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(originally published by Booz & Company)


The Top 10 M&A Fallacies and Self-Deceptions

With merger and acquisition activity heating up, here’s a due diligence checklist for regaining clarity.

Note: This article was originally published by Booz & Company.

Imagine that you have just concluded a major merger or acquisition. Your organization is energized and focused by your speech, which outlined the features of the M&A deal and the potential of the combined entities. Having crossed off every item on your due diligence checklist, you expect big savings from restructuring; more importantly, you know that a year from now this newly created company will be the leader in its industry, with significant growth in revenue and higher profit levels.

Then flash forward to the first anniversary of your M&A deal announcement. The company’s performance is below expectations and you’re left with a nagging sense of doubt about the transaction. Wall Street analysts are questioning your firm’s strategy, the wisdom of the deal, and the prospects for your stock.

We have seen this story repeated again and again after mergers and acquisitions. What goes wrong? Often, when you look closely, a common set of attitudes is at play — implicit assumptions held by the leaders who put the M&A deals together and conducted the due diligence. These attitudes fall into two broad groups. First are fallacies, misleading beliefs about the nature of M&A itself. Second are self-deceptions, the acquirers’ misperceptions of their own company’s capabilities and competence. By becoming more aware of them, you can raise the success rate of all your M&A deals significantly.

Five Fallacies to Avoid

M&A fallacies are often ingrained in a company’s legacy practices, including the due diligence practices that have been successful in the past. It’s not enough to recognize these fallacies. You must take specific precautions to keep from being blindsided by them.

1. “We can’t walk away from this deal.” This fallacy about M&A seems to make intuitive sense. The people who put a deal together — often the business unit general manager and his or her staff — know the target company’s strengths and weaknesses and have the most at stake in the deal’s success. Like all of us, however, they are subject to the vagaries of human nature. When they are too close to a deal, it clouds their ability to make an objective, unbiased decision. They are far too likely to focus on details that confirm their preconceptions and ignore details that contradict them. This is known in the field as “deal fever.” It often manifests itself in statements like “We already have an agreement. Backing out would be too embarrassing to the CEO.”

You can generally avoid deal fever with a layered decision-making process. The deal team, including the business leader who champions the acquisition, should present the case to a separate group or individual who can review its attractiveness more objectively. You must balance these prudent checks and balances against your need for speed. The most effective companies adopt “high-speed lanes” for decisions that must be fast-tracked, as well as top-layer deal review committees staffed by executives who agree to make themselves available quickly if needed. A deal committee frequently includes members of the company’s capital committee, but the deal committee is smaller, enabling greater nimbleness and flexibility.

In one large industrial company, three layers of senior executives must approve a deal. The first layer consists of the president of the relevant business unit and his or her team; the second is a committee of senior corporate executives including the firm-wide CFO; the third includes the CEO and chairman of the board, plus corporate counsel and a few key advisors. Thus, the final level of approval consists of just a half-dozen individuals. Between 2002 and 2008, this company executed more than 50 transactions, and after the close, more than 90 percent of their deals either met or exceeded the performance target metrics set during pre-deal. The layered decision-making process, including efficient oversight at the top, is credited with being an important factor underlying the company’s success. It means that experienced executives, who were not involved in setting up the deal, participate actively in two levels of review.

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  1. Paul Leinwand and Cesare Mainardi, The Essential Advantage: How to Win with a Capabilities-Driven Strategy (Harvard Business Review Press, 2011): Guide to the meaning and value of coherence in strategy, with a chapter devoted to M&A principles that will produce a good fit between the two merging companies.
  2. Gerald Adolph and Justin Pettit, with Michael Sisk, Merge Ahead: Mastering the Five Enduring Trends of Artful M&A (McGraw-Hill, 2009): Describes the trends affecting M&A and the ongoing strategy that a company can use to become an effective serial acquirer.
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