Risk Management in Mergers and Acquisitions

Nov, 18 2022


Any type of business comes with an inherent risk, and as the firm expands, the risk gets greater and might come from unexpected places, which is why risk management software should be considered. This type of software can assist you in determining what might happen next and how to position yourself to avoid damage to your organization or adapt to a new circumstance.

Even with the best preparedness, certain threats are impossible to recognize. There is no way to account for everything.

The list of potential issues is far too long. Even if you could devote more time to delving deeper into those issues, you’d most likely be destroying value elsewhere by delaying the closing date.

The important part is to take precautions to reduce the likelihood of unpleasant surprises.

What Is Risk Management Mergers and Acquisitions and How Does It Work?

Let’s start with a definition of risk management so we can better understand why we need tools to assist us with it.

Risk management is an inherently unpredictably unpredictable aspect of the business. It’s difficult to predict what will happen next, but depending on the information you have, you may be able to better grasp your company’s trajectory.

Although the level of risk varies depending on the industry and the size of the firm, there are always certain hazards that come with operating a business. Companies are mostly concerned about financial risk, but other types of risk can be just as damaging to the organization.

Legal, competitive, reputational, and regulatory concerns all exist. Risk management used to be handled by one or more persons who were responsible for identifying, evaluating, and managing possible losses. This was also a 24-hour profession that needed continual awareness in order to spot possible danger indicators and take appropriate action.

Enterprise risk management is a term that is frequently used these days to describe a company’s active creation of catastrophe plans as well as an analysis of their roadmaps and picking the least hazardous routes. This entails identifying opportunities and threats (the ‘OT’ component of the ‘SWOT’ analysis) and developing a business plan to reduce risk and optimize earnings potential.

It’s crucial to remember that even with the strongest risk management technologies in the world, you’re still vulnerable to the world’s unpredictability. An accident or a storm might strike at any time, therefore you must psychologically prepare for those unusual but conceivable tragedies.

How Does Mergers and Acquisition Risk Management Work?

So, we’ve established a basic understanding of risk management, but how does software play a role in this?

A risk management program, like any other contemporary business software, will assist streamline a process that was previously done by people. In principle, this should reduce the likelihood of human mistakes greatly, but this isn’t always the case because it’s practically hard to totally eliminate people. We don’t live in the future that much.

This sort of software (as compliance management software) assists businesses in keeping track of possible dangers. It can identify potential threats to the company’s bottom line and provide solutions. These problems might vary from a data security breach to a sales downturn to non-compliance with regulated transactions.

In any event, it is the software’s responsibility to keep track of these possible threats and notify those in control. Typically, these individuals would create an easy-to-use and monitor dashboard via which they can track the progression of possible dangers and take action before things spiral out of hand.

Most business risk management software these days can and should collect data from throughout the firm in order to take it all into account. You may also use the risk management tool to keep track of market trends.

Before we show you some of the top risk management software options, we want to make sure you’re aware of some of the challenges you can face while implementing and utilizing such products.

Now let us examine Merger and acquisitions transaction risks and how to reduce them.

1. Merger and acquisition Risk 1: Paying too much for the target firm

Overpaying for a firm, according to Forbes, diminishes shareholder value. This is an extremely frightening reality given According to Forbes and other comparable research, most

“70-90% of the time, purchases fail to produce value for shareholders.”

With these startling statistics in mind, it is evident that overpaying for a firm is one of the most significant M&A risk factors of our day.

This alludes to the underlying issue of inadequate valuation processes, since many corporations have lately overpaid while acquiring other firms.

How to avoid paying too much for the target company:

To begin, focusing on your company’s general strategy and broad aims behind the agreement is critical in laying the groundwork for avoiding overspending.

Several crucial questions will serve to guide our work.

  • Why do you wish to execute this transaction?
  • What are your primary objectives?
  • Is there any other method to achieve these objectives except acquisitions?
  • Next, whether your organization completes its own assessment or pays someone else to do it, publishing a detailed valuation report is prudent.

In each case, gathering crucial business knowledge about the target results in a more realistic and suitable price point.

Collecting information such as tax returns, critical financials for the last three to five years, an overview of the target’s organizational structure and number of workers, and shareholder agreements, in particular, is most valuable.

When reviewing the aforementioned facts and/or valuation report, it is critical to regard the calculated acceptable price as a limit, rather than a beginning point; this causes a strong shift in thinking that results in paying the proper amount for a goal.

Finally, it should go without saying that leaving your ego at the door is critical when deciding proper transaction price – egos frequently run high during negotiations or while contending over a target, which can sabotage good economic judgments about agreements.

2. Overestimation of synergies in mergers and acquisitions

There are synergies. It’s just that they’re not the panacea that many acquisition executives imagine they are. Synergies are sometimes cited as the only rationale for an acquisition, whereas they should be merely one of numerous criteria.

