Mergers and acquisitions provide fertile ground for growth and can be highly beneficial to both buyers and sellers. Too often, though, the parties buy into the sunk cost fallacy, causing them to continue to invest in a deal that is doomed not to realize its promised value. So when should owners consider walking away? Consider these guidelines.
Mismatch in Strategy
With large sums of money at stake in most M&A deals, it is critical that sellers have a similar strategy. Sometimes this mismatch in strategy only becomes apparent at the negotiation table. In other cases, it’s obvious from the get-go, but the high value of the deal distracts dealmakers from its glaring shortcomings. Some common strategic mismatches include:
- Not meeting growth requirements. Safe deals can be appealing, but if they don’t meet the growth potential that PE investors demand, they’re a bad investment.
- Different industry focuses. If the deal is in a new industry than either company’s original operations, there may be needless risk, especially if either party is unprepared to pivot their company.
- Disagreements about integration strategy. Failures of integration are a leading cause of deal failure. If the parties cannot agree to an integration strategy early in the process, the new company may lose staff, influence, and momentum.
Rapidly Accelerating Expenses
Sometimes a deal turns out to be more expensive than either party bargained for. Whether it’s because of unanticipated issues uncovered at due diligence, increased regulatory compliance issues, a prolonged negotiation process that requires more expert insight, or a combination of all of the above, sometimes a deal becomes too expensive to justify itself. And sometimes the price of the company for sale has to increase thanks to clear increases in value. This is a completely valid reason to walk away. Don’t let the expense of closing the deal outpace its potential investment value.
Too Many Details, Not Enough Big Picture
Sometimes everything that’s wrong with a deal is in the details. In most cases, the problem isn’t one of overall strategic mismatch. Instead, deals die deaths of a thousand cuts. The buyer may want to take the company culture in a direction the seller doesn’t want. Branding may shift in a less than ideal way. There may be adjustments in pricing for everything from the acquisition itself to the cost of paying intermediaries. When the details become a distraction (and an expense), the big picture may matter less.
Conclusion: How to Walk Away
Sellers are often reluctant to walk away, citing fears of burned bridges and even lawsuits. Walking away is an art. Getting it right can preserve the relationship, and potentially even lay the foundation for a future deal. To minimize the consequences of walking away, owners must walk away quickly, after being direct and honest. And do so as early in the process as you can. They should never drag things out and must begin due diligence early to identify problems before either party has invested too much.
A professional advisory team on both side of the deal can help guide decisions about when to walk away.