Mergers and acquisitions (M&A) can be a powerful tool for global business growth and expansion. However, M&A activity poses significant risks that can derail even the most promising deals. In fact, an estimated 70-75% of M&A fail due to factors like poor due diligence, inadequate integration planning, and a lack of strategic alignment.
Although complications can vary depending on the type of M&A deal a company pursues, many challenges arising from inorganic growth are universal—especially concerning impacted employees.
13 common risks of mergers and acquisitions
Here are 13 common risks associated with M&A paired with strategies that may help safeguard M&A deals through closing:
1. Integration challenges
Integrating organizations is a complex and time-consuming process. Since each business relies on distinct systems, processes, and workflows, bringing companies together can lead to operational inefficiencies and disruptions—not to mention decreased productivity and loss of talent.
For example, when Daimler-Benz merged with Chrysler in 1998, the companies struggled to integrate vastly different corporate cultures and management styles, ultimately leading to the merger's failure.
This is especially challenging when integrating HR processes for globally distributed employees and managing a large number of new hires all at once.
Mitigation tip: The key to overcoming integration challenges includes a comprehensive integration plan that spans technology, processes, and human resources. With clear timelines and milestones, this plan can help boost accountability and support a smoother transition, providing teams with a sense of control and reassurance.
2. Cultural clashes
Merging companies often have distinct corporate cultures, values, and working methods that can result in employee conflict—these challenges are multiplied by geographical divides. Cultural clashes over “how we do things around here” can result in poor morale and increased turnover. Teams with friction can also fail to align goals and values.
The AOL-Time Warner merger in 2000 offers a prime example of how cultural incompatibility can derail a merger, as the two companies' vastly different corporate cultures clashed.
Mitigation tip: Cultural due diligence and a detailed plan to address cultural differences are vital before any merger. Successfully bringing employees from distinct organizations together relies on open communication and meaningful opportunities for individuals from both organizations to collaborate and build relationships. According to Bain & Company, the success of M&A deals often comes down to people and culture, an area where companies fail to invest sufficiently in communication.
3. Financial challenges
M&A transactions can burden financial resources, leading to cash flow problems, increased debt, and unexpected costs—as an example of the latter, businesses may wind up overspending on Transitional Services Agreement (TSA) and multiple benefits providers with individual policies in different countries.
If companies overvalue assets or underestimate the cost of integration, the acquiring company may face financial strain or even bankruptcy. For example, Oracle’s acquisition of Cerner in 2022 was financed through debt that amplified financial pressure—the merger has resulted in lost clients, stagnant sales growth, and layoffs.
Mitigation tip: Creating realistic financial projections that include potential integration costs is essential to financial due diligence. Global companies involved in M&A should maintain a cash reserve to address unexpected expenses and provide adequate liquidity throughout the integration process.
4. Regulatory and legal risks
Mergers and acquisitions fall under scrutiny from regulatory bodies, particularly global mergers and acquisitions. Global compliance failures (related to antitrust concerns, regulatory compliance issues, and legal disputes) can result in fines, delays, or even the termination of a deal. For example, Nvidia’s attempt to acquire Arm for $40 million was derailed by violating U.S. FTC policies related to competition.
Regulatory risks include challenges that result from improper onboarding, including incorrect payroll and benefits transfers.
Mitigation tip: Companies must engage legal experts familiar with the relevant jurisdictions to conduct thorough due diligence. Developing a global compliance strategy that addresses all applicable regulations and maintaining open communication with regulatory authorities throughout the process can safeguard expanding businesses. However, compliance isn’t a one-and-done affair—companies also need a post-M&A plan to stay current on emerging policies in every region where operations occur.
5. Loss of high-quality talent
Restructuring and layoffs are common during M&A, inspiring uncertainty among employees and leading to talent departures. A so-called “brain drain” can significantly endanger a company's performance, not to mention competitive advantage.
Still, fear among employees isn’t surprising, given the frequency of layoffs after M&A activity. Salesforce offers an example, with plans to eliminate workers from newly acquired ownership after reducing headcount in 2022 when the company acquired Slack.
Mitigation tip: To quell employee doubt and speculation, teams should prioritize frequent and transparent communication about the merger process and employee roles in the new organization. Companies should also implement retention strategies for essential talent, such as incentive packages or career development opportunities.
6. Reputational risks
M&A activities can affect a company's reputation among customers, suppliers, and the general public. Negative perceptions of acquiring and acquired companies can arise from layoffs, customer dissatisfaction, perceived changes in company values, or ethical breaches. Once trust is lost, it’s not quickly regained—repairing relationships with stakeholders, including customers, employees, and investors, can take significant time and effort.
Mitigation tip: To mitigate reputational risks, companies pursuing global M&A should develop a comprehensive communication strategy. This strategy, prioritizing transparency, should address potential stakeholder concerns and provide clear reasons for the merger. It’s also important to communicate the expected benefits for customers, employees, and the community.
7. Intellectual property risks
Mergers can expose intellectual property (IP) to new risks, including unauthorized access, infringement claims, licensing disputes, or loss of competitive advantage. Failure to properly manage IP (including patents, trademarks, and proprietary technology) can result in significant financial and competitive losses.
Mitigation tip: Conduct thorough IP due diligence to identify and quantify the value of all intellectual property assets. Companies should implement robust IP protections and ensure confidentiality agreements throughout the M&A process.
