January 22, 2021

When M&A Goes Wrong: Lessons From Divestitures

This recent Deal Law Wire blog from Norton Rose reviews a 2020 study addressing why companies divest businesses. The study found that a staggering 77% of divestitures are attributable to M&A failures. The blog says that the study identified two driving forces behind these “corporate divorces” – post-acquisition industry shocks and cultural dissimilarities. Here’s an excerpt:

Post-Acquisition Industry Shocks. “Industry shocks”, or unforeseeable events that disturb industry structures and the economic landscape, were found to have a high correlation with the long-term success of a merger or acquisition, both positively and negatively. Targets who experienced a positive shock to their respective industry were less likely to be divorced, while divestitures were more likely to occur when the target’s industry experienced a negative shock. A similar effect is likely to occur as the result of the ongoing COVID-19 pandemic, with companies taking a sharp look at the profitability of their pre-COVID investments. While the pandemic has already led to significant changes in the M&A landscape, it may be years before the effects of this “industry shock” can fully be measured.

Cultural DissimilaritiesCultural dissimilarities between acquiring and target companies was found to be the greatest driver of corporate divorce. Unions between companies with vastly different values and disparate ages frequently ended in divorce.  According to the authors, this pattern reveals executives’ failure to adequately consider cultural values and symmetries, such as trust, hierarchy and individualism, before concluding M&A deals. CEOs often address M&A failures stemming from insufficient cultural awareness by quickly undoing unsuccessful deals, with 40% of corporate divorces happening within fours years of a new CEO’s term.

Many companies are expected to be active buyers during the upcoming year, and the blog says that careful due diligence and a proper assessment of corporate culture are essential to ensuring the long-term success of those acquisitions.

John Jenkins