What are the Secrets to Successful Corporate Acquisitions Learned from M&A Failure Cases?

Many companies have considered Mergers and Acquisitions (M&A) as a means to expand their business. However, the number of cases that actually succeed through M&A is not so high. Despite the not-so-high success rate of M&A, why do many companies fail? Based on common failure examples, we will explain the secrets to successful M&A.

What Constitutes a Failure in M&A?

Before we delve into examples of M&A failures, it’s important to understand what exactly constitutes a failure in M&A.

The Purpose of M&A

Most companies consider M&A because they anticipate significant benefits to their business management. The following are commonly cited purposes of M&A:

Entry into New Business Areas

In rapidly evolving industries such as IT, it can take a long time to develop a new business from scratch, including talent cultivation, market research, and marketing. This could potentially result in missed investment opportunities.

Therefore, if a company wants to enter a new business area, it can accelerate its business expansion by acquiring another company that is already involved in that business through M&A.

Synergy with Core Business

A traditionally cited purpose of M&A is the synergy it can create with the core business. Synergy refers to the combined effect. By integrating with another company through M&A, it is expected that the results will exceed the simple sum of the sales or profits of the two companies.

For example, a software development company acquiring a company with a software sales platform to increase its customer base is a typical example of an M&A aiming for synergy.

What is a Failure in M&A?

In essence, a failure in M&A refers to the inability to achieve the purposes of M&A as explained above. Specifically, M&A is considered a failure in the following cases:

Failure to Achieve Expected Acquisition Effects

There is always a purpose for an M&A. For example, in the case mentioned above, the purpose of the acquisition is to achieve synergy effects through M&A with a company that has sales capabilities. However, it often happens that the expected effects are not achieved after the M&A.

For instance, a company may have conducted an M&A thinking that the other company has sales capabilities, but it turns out that key employees who were responsible for most of the sales have already resigned.

Unexpected Losses After Acquisition

A common reason for M&A failure is the recording of unexpected losses after the acquisition. In M&A, depending on the structure, it is common to also inherit the debts of the acquired company. Therefore, financial and legal due diligence is always conducted before concluding an M&A contract to identify the target company’s debts. The details of the structure used in M&A are explained in detail in the following article.

https://monolith.law/corporate/merger-acquisition[ja]

However, in cases where this due diligence is not entrusted to experts, significant debts may not be discovered. The existence of such hidden debts may become apparent after the acquisition, resulting in significant losses.

In addition, when calculating the consideration for M&A, the “goodwill” of the company to be acquired is added. Goodwill refers to the brand value and connections of the company to be acquired, which influence the profitability of the business and are usually considered when calculating the acquisition price.

However, goodwill is an intangible value and is difficult to accurately evaluate. After the acquisition, goodwill is amortized over a long period of time, but if the acquisition effects initially expected are not achieved and the evaluation amount falls below the acquisition price, a loss is recorded through impairment.

Bankruptcy in the Worst Case

If an M&A fails, the stock price of a listed company may fall, or the management team may be held accountable for the acquisition. Depending on the degree of deterioration in the financial situation, although it is the worst-case scenario, it is necessary to be prepared for the possibility of being driven into bankruptcy as a result of the M&A.

Examples of M&A Failures

Let’s take a look at some publicized cases where M&As were carried out but were deemed failures. In this section, we will discuss examples within the IT industry.

M&A by DeNA

A recent and notable example of a failed M&A in the IT industry is that of DeNA. DeNA, a major company involved in the development of game apps, acquired a curation site operating company for about 5 billion yen in 2014.

However, this curation site became a major issue as it was found to be publishing numerous articles that infringed on copyrights and contained unscientific medical information, leading to the closure of the site.

This M&A was carried out with the expectation of revenue from the curation site, but with the closure of the site itself, which was supposed to be a pillar of revenue, it became impossible to achieve the purpose of the acquisition. As a result, DeNA was forced to write off 3.8 billion yen.

M&A by Microsoft

Microsoft, a U.S. company, has also experienced a failed M&A in the past. In 2014, Microsoft acquired Nokia’s communications device business for $7.2 billion with the aim of entering the smartphone business.

Nokia had a global share in the pre-smartphone era, but at the time of the acquisition, its performance was declining due to competition from companies like Apple.

On the other hand, Microsoft was also significantly behind Apple and Google in the smartphone business. Therefore, they decided to acquire Nokia, which had a strength in communication devices, to enter the smartphone business at an early stage.

However, even after the M&A, Microsoft’s performance did not contribute as much as expected, and they ultimately had to write off $7.6 billion, which exceeded the acquisition price. It is also said that due to the failure of this M&A, Microsoft had to give up on entering the smartphone business.

Learning the Secrets of Successful M&A from Failure Cases

There’s no doubt that mergers and acquisitions (M&A) between companies can be attractive to business leaders. Therefore, to effectively utilize M&A, it’s crucial to analyze failure cases and avoid risks to get closer to success.

Utilizing External Experts for Due Diligence

In the case of DeNA, the main cause of failure was illegal activities on the site operated by the acquired company. Concerning web content, issues such as copyright infringement and the validity of affiliate sites dealing with medical information were initially questioned in some quarters.

When acquiring a business like a website, which is prone to legal issues, it can be said that it was necessary to thoroughly scrutinize the legality and validity of the content through due diligence, utilizing external experts such as lawyers, certified public accountants, and tax accountants.

Setting Acquisition Price Considering Risks

In the case of DeNA, given the nature of the website, it should have been anticipated that site closure due to copyright infringement or other reasons could occur, and this should have been factored into the acquisition price calculation.

When conducting a risky acquisition, it is necessary to negotiate to keep the acquisition price down, assuming that problems may occur, or to make a contract that requires the acquired company or its representative to bear the damage if problems arise.

Competitor Research for New Business Entry

The M&A case of Microsoft is pointed out that the failure was due to the fact that competitors in the smartphone business, such as Apple, were too strong.

Initially, Nokia, the acquisition target, was a struggling company. Even with the synergy with Microsoft, it can be seen that the competitive environment was too tough to compete.

This point is a very difficult management decision, but at least for the business entering a new field through M&A, competitor research is essential, and if the competition is too strong, it may be a management decision to postpone the new entry itself.

Proper Implementation of PMI (Integration Work)

Regarding the acquisition of Nokia by Microsoft, it is pointed out that the failure was due to the inability to properly integrate the corporate cultures of both companies. Surprisingly, this corporate integration work often becomes a problem in M&A situations. It is also called PMI (Post-Merger Integration) in professional terms.

PMI involves merging employees and corporate cultures, as well as integrating accounting methods and other systems and workflows related to operations.

Immediately after an M&A, both the acquiring company and the target company experience significant confusion. To minimize this confusion and merge both parties as soon as possible, it is important to thoroughly plan the implementation of PMI before the M&A is carried out.

Summary

In order to avoid failure in M&A, it is essential to conduct due diligence with the help of professionals such as lawyers before implementing M&A.

Furthermore, in the case of introduction cases by M&A brokerage firms, it is important not to simply follow the brokerage firm’s advice, but to independently scrutinize the risks and the appropriateness of the acquisition price with your own experts. For more details on advisory contracts concluded with brokerage firms and others, please refer to the article below.

https://monolith.law/corporate/advisory-contract-points[ja]

If successful, M&A can significantly increase a company’s performance in a short period of time. Therefore, many companies have been continuously searching for excellent companies to be acquired through M&A. For this reason, it is important to minimize risks as much as possible to maximize the effects of M&A.