8. Unforeseen liabilities
Hidden liabilities, such as pending lawsuits, environmental issues, or undisclosed debt, can emerge after a merger is completed. This news can be potentially disastrous for a company's financial health and reputation. Google’s purchase of Nest Labs, for example, later revealed privacy concerns that due diligence processes failed to address.
This challenge can be amplified when companies lack expertise in the jurisdiction where the acquiring or acquired company operates.
Mitigation tip: Before M&A, companies must conduct comprehensive due diligence across all business activity, including legal, financial, and operational aspects. Including contingency clauses in the merger agreement can help companies address potential undisclosed liabilities.
9. Poor customer relationships
Mergers can disrupt customer relationships, leading to dissatisfaction and potential loss of business. Disruptions in supply chains, changes in product offerings, or shifts in customer service can alienate existing customers and suppliers. Sprint’s acquisition of Nextel Communications in 2005 cost the company millions of customers, resulting in dramatic financial losses.
Mitigation tip: Businesses must prioritize customer communication and engagement throughout the merger process. Developing a customer retention strategy that focuses on maintaining service quality and proactively addressing customer concerns can help expanding companies fight churn.
10. Strategic misalignment
Sometimes, the strategic rationale behind a merger may be flawed or based on unrealistic assumptions. A flawed strategy can lead to poor decision-making and failed integration. Plus, acquiring a company with long-term goals that don’t align with those of the acquirer can waste resources and damage opportunities.
The merger between Quaker Oats and Snapple in 1994 is a classic example of strategic misalignment. Quaker Oats overestimated Snapple's growth potential and paid a premium price, resulting in significant losses.
Mitigation tip: Global companies should conduct thorough strategic analysis and market research to validate a merger's rationale. Key stakeholders must be included in the decision-making process—businesses must also be willing to walk away from deals incompatible with long-term strategic goals.
11. Geopolitical and economic instability
Cross-border mergers and acquisitions are particularly vulnerable to geopolitical risks and economic fluctuations. Changes in trade policies, currency values, or political landscapes can impact the success of international M&A deals.
Although risks are part of any M&A transaction, those involving buyers and sellers in two countries pose particular volatility. In fact, 67% of respondents to a 2024 McKinsey survey said that geopolitical concerns were the top threat to global economic growth in 2024.
Mitigation tip: Stay informed about geopolitical and economic trends in target markets, especially in more changeable emerging markets. Companies should develop contingency plans to address potential risks and consider partnering with local experts who understand the nuances of the target market.
12. Depreciated shareholder value
Mergers and acquisitions that fail to deliver expected outcomes or financial benefits can decrease shareholder value. A drop in share value can result in dissatisfied investors and potential legal challenges. The failure of Novell Inc.’s acquisition of Wordperfect provides an excellent example of lost market share.
Mitigation tip: Companies must set realistic expectations that are communicated clearly to shareholders. Robust performance tracking mechanisms can help monitor progress towards merger objectives. Companies should also be prepared to adjust strategies if targets are not being met.
13. Stress for HR teams
Mergers and acquisitions often place significant stress on HR teams due to the complex human capital management (HCM) challenges they present. Many companies treat HCM as an afterthought, focusing primarily on the legal and financial aspects of the deal. This reactive approach to HCM can create unnecessary pressure on HR departments, which must suddenly grapple with integrating diverse workforces, aligning cultures, and managing employee concerns.
The scope of HCM extends beyond traditional HR functions, requiring coordination with finance, IT, and revenue leaders, further complicating the process. According to a study by Wuorinen, Burgess, and Wright, HR professionals are often granted little influence in acquisition planning despite their crucial role in managing these complex people issues.
Mitigation tip: Companies should involve HR early in the M&A process. This allows HR to conduct compatibility evaluations and identify potential cultural and human capital issues before significant resources are committed to the deal. Organizations should also create a cross-functional team (including HR, finance, IT, and revenue leaders) to develop an HCM strategy, helping companies anticipate and address people-related challenges proactively.
Mitigate M&A risks with Velocity Global
Mergers and acquisitions are complex processes that require careful planning and execution, particularly when managing human capital. Partnering with an employer of record (EOR) like Velocity Global offers a strategic solution to simplify the intricate employment-related issues that often arise during these transactions.
Velocity Global's acumen in global employment solutions offers several key advantages:
- Streamlined onboarding. As an EOR provider, Velocity Global helps facilitate a smooth transition for newly acquired employees by managing onboarding. Our team ensures the proper setup of payroll, benefits, and necessary documentation, which is particularly valuable when integrating a large number of new hires simultaneously.
- Compliance. By partnering with Velocity Global, companies can navigate the complex landscape of employment laws and regulations with confidence—in 185+ countries. This is especially crucial when dealing with a substantial influx of acquired employees. Our team will take charge of all payroll and tax-related responsibilities, ensuring ongoing compliance without the need for entity establishment.
- Cost savings. Velocity Global helps reduce the administrative and legal expenses typically associated with onboarding and managing multiple new hires. Also, our team leverages established relationships with benefits providers and vendors to secure additional cost savings.
- Expertise. Velocity Global brings specialized knowledge in employment and HR matters to the table, offering guidance and support throughout the acquisition process. This expertise is particularly beneficial for companies with limited experience in acquihires or those unfamiliar with employment laws in the target company's jurisdiction.
Partnering with Velocity Global for M&A transactions offers a strategic advantage in today's global business environment. Our team’s comprehensive approach facilitates smoother transitions and sets the stage for long-term success in the post-merger landscape. Contact us to learn more.
Disclaimer: The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. © 2024 Velocity Global, LLC. All rights reserved.
Topic:
Global Growth
