Top 15 Risk Factors for M&A

Sixty percent of financial professionals say overpaying for deals is the biggest M&A risk factor facing buyers next year, according to new research.
Sean AlloccaDecember 19, 2016
Top 15 Risk Factors for M&A

In an uncertain economic year, its not surprising the M&A market was equally as rocky. In March, mergers and acquisitions declined more than 55% in value from the prior year period only to bounce back in October with four of the year’s top 10 deals and $250 billion in announced transactions. As 2016 comes to a close short of last year’s record-setting levels, what risk factors are acquirers worried about most before closing their next deal?

Sixty percent of financial professionals say overpaying for deals is the biggest risk facing buyers in 2016, according to a new survey conducted by the Financial Executives Research Foundation and the consulting firm Crowe Horwath. Forty percent say high valuations are making completing M&A transactions risky business.

“Today’s M&A market is just too competitive and the pricing too expensive to rely on financial arbitrage, inflated cross-selling models, or wishful thinking that you will find a diamond in the rough,” said Chris Nemeth, managing director of advisory services at Crowe Horwath.

Companies have learned to operate on leaner budgets since the financial crisis and have been reluctant to spend capital on mergers and acquisitions that don’t provide near-term value, the survey suggests. The net result: Companies have an overabundance of cash on their balance sheets, and, combined with the still-low cost of debt and a limited availability of targets, it makes the M&A landscape a seller’s market.

“Today, many companies face increasing pressure for growth and limited organic growth prospects in local markets, but have access to high levels of available, inexpensive capital,” Nemeth said. “Given this kind of environment, it’s really no surprise that M&A activity and general interest in M&A continues to be quite strong.”

One of the biggest challenges, and the one cited by respondents as the most overlooked risk factor, is successfully integrating companies post-deal. Seventeen percent of respondents say successful integration is a major impediment to getting full value from their mergers.

“It can be devastating to put all of the work into the front end of a deal,” the report says, “only to poorly execute the ultimate integration and value capture.”

Maintaining strategic clarity and focus was in the top three risk factors survey respondents mentioned. The survey suggests a lack of clarity often leads to a more reactive approach to unforeseen problems, overpaying on the acquisition itself or simply chasing too many targets.

“The single most common mistake that more inexperienced poker players make is simply playing too many hands,” said Marc Shaffer, partner with Crowe Horwath. “It’s indeed hard — and takes real discipline — to wait on the sidelines, at the ready, until precisely the right opportunity comes along.”

Eight of the top 15 risk areas involved operational team functions, including insufficient operational diligence or oversight and underestimating the resources required to complete the projected synergies (ranked second and ninth overall, respectively).

The “Navigating the Risks oft the Contemporary M&A Market” survey polled 180 financial professionals (mostly CFOs) from private, public and not-for-profit organizations, during May and July of 2016. The average respondent targeted six transactions, completed two due diligences, and closed one deal worth $47 million in the past year.

Understanding Which ERP Modules Your Business Needs – And When