Mergers and acquisitions (M&A) can change the course of a business, opening the door to new opportunities. However, despite the promise they hold, up to 90% of M&A deals fail to meet their goals. That’s a surprisingly high number, especially when these deals often involve extensive planning and significant financial investment. So, why do so many mergers fail? It usually comes down to specific details—especially legal ones. Whether you’re an experienced business owner or just starting out, understanding and avoiding legal risks is key to making a merger successful. Let’s take a look at the top five challenges that can derail companies about to merge and how to avoid them.
What Are Mergers and Acquisitions?
A merger occurs when two companies join to create a new business entity, while an acquisition occurs when one company takes over another. Both approaches are meant to bring benefits like cost savings, a bigger market share, or a wider product offering. But despite the advantages, mergers don’t always go as planned.
Research shows that 70% to 90% of M&A deals don’t reach their intended goals, often due to missteps like cultural differences, poor planning, or overlooked legal issues. Paying close attention to these pitfalls is crucial to keeping your company’s M&A process on track.
Top 5 Legal Pitfalls to Avoid When Companies About to Merge
- Cultural Clashes
When two companies with different work cultures come together, conflicts can arise. A well-known example is the 1998 Daimler-Benz and Chrysler merger, which failed due to cultural differences. Daimler had a more traditional, systematic approach, while Chrysler thrived on innovation. This led to misunderstandings and tension, eventually causing the merger to unravel.
Cultural clashes can manifest in contracts, management disagreements, and even employee lawsuits. To avoid these issues, M&A attorneys recommend carefully integrating company cultures. When company visions don’t align, it can hurt productivity, increase turnover, and affect profitability.
- Overestimating Synergies
Companies often merge to capture synergies, such as reducing costs or boosting revenue. However, these potential benefits are sometimes overestimated. A classic example is Hewlett-Packard’s 2001 acquisition of Compaq, which was meant to create the world’s top PC maker. Instead, HP faced major losses due to underestimated integration challenges.
It’s important to manage expectations during a merger. Experienced M&A attorneys can help assess synergies realistically so the deal is based on facts, not overly optimistic projections.
- Inadequate Due Diligence
Merging without thorough due diligence is like buying a house without inspecting it first. Due diligence involves a detailed review of the target company’s financial, legal, and operational status. Without it, you might overlook critical problems and end up overpaying or dealing with unexpected liabilities.
For example, News Corp’s 2005 purchase of MySpace for $580 million seemed like a smart move at the time. However, a lack of proper due diligence meant they missed key trends, and the acquisition didn’t pay off. News Corp eventually sold MySpace at a huge loss.
Working with a skilled M&A attorney ensures that thorough due diligence is conducted, uncovering hidden risks and protecting the merger’s success.
More: 3 Reasons Why You Need an M&A Lawyer for Your Merger and Acquisition
- Insufficient Communication and Transparency
Effective communication is vital in any business, but it becomes even more important during a merger. Many mergers fail due to a lack of clear communication with employees, stakeholders, or regulators. This can lead to confusion, mistrust, and even legal disputes.
In the failed 2014 merger between Pfizer and AstraZeneca, poor communication between the companies and their stakeholders caused the deal to fall apart. Being open and transparent throughout the merger process can help avoid such issues.
- Regulatory and Legal Issues
Mergers often draw attention from regulatory bodies, especially if the deal could impact competition. Failing to comply with antitrust laws or other regulations can result in hefty fines or even stop the merger from happening. In 2011, AT&T’s $39 billion attempt to acquire T-Mobile was blocked by U.S. regulators, costing AT&T millions in fees and legal expenses.
A knowledgeable M&A attorney can help navigate regulatory concerns, ensuring your deal complies with all necessary laws and avoids costly roadblocks.
Contact the Leading Mergers and Acquisitions Attorneys at Saltiel Law Group Today
Merging two companies is a big step, and it’s easy for things to go wrong if you don’t avoid common pitfalls. From cultural clashes to regulatory challenges, the risks are real—but with the right guidance, they can be managed.
At Saltiel Law Group, our experienced M&A attorneys will guide you through every step of the process. We’ll ensure thorough due diligence, help you assess synergies accurately, and keep you compliant with all legal requirements.
Ready to get started? Contact us at 305-735-6565 today for expert guidance on your merger.