UNIT 9.

LESSON 3. RISKS & RISK MITIGATION STRATEGIES

The total global value of corporate mergers and acquisitions (M&A) reached $5.9
trillion in 2021 ande reacdh $4.7 trillion in 2022. Clearly, robust M&A opportunities exist
for companies looking to stimulate growth, increase market share, and influence supply
chains. Despite those potential benefits, however, M&A deals are also fraught with serious
risks.

Below, we explore the risks that can jeopardize the outcome of an M&A deal or prevent a
company from capturing the expected benefits.

1. Poor Due Diligence

Due diligence is essential for all mergers & acquisitions. It allows the acquiring company
to discover important facts about the seller, such as:

• Contracts
• Financial stability
• Insurance
• Customer agreements
• Distribution agreements
• Compensation agreements
• Employment contracts
• Liabilities, such as debts

Inadequate due diligence can cause serious problems. For one, it can result in poor
valuation. The valuation process guides the buyer and seller to agree on a mutually
acceptable purchase price, which is why it requires thorough due diligence.

Poor due diligence also increases the buyer’s risk of unexpected litigation or tax issues.
Ultimately, the buyer may make a poor decision that could damage its financial position or
reputation.
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2. Overpaying for the Target Company

In M&A transactions, buyers are frequently under a lot of pressure to close the deal. In
their rush to complete the transaction, they may end up overpaying for the target company
rather than negotiating a fair price that could create market value and provide a satisfactory
investment return.

Buyers may also use overly optimistic assumptions to justify the transaction or follow poor
valuation practices, resulting in overpayment.

Risk Mitigation Strategies:

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3. Overestimating Possible Synergies

Tangible synergy is rooted in economic reality, so it’s easier to put a price on it. On the
other hand, if the buyer is willing to pay for intangible synergies that are not rooted in
economic reality, and therefore can’t be measured easily, then the buyer ends up
overpaying for the deal.

Buyers often overestimate synergies, too. According to McKinsey, this optimism strikes at
least 25 percent of mergers and results in a 5 to 10 percent valuation error.

Additionally, buyers often underestimate how long it will take to achieve the synergies,
resulting in unrealistic expectations. In real life, it’s not always easy to integrate companies,
people, and processes.
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4. Integration Challenges

Integrating processes, systems, and workforces after an M&A is one of the most complex
aspects of the deal. A robust post-merger integration (PMI) process is vital to reduce the
complexity. A poor PMI process can reduce employee engagement, increase turnover,
affect customer engagement, and erode sales and profitability. In the meantime, the buyer
may miss its growth and cost targets as the two business units struggle with these growing
pains.

Risk Mitigation Strategies:

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