What are the risks of mergers and acquisitions?
Although M&A deals are a popular tactic for growing a business and adding value, the strategy doesn't always pan out, and mergers aren't as easy as they seem in the boardroom.
There are a number of risks and pitfalls involved in the process. Among the biggest is the cultural fit. If the two companies have much different cultures, the absorbed employees are unlikely to feel at home.
AT&T's acquisition of Time Warner was plagued by a culture clash since AT&T was much more conservative and formal than the more freewheeling Time Warner. Similarly, Walmart's takeover of Jet.com led to Walmart banning alcohol and profanity from Jet's offices before reversing that decision after a protest.
Similarly, deciding on new leadership can also be a pitfall since the absorbed employees may prefer to work for their former executive team, and making a new leadership team for a new company is not easy.
Another common risk is that a company overpays in an acquisition. To buy out a company, the acquiring business often has to pay a premium, buying the company for significantly more than the existing stock price. To justify that, the target business has to deliver extra value to the acquirer. If the deal goes bust, as it did with Time Warner and AT&T, that can make it especially costly.
Finally, there's the risk that the strategic rationale behind the deal is poorly thought out. AT&T acquired DirecTV in 2015, for example, buying a declining satellite TV business that would soon be worth much less than the $67 billion it paid for it.
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