According to a McKinsey poll (link), a quarter of all managers overestimate post-deal synergies by more than 25%.

These executives often envision synergies across the board if the acquisition is completed: scale and breadth, best practices, shared distribution, intellectual property and possibilities, and, of course, the “streamlined” personnel.

The difficulty with this lack of concentration is that attempting to develop synergies everywhere risks resulting in no synergies money at all.

Avoiding overestimation of synergies:

The single most critical step you can take when evaluating deal synergies is to be conservative when estimating synergies. As a result, M&A project management systems and valuation spreadsheets are useful tools for finding synergies.

Once you’ve determined what you believe the synergies are, you should reduce that number – common practice is to divide by two – to maintain a conservative stance on deal synergies.

3. Merger and acquisitions Risk 3: Inadequate due diligence procedures

Poor due diligence processes simply contradict the essence and meaning of due diligence, yet deals are frequently harmed by teams that are unprepared for legal due diligence and lack diligence experience and competence.

In reality, inadequate due diligence planning and execution can lead to poor value, higher risks, and overall misguided decision making.

How to Avoid Improper Due Diligence:

Due diligence is a crucial process that may make or break agreements, therefore starting diligence early and with the proper team is critical.

When putting together your diligence team, make sure it has a diverse range of skills and experience for the deal at hand.

While broad qualities such as experience in business, legal, and financial concerns will be shared by all teams, the best constructed diligence teams will be those that are more relevant to the deal and the company’s industry.

The rising use of expert networks in due diligence for larger purchases reflects the need of establishing a team with particular knowledge and experience. Bringing in an expert may be more expensive in the near term, but it will always generate value.

In many circumstances, a company’s in-house legal staff, for example, is unlikely to have sufficient expertise of intellectual property management to offer an accurate merger and acquisition risk assessment of the target’s IP.

The diligence team is crucial both before and throughout the due diligence phase.

As previously stated, the due diligence team’s responsibility prior to the start of due diligence is to compile the due diligence request list.

This is where the diligence team’s knowledge comes into play: knowing the correct questions to ask; not only does this reduce the potential of surprises, but it also gets to the essential issues faster.

4. Merger and Acquisition Risk 4: Integration Deficits (Risk of M&A integration)

M&A professionals typically believe that post-merger integration is the most difficult aspect of any deal.

A plethora of concerns must be addressed, ranging from internal management audits to salesforce integration, posing major risks, the potential of employee discontent, inability to realize synergies, and, ultimately, value loss.

Furthermore, the extent of variation between each integration procedure might be significant, compounding the dangers.

What makes integrations even more challenging is that the most crucial aspect to incorporate – culture – isn’t always easy to recognize right away. When all of these factors are considered together, it’s easy to see why the integration process poses such a significant risk.

How to Avoid Common M&A Integration Gaps:

 The first obvious step toward better integration processes is to have members of the due diligence team join the integration team. This ensures consistency and streamlines information, resulting in less duplicated labor and activities.

Along with members of the diligence team, your integration team should include people who understand and have a strong history in value generation.

Additionally, the team should contain people with strong IMO and project management abilities. Finally, you’ll want someone from HR on your integration team, preferably from HR’s organizational development department.

With an experienced and skilled integration team in place from the start of the transaction, a sharp eye toward integration planning may occur throughout diligence when fresh facts and a deeper understanding of the target firm are unearthed.

5. Merger and acquisitions Risk 5: Inadequate culture and change management

Related to integration techniques is the need of considering business culture and providing your new workers with the skills they need to succeed, as well as recognizing them as valuable and welcomed members of the new firm.

Dawn White, a change management specialist, reminds us:

People are the most valuable assets for the most successful acquirers because they help organizations achieve goals, sell goods, capture synergies, and drive innovation.

An acquirer’s failure to consider culture can be disastrous. This is also true for ineffective change management strategies.

For example, we’ve all seen talented people depart amid mergers and acquisitions.

Indeed, industry recruiters are frequently on the lookout for angry, terrified, or hesitant personnel from the new business.

Corporate morale, which may drive performance if it is good and supportive of company goals and plans, is also directly tied to culture and change management.

How to Avoid the Negative Cultural Effects of Mergers and Acquisitions:

As with integration planning, the buy-side should begin gathering information about the target’s culture as soon as feasible.

Observations during onsite visits, study of how the target communicates about management styles and procedures, or one-on-one interactions can sometimes be done in the early phases of a negotiation when the buyer is not privy to particular facts.

In an ideal world, the buy-side would have a change management specialist or team in place to be in charge of acquiring this knowledge.

The change management team can evaluate the contrasts between the buy-side and sell-side that might undermine or even kill the agreement as the deal continues and more information about culture is obtained.

The change management team can utilize this knowledge to avoid these hazards.

Finally, paying attention to culture and change management can help you identify and engage with resistive personnel.

