Merger & Acquisition Deal Breakers

For every merger or acquisition transaction that is announced, there are usually ten or more possibilities that fall apart for a variety of reasons. Here's a list from ZweigWhite of the most common deal breakers that its teams have witnessed and some tips on how to mitigate them.


"Anyone who has gone through the entire deal making process—from courtship to closing—knows how fragile an A/E deal can be. Smiles and synergies can quickly turn to eleventh hour misunderstandings. Months of meetings, integration planning, due diligence and drafting sessions can quickly evaporate due to financial or operational surprises, unclear expectations, or just bad timing and luck," says Steve Gido, CFA, a principal with Natick, Mass.-based ZweigWhite who specializes in merger and acquisition financial advisory services.

For every transaction that is announced, there are usually ten or more possibilities that fall apart for a variety of reasons. Here are some of the most common deal breakers that ZweigWhite's M&A team have witnessed and some tips on how to mitigate them:

Valuation. When all the niceties and pleasantries are over, it always comes down to price. Many potential buyers don't or won't recognize the benefits of paying for the value and synergies of a target firm—it is by far the number-one deal killer.

A big challenge with sellers is over-inflated expectations. Unfortunately, many potential acquirers don't realize what a seller's market we're in and there are plenty of other A/E buyers, private equity firms, or multinational organizations ready and willing to snap up attractive targets. According to ZweigWhite's 2006 Merger & Acquisition Survey, 73% of firms surveyed are considering buying another firm. Given the sustained strong market for design, many owners are making a great return through higher salaries, bonuses, S-distributions, and other firm perquisites, which is impacting valuations and buyers have to recognize that.

Culture. One could make the argument that disparate firm cultures should be the number-one deal killer as there probably isn't any price a buyer would pay for a firm that didn't mirror their values and vision. Serial acquirers can usually tell after the first meeting whether or not a seller's ownership and firm culture would integrate well with theirs. Whether you are a buyer or a seller, talk to a range of partners and figure out which type of firms your organization would best fit with. How would your staff and clients react to combining with this entity?

Deal structure. Every once in a while, a deal is lost right out of the chute because a buyer or seller is incredibly rigid and will only want to structure and fund a deal one way—theirs! Fortunately, there really is no one common deal structure and there are dozens of possible combinations acquirers have at their disposal to finance and structure deals in a variety of creative and tax-efficient ways. Cash, installment notes, stock, and earnouts, for example, can be used in various forms depending on the M&A goals, financial strength, and ownership profile of the buyer and seller.

Due diligence. Due diligence can either kill the deal or force the parties to redraw the terms agreed to in the letter of intent. Many sellers will usually try to dress up the company for sale and may not be exactly forthright with the buyer during the courtship process. Buyers have to realize you get everything when you acquire a firm—the good and bad—and the due diligence period is really where you slowly grind through the operational issues and plan for the integration process together.

Cold feet and bad luck. There are many cases where deals fall apart simply because the seller's owner(s) just have reservations or anxieties with selling the firm and the professional and personal change and stress that comes along with that. M&A is a risky endeavor, with the ability to disrupt career paths and professional goals, and some sellers start to have sleepless nights when their deal quickly moves from theoretical to go time!

In other situations, well-planned deals can crater because of factors outside the control of either buyer or seller. For example, there could be newly created uncertainty in the industry, or a buyer may have some issues within their firm forcing them to shelve the deal until they can resolve them. It happens. The best you can do is to plan for the expected and unexpected just like you would with any other event in your organization.

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