Mergers and acquisitions can result in a profoundly strong, new business, but most attempts fail by 80%. Below is a look into what can go wrong when two companies combine into one or when investors buy outstanding-public shares.
Challenges in Communications
A takeover, as it relates to finance, is when the majority, or all of the shares of a public company, are bought by a single entity. A single company can lead the charge behind an “acquisition,” but their success is still limited to how well they communicate their new values, the changes to be expected and what future goals the brand has.
Lacking good communication within a merger, likewise, disables businesses from working as one.
Inaccurate Valuations
Financial professionals who undervalue a company can somewhat get away with their mishaps, for it means that the new business that’s formed is valued more than investors had expected. The consequences of overvaluing a company, however, can leave stockholders and business partners with assets that are worth less than what they had before.
Valuations are done in an attempt to define the costs of production, market cap, and revenue a business has.
Debt and Restructuring
Some businesses are still valued as desirable, regardless of their substantial debts. “Restructuring” is a financial strategy that limits and then pays off the debt acquired by a company. The true risks of debt occur when the group being bought via its public stock has concealed the imbalances in their debts.
The infamous case of Enron showed the world what happens when corporations lie about their fiscal deficits.
Employee Sentiment and Morale
Creating a new company is the core objective of a merger or acquisition, which means that the employment of that company is likely to change. Employees will have a sense of fear and panic when outside investors take over their employer’s assets. Being able to maintain a “current-employee base” during a merger is difficult when the new business being formed has refined goals and new missions to accomplish.
Investors must analyze their true prospects within a merger or acquisition—if they expect to be successful. The work of changing a business’s ownership is riddled with risks that can make one’s investment costs higher than their returns. Start your investment by first fully understanding the risks behind mergers and acquisitions.