the other hand, vertical mergers might be a better option if you want to become a stronger competitor yourself and reduce costs.

Key takeaways

  • A horizontal merger takes place when two companies from the same or similar industry merge.
  • A vertical merger occurs when two companies that operate in the same or similar industry yet at different stages of the same supply chain merge.
  • The difference between a horizontal merger and a vertical merger is that during horizontal mergers, a buy-side M&A and an acquired company are direct competitors, while during vertical mergers, two companies operate on the same supply chain and are not competitors.
  • Among horizontal mergers examples, the most famous is the deal between Walt Disney and Pixar.
  • Among the top vertical mergers examples, the brightest is the deal between eBay and PayPal.