Why do M&A deals fall apart?

Many M&A deals stop short of the finish line. Usually, this type of closure failure can be attributed to issues that crop up due to internal or external factors, during negotiations or because of discrepancies in the deal itself. The most common factors that can make or break a deal are what we term as the 6 Ps: Price, Perceptions, Plain-speaking, Post due diligence, Politics and Permissions.

·??????Price

Even in your daily life, you may enter into many deals and haggle over price, whether at the sabzi mandi or at your local grocery store. If you think the price is not fair or reasonable, you walk away. This is what happens in M&A deals as well, no matter how large.

Price is the valuations of all the financial items included or involved in the deal. Anything that can be valued and appreciated in money terms and which forms part of the deal affects its price. Price i.e., the cost of the transaction for the company is the bottom line. You have to evaluate whether the price is worth it for the post-deal synergies that you anticipate your organization will achieve. This evaluation is critical as many M&A deals post-integration fail if they overvalued the financial benefits of the deal and the anticipated synergies. Therefore, a disagreement as to the price of the deal, which typically arises during negotiations, is the No. 1 reason why M&A deals fall off the table.[1]

So, what corrective action can you take to bring the party back to the negotiating table? Compromise. Extend the olive branch to the other party. Show your willingness to talk about the issues that you both have regarding the price. This goodwill gesture shows your intention to go ahead with the deal and that you are agreeable to reaching an agreement. Be ready to give a little, to get a little.

·??????Perceptions

Has it ever happened to you that you had misconceptions about a person that later proved to be false? You might have been reluctant to work with them or even go on simple outings with them because of those misconceptions and later felt bad about the lost opportunities. Take care so that this doesn’t happen to your business.

Each party to the deal may be a victim of their own false or misleading perceptions regarding the other party(ies) to the deal. Perceptions can be regarding the people in-charge of negotiations, ethics, values, behaviors and attitudes of the organization and its people, etc. These subconscious thoughts and emotions can be the death of the deal. Thus, it is important for you to move forward without any inherent biases affecting decision-making and the closing of the deal. Remember, facts are superior to fiction and all decision-making must be guided by facts and other relevant qualitative factors rather than misplaced perceptions.

So, how can you correct your (mis)perceptions?

Step 1: Inform yourself.

Do some background research of the people involved in the deal, before you start discussing the deal with them. This can take the form of looking up their profiles on their work website, social media profiles, their recommendations or their professional cv, skills and accomplishments. Sometimes, you might understand a person’s viewpoint through any speeches that they might have given in the past.

This information might prevent you from arriving at a false impression when you meet them for the first time. It is also useful as an ice breaker as you can discuss some common hobbies, interests, etc.

Always remember to be flexible with your perceptions as they may change according to the length of time you know the person and the actions they take and the decisions they make thereafter.

Step 2: Enter all conversations with an open mind.

An open mind that is free from all biases is important. Sometimes your own misconceptions may prevent you from understanding the other party’s intentions in the context that they were meant.

Step 3: Backtrack.

If your misperceptions have already affected the deal, backtrack. Be upfront and acknowledge them. Honestly confronting these misperceptions and informing the other party you had them will repair the damage.

Step 4: Correct.?

Once you’ve acknowledged your misperceptions, take action to correct them. Open channels of communication that were previously closed with those people or discuss the misperceptions you had regarding the deal, the culture of the company etc. Take steps to inform yourself and ask for more information to displace your misperceptions.

This brings us to the next P – Plain-speaking.

·??????Plain-speaking

Has a person’s dishonesty ever put you off with them or made you feel like you don’t want to ever interact with them? This can happen in M&A deals as well.

Transparency when stepping into any new relationship is key. It is important to be plain-speaking when negotiating and agreeing to the deal. A lack of frankness, clarity or straightforwardness can put off the other party and terminate the deal. A certain amount of vulnerability can go a long way to create trust and strengthen the business alliance.

So, what corrective action can you take to bring the party back to the negotiating table? Be upfront. Acknowledge the mistake or lack of transparency, whoever’s side of the table it's on. Take the conscious step to discuss the issues with the other party and together, resolve to be plain-speaking.

·??????Post due diligence

Conflicts may crop up after each party conducts its own due diligence and if not addressed or redressed satisfactorily, can mushroom to a stage where the deal is taken off the table. Any shortfalls of due diligence on your side, if acknowledged and redressed promptly keep the deal afloat and allow the other party to rely on you.

So, what corrective action can you take to bring the party back to the negotiating table?

Undertake thorough due diligence assessments and if there are any shortfalls, take actions to correct them. You may refer to the Due Diligence Checklist in Chapter [?] for basic guidance on the same.

·???????Policies

Changes in the political environment of the country(ies) where the deal is to take effect may also stop the deal from happening.

Let's say for example, that the Government of India has made statements about introducing a new policy for start-ups in the fintech industry that gives tax concessions. This announcement might have been the incentive for two companies to start negotiating an M&A deal. However, the Government of India, in the interim, may have withdrawn the policy. Thus, the incentive for the deal is no longer in existence. So, the deal falls through.

So, what corrective action can be taken in this case?

You can try to see what synergies, if any, may arise from going through with the deal regardless of the policy or political change that has (not) taken place. If this fails, then realistically, your business has no reason to enter into the deal as it will not benefit in any way. Nothing much can be done in these cases.

·??????Permissions

When children agree to go out with their friends but forget to take their parent’s or guardian’s permission, it so happens that the permission is refused and their outing is cancelled. This is also what happens when the necessary regulatory permissions are not taken beforehand.

The deal might also fall through because one of the parties (or both of them) failed to get the necessary approvals from the appropriate regulatory authorities such as the Reserve Bank of India (RBI) or the Securities and Exchange Board of India (SEBI). In some cases, a failure to get these permissions might only result in delays. But sometimes, such failures can be bad in law and have serious consequences which not only terminate the deal but also have serious legal penalties.

Additionally, compliance costs tend to be very high. So, even in cases where the failure only results in a delay, the parties may be put off the deal due to the high costs of repeating or making corrections in the compliance procedure.

For example, SEBI has released a circular in 2013 regarding the approvals necessary for an M&A scheme by all listed companies. It requires approvals from the shareholders, a valuation report from an independent chartered account and timely intimation to SEBI and the relevant stock exchange. Organizing a shareholders’ meeting and getting a valuation report requires advance planning and costs such as paying the independent chartered accountant for his services, sending invitations to all the shareholders, booking a venue for the meeting, ensuring attendance, counting the votes, making provisions for e-voting and postal ballots, etc. All of these activities are costly operations and the company may be reluctant to redo the process due to a failure in compliance.

So, what corrective action can you take to bring the party back to the negotiating table? Get the necessary permissions.

These are the 6 Ps that may stop your deal you need to overcome in the negotiation stage itself to get the deal finalized: Price, Perceptions, Plain-speaking, Post due diligence, Politics and Permissions.

[1] Source: McKinsey Study, Exhibit 3, Why large M&A deals fail | McKinsey

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This is seventeenth article in the series on #mergersandacquisitions by our student researchers Swasti Patoria, Annapurna Prabhu, Astha Agarwal, Aayomi Sharma, Amrutha Alapati and Aradhya Singh, students of Jindal Global Law School (JGLS) Symbiosis Law School, Pune and Symbiosis Law School, NOIDA

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