Fact or Myth: Do 80% of M&A Deals Fail?

We are often asked by business owners if the commonly quoted figure is true that 80% of mergers fail to meet expectations after closing. There is a fair amount of research on large ($1 billion+), public deals that suggests that the 80% post-closing failure rate may be true. However, I suspect that for smaller public or private deals, the percent of success is much higher. We polled a wide range of experienced acquirers in the electronics sector, and most believe that over half their deals are successful after closing. 

Private equity firms seem to have a pretty good batting average for both platform and add-on deals because they tend to be long-term, experienced investors who are careful buyers. PE firms tend to monitor their acquisitions closely, and they enlist industry experts to help them analyze and manage their portfolio companies. Corporate/strategic buyers tend to do well if there is a good fit and they do not rush to pay too much for a deal.

On the other hand, venture capital firms expect a high percentage of investments to not succeed, but the 20−30% that do succeed more than make up for the others. For small, private deals, I believe that many do not meet original expectations, but that buyers are satisfied with more than half of their acquisitions. While the statistics may or may not be true, the more interesting question is, why do some deals fail while others succeed?

Overpaying 

I believe the main reason why deals fail to meet expectations after closing is that the buyers overpaid. That sounds simple, but we see deals that appear to be way overpriced all the time. Of course, the sellers may be very satisfied with the deal, so at least half of those involved are happy at closing. Many times, terms of the deal include earnouts or other types of deferred compensation, so the headlines may not accurately reflect the true value of the deal.

Why do buyers overpay? There are a variety of reasons, including buyers’ egos, use of public company stock instead of cash, unrealistic growth expectations, lack of industry knowledge, unrealistic sales or cost synergies, etc. Buyers of small companies should talk to outside advisors to get a sanity check on the deal value.

Crazy or Just Plain Wrong Expectations

Almost every seller shows sales projections that climb to the sky in the future. Sometimes these expectations are realized, but in many cases those projections are over-hyped. In deals that fail to meet expectations, often the growth projections were much too optimistic, or the buyers’ assumptions were incorrect. Sellers should make sure that their projections are realistic, otherwise, they may lose the trust of potential buyers. Buyers should carefully review projections to make sure there is a basis for those assumptions, and should create A, B, and C scenarios to make sure they can still make money on the deal.

Focus on the Deal, but Not on Integration

Many buyers are so focused on closing the deal that they fail to prepare for the integration of the acquired company. It is important that buyers think about what happens after closing before they put in a bid. It is understandable that buyers forget about integration, as corporate buyers usually already have a day job, and closing deals is very difficult and time-consuming. If any part of the deal is in the form of deferred compensation, sellers should also be careful that the buyer has a good integration plan.

Missing the Boat on Culture, People  

Buyers often misjudge the cultural fit between the two companies or ignore key employees. Culture is very difficult to define, and many sellers of small companies don’t understand their own culture. Buyers also tend to focus on the deal and ignore key employees until just before closing or even after closing. Sometimes, the culture of the smaller company is more dynamic than the buyer’s, and the last thing the buyer should do is change anything. Buyers tend to believe that their culture and systems are better than the seller’s and, whether that’s true or not, buyers should be careful not to change too much too quickly.

Force-Feeding of Changes

Buyers often say prior to closing that they will not change anything, and then afterwards change everything. Sales policies change, distributors and/or reps are terminated, suppliers are consolidated, employee benefits are cut, employees are let go, etc. It is best to make it clear up front that changes will come, rather than surprise the acquired company with sudden changes.

Sloppy Integration

Often, the buyer of a business has a good integration plan, but then the plan is passed off on already over-worked executives who are left to make their own decisions. Either the acquired company is ignored, or the integration is sloppy. The CEO and executives of the buyer need to monitor the integration process, otherwise, much of the value of the deal can be lost. If the two entities need to work together to make the deal successful, those employees should be incentivized to work together.

External Circumstances

Sometimes, deals fail to meet expectations due to outside factors, such as a recession, new competition, or a change in regulations. While it is difficult to predict these factors, buyers should be careful to put ‘circuit breakers’ into their expectations to make sure they do not wildly overpay. It would be great if the seller's projected sales will climb 25% a year for 10 years, however, there is at least some chance of a recession during that period.

Based on the statistics on failed deals, it begs the question: If so many deals fail, why do companies keep making acquisitions? Acquisitions have a higher batting average than starting a new business or division from zero. Also, larger companies usually have more cash, borrowing power, or stock value than smaller companies, so acquisitions can be a great way to grow or expand product lines. Larger companies can leverage the power of their organizations to take advantage of various synergies, such as purchasing power, sales/marketing structure, international opportunities, service capabilities, etc., which allows them to obtain a better ROI than smaller companies. While large, failed deals tend to grab headlines, the reality is that most small, private deals are at least somewhat successful. Experienced, knowledgeable, and practical acquirers do not succeed every time, but by following a disciplined acquisition strategy and skillful integration plan they can bat well above .500.

Tom Kastner is the President of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. Securities transactions are conducted through StillPoint Capital, LLC, Tampa, Florida, member FINRA and SIPC. To read past columns or to contact Kastner, click here.

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2018

Fact or Myth: Do 80% of M&A Deals Fail?

05-09-2018

We are often asked by business owners if the commonly quoted figure is true that 80% of mergers fail to meet expectations after closing. There is a fair amount of research on large ($1 billion+), public deals that suggests that the 80% post-closing failure rate may be true.

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How to Prepare for a Smooth Post-M&A Deal Transition

04-05-2018

Selling a company is an exciting process, as well as time-consuming, stressful, and complex. Both sellers and buyers are sometimes so caught up in the deal that they forget to properly plan the post-deal integration.

