Most people would say that to do business is always a risk; as such, it is up to the people running the business to minimize or even to eliminate these risks.
Mergers and acquisitions have many advantages, which is why these are still relevant in Canada’s market. However, parties to these transactions may wonder what the risks of mergers and acquisitions are.
Knowing these risks will help parties strategize on how to move forward with the merger or acquisition – or whether to push through with it at all.
What are mergers and acquisitions?
Mergers and acquisitions (M&As) are business transactions where two separate companies become one, either through:
- combination of the two companies
- when one company buys another
While these two may seem similar, they still have their own differences.
Mergers are when two companies integrate to continue as a single entity. Acquisitions, on the other hand, are when a company is taken over by another through the purchase of its shares or its properties.
In acquisitions or takeovers, the company being bought is called the target company, while the other is called the purchasing or acquiring company.
M&As in Canada are governed by federal laws such as the Canadian competition law and other statutes.
What are the risks of mergers and acquisitions?
Parties must minimize the risks of mergers and acquisitions. These risks may result in failed M&As, triggering legal problems against both parties.
Here are some of the top risks of mergers and acquisitions, and some practical examples of how these may happen:
Overestimated synergies
The point of M&As is to create a new company from two different (but similar in some ways) entities.
Undergoing this rigorous process must result in something bigger profit-wise, compared to when these two entities operate on their own. However, an unharmonious merging or acquiring process is one of the risks of M&As, which may even have a domino effect on the other aspects.
This is usually the result of an “overestimated synergy”. Here, companies tend to set up unrealistic expectations and bank too much on their perceived results.
Instead of reaping the benefits of a much-anticipated M&A, parties in the end lose much more.
Unexpected costs
Another risk of M&As is the surge of unexpected costs along the way. These costs may show up before the contract signing and until the integration phase.
Some examples of these unexpected costs are:
- employee training
- rebranding costs
- new systems and processes
- costs for legal compliance
The risks of M&As related to costs may also arise in the contract price itself. When there’s overvaluation of the other company, it may trigger unnecessary costs just to ease this problem. And this is aside from the excess cost due to the overvaluation itself.
Integration shortfalls
Even if companies reach past the signing of all the necessary contracts, there are still M&A risks that these companies must be aware of.
One of these risks of M&A post-contract is integration failures. While integration may last for months or even years, there are many shortfalls that may arise during this stage, such as:
- clashes between company cultures
- confusion of newly implemented systems
Employees integration
Because changes will surely be implemented, one of the risks of M&As is disturbing the already established culture among employees.
M&As may result in layoffs, such as when there’s redundancy between positions, or when there’s excess employees after the integration. These things, when not handled correctly, may pose a problem for the new company.
It may demoralize employees, increase stress levels among them, or develop uncertainty as to their future in the new company. All of these may impact the efficiency of employees, affecting the overall performance of the company.
This video explains further the issues and risks of M&As as for employees and human resource:
If you’re considering a merger or acquisition, consult a lawyer in your area. Companies in Toronto or Ottawa can contact one of the Lexpert-Ranked best M&A lawyers in Ontario for advice.
How can the risks of mergers and acquisitions be mitigated?
All these key risks of M&As can be addressed by parties through preparation. Here are some ways to prepare parties to the M&A in mitigating these risks:
Comprehensive strategic planning
Risks of M&As – such as unexpected costs and integration problems – are mitigated when there’s a comprehensive strategic plan in place.
Aside from outlining everything in the contract, a plan on how to move forward during the integration process will be helpful.
The plan may also include specific persons involved in a particular process, the costs allotted for such process, and remedies when the process fails or does not meet expectations.
Everything is on paper
M&A risks that may arise because of the relationship between the two companies involved are solved by paper: the contracts of the M&A.
These contracts, when drafted in specific detail, will answer problems that may arise during integration.
It will also clear up any dispute between parties, but only if all agreements are on the record through these contracts.
Focus on due diligence
Exercising the highest degree of tenacity when conducting due diligence is one of the important problem-solvers, and even troubleshooting tools, for M&A risk management.
The due diligence team must be composed of the most trusted person in the company. It must include M&A lawyers, HR executives, and the company accountants.
They must also be familiar with the transaction – from the company’s strategic planning until integration.
Choosing the right due diligence team is one of the ways to mitigate most risks of M&As, such as:
- whether the right target company was chosen
- how to do a smooth integration
There are also certain areas that the due diligence team may look at in the other company to address some key risks of M&As:
- cultural assessment
- market and industry analyses
- legal and regulatory compliance
Interested in knowing more about risks in mergers and acquisitions and what strategies you can take to address them? Reach out to the best mergers and acquisitions lawyers in Canada as ranked by Lexpert for guidance.