6. Merger and acquisition Risk 6: Lack of overall communication and openness

To the best of our knowledge, no agreement has ever failed due to excessive communication. Communication is the lubrication that keeps most mergers running smoothly, both before and after the deal.

Polite and frank communication begins during the negotiating process and should continue until the deal is completed.

Lack of communication and openness, which is typically caused by teams operating in silos, can stymie deals of all sizes.

Lack of communication was listed as the most significant concern discovered by managers at the PMI stage in an AT Kearney poll of worldwide managers who have done M&A.

Those conclusions are still as important in 2021 as they were nearly two decades ago, when the study was done.

How to avoid poor communication and opacity during a transaction:

Without a question, technology is one of the most powerful instruments that can be used to ensure effective communication and transparency throughout transactions.

The emergence and use of the virtual data room for M&A have made safe information sharing easier and more efficient.

Project management tools designed specifically for M&A activities, such as DealRoom, enable real-time collaboration and transparency.

M&A Risk 7: Failure to capitalize on synergies

Once projected transaction synergies are discovered and their values are conservatively evaluated, precise strategies and deadlines must be developed to ensure the synergies offer the predicted value to the new firm.

How to prevent missing out on synergies:

To return to our second M&A risk, being conservative when predicting synergies is critical.

Furthermore, the following best practices (many of which have already been mentioned) might be used to actualize your projected synergies:

Take advantage of low-hanging fruit. This entails focusing early on the “simplest” synergies that will produce the biggest return. This low-hanging fruit technique should also be in line with your overall aim and have a high chance of success.

Concentrate on your ultimate aim. As previously said, aligning all stakeholders and team members around your overarching aim/objective will assist you in capturing synergies that will help you achieve this goal.

Implement an Agile process or practice. Because Agile advocates focusing on the big picture and regrouping and refocusing when you get off track, this method promotes the effective realization of discovered synergies by focusing on synergy implementation. Agile M&A might assist you in delving further into how to adapt Agile methodology to the M&A process.

Attempt to retain key individuals from the target organization. Returning to the significance of culture and change management, as well as the idea that people make a firm successful, maintaining important staff is critical.

Examine your client base for revenue synergies.

This entails examining both your current customer relationships and the additional services and products your customers require that you do not currently provide.

Final Thoughts

Mergers and acquisitions both have the potential to generate long-term profitability for the combined company in the case of a merger, or the purchasing company in the case of an acquisition. Mergers and acquisitions can also help a developing company grow and develop. These characteristics are not always present, and other advantages or risks are always present in each unique merger and acquisition. Even the most seasoned organizations make mistakes in transactions that reduce their worth. There is a lengthy history of corporations that have overpaid, failed to integrate correctly, and failed to achieve synergies.

As with many other aspects of life, being aware of the dangers entailed by M&A activity may help you avoid them or, at the very least, limit their influence on your company’s performance.


What are the risks of mergers and acquisitions?

Mergers are not always successful. Mergers can often result in a loss of value due to issues that develop during the merging of forces, such as technology incompatibility, unneeded workers or equipment, inadequate management, and so on. This sometimes leads to misunderstanding among new management on which employees to retain and which operations to maintain. It is necessary to conduct extensive study in order to produce a successful merger.
Monopoly issues are another danger associated with mergers. In antitrust matters involving a monopoly or a harmful impact on the market, the European Commission, the United States Department of Justice, and the US Federal Trade Commission have the authority to refuse a merger. Smaller business mergers may not always pose the same hazards. George and Company can help you determine the risks and benefits of any merger or acquisition, as well as clarify each step to ensure a smooth and professional process.

What is the importance of risk management in mergers and acquisitions?

A risk manager’s job during the M&A process is to ensure that key stakeholders have sufficient insurance coverage to handle and mitigate significant risks inherent in the M&A transaction.

How do you mitigate risks in M&A?

Many businesses fail to accomplish their goals through mergers and acquisitions. These breakdowns are frequently caused by human capital issues, such as talent attrition, a lack of fit across cultures and management styles, and poor communication, which leads to ambiguous expectations and anxieties about the future. HR executives must be proactive throughout the process to ensure that M&A compliance risks are controlled and that employee difficulties do not undermine mergers and acquisition investments.
Here are three strategies for reducing M&A compliance concerns.
1. Investigation
2. Select the Best Due Diligence Partners
3. Identify Technology Alignment Gaps

What are the 4 types of M&A?

A paradigm that has been quite useful in thinking about acquisition values and how businesses might position themselves to receive more appealing offers. The trick is to recognize that, everything else being equal, the buyer’s willingness to pay is determined by why you’re being purchased. These incentives fall along a continuum that divides purchases into four categories:
– Acquisition of Talent
– Acquisitions of Assets and Capabilities
– Acquisitions of Businesses
– Strategic Gamebreakers

Author of the article
Risk Management in Mergers and Acquisitions
Valentina Khlavich
Managing Partner
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