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Cross Border Deals: What to Look for and How to Manage

02-22-2018

My firm has been approached by foreign firms several times this year and in 2017 who want to acquire PCB, PCBA, or other electronics companies in North America.

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Punching Out! Top 10 M&A Deal Killers

01-25-2018

I am often asked about some of the reasons why M&A deals die. Although this is a very painful subject, hopefully through sharing these reasons we can help some deals survive the M&A process. Here are my top 10 M&A deal killers (and some of the solutions).

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2017

Punching Out! Survey on State of the North American PCB M&A Market

12-29-2017

Recently, my firm surveyed about 20 PCB manufacturers in North America with an estimated greater than $10 million in revenue. Quite a few replied, and we have spoken with many others throughout the year, which gives us a good view on the state of the PCB market. If I did not contact your shop recently, it is because we already talked within the last 12 months.

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Punching Out!: PCB/PCBA M&A Top 10 FAQs

11-13-2017

We talk with owners a lot about the possible sale of their businesses. Here are the top 10 questions asked by PCB/PCBA shop owners about the process.

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Punching Out! Case Study—Lessons on a Deal

10-19-2017

This is a story of one of our clients, a U.S. contract manufacturer that sold a few years ago. To maintain confidentiality, the names have been changed and the details slightly modified.

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Punching Out! Making the Process Easy (M&A Process Engineering)

09-06-2017

In the M&A world, there are companies that make it easy (or at least easier) and those that make it difficult. By making the process easier, sellers should see better valuations and terms, and have a smoother deal process.

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Punching Out! Bridging the Valuation Gap Between Buyer and Seller

06-13-2017

PCB acquisitions in the U.S. are down so far in the first five months of 2017, with only two announced deals (HT Global Circuits’ acquisition of Pho-Tronics in April; American Standard Circuits’ acquisition of Camtech in May); and one anonymous deal that I am aware of that has not been announced. This compares with 11 announced deals in 2016. There are a variety of reasons for the decline, but one reason could certainly be the valuation gap between buyer and seller.

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Punching Out! How to Put a Wrench in the Rumor Mill During the Sale of a Company

05-23-2017

When selling a house, the owner’s agent puts a sign in the front yard, posts info on the Web, and invites buyers over for an open house. When selling a car, we put a sign on the windshield and take out an ad with our phone number on it. However, when selling a business, some owners do not even tell their spouses.

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Punching Out! Selling a Company—Seeing it as a Triumph, Not a Defeat

04-25-2017

Somehow, there is a still a stigma that selling a company is a negative for the owner. Many people think that there must be something wrong, otherwise, they would not be selling. In reality, exiting a business should be looked at as a triumph for the owner, not a defeat.

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Punching Out! 10 Ways to Increase the Value of Your PCB/PCBA Shop

03-22-2017

I have worked with a wide range of companies in the PCB, PCBA, and other tech and electronics sectors. Through the years, I have developed some ideas on how companies can improve their valuation. Some of these ideas are simple and involve little cost, other ideas are more long-term and involve more effort or investment.

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Punching Out! When Should I Call an Investment Banker?

02-20-2017

The quick answer is ASAP. Even if you are not considering the sale of the company for 5−10 years, it is best to be educated and prepared. Give your advisor (or a few advisors) a call to discuss what can be done to get the company ready for a future sale. The worst time to call an i-banker or business broker is when you are forced to sell due to poor performance, health issues, pending bankruptcy, or dispute with a partner or manager.

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Punching Out! Types of Company Buyers in the PCB and EMS Sectors

01-09-2017

Mergers and acquisitions in the U.S. PCB sector have been in the news recently, with at least 12 deals completed over the past year, and several more in the works. In contrast, the EMS sector has been relatively quiet, but that may change now that the presidential election is over.

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2016

War Stories from the Front Lines of Deal-Making

09-16-2016

Here are some war stories from my experience in working on M&A deals in the PCB, EMS, and electronics fields. The names and details have been changed to protect the innocent.

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Timing: When is the Best Time to Sell?

08-18-2016

A few of the top questions we receive relate to the timing of the sale of a business. The first is, "Is now a good time?" The second one is, "How are market conditions?" These are the top FAQs.

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The PCB Sector—What Buyers Look for and Recent Deals

07-14-2016

The past few months have seen a rash of PCB deals in North America, for a variety of reasons.

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What the Heck is Adjusted EBITDA?

06-07-2016

If you are looking to sell or buy a business, you will most likely come across the term ‘adjusted EBITDA.’ Other common terms are adjusted cash flow, owner’s discretionary earnings, earnings after add-backs, etc. What do these terms mean, and why are they important?

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The Additive Process: Tips on How to Buy a Board Shop or Assembly House

05-14-2016

One of the quickest ways to grow a business is to acquire another business. At the same time, acquiring a business can be risky, and a really bad deal may put your original business in jeopardy. Here are some tips on how to make acquisitions.

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Your Baby’s Ugly, Now Get Over it (How to Work with Buyers)

04-14-2016

Here’s a scenario: An owner has gone to market and is starting to get feedback from buyers, and shockingly, not everyone appreciates the hard work and achievements that went into the business. Buyers may not understand the business, or they may be trying to position things for a low offer. In any case, it is important to know how to work with buyers.

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Putting Together the Deal Team

03-21-2016

When preparing to sell, remember the old saying, “He who represents himself has a fool for a client.” While many owners might be tempted to go it alone, in my experience it pays to have a deal team to help prepare a company (and the owner) for a sale

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Punching Out: How to Sell Your PCB/Assembly Shop

02-04-2016

You are thinking of selling your PCB or assembly shop. Perhaps you are contemplating retirement, you have no successors, and the thought of going to the office on Monday is driving you crazy. This column is designed to help your planning efforts. Future columns will go deeper into each subject

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