10 Biggest Challenges During M&A & How to Overcome Them

This post was originally published in October 2019 and has been updated for relevancy in May 14, 2024.

Executing mergers and acquisitions (M&A) is far from easy. The M&A process alone is extremely complex and tedious that requires precision, alignment and experience. In addition, every step of the way is filled with risks and uncertainties because M&A involves dealing with a lot of people. To make things more difficult, every deal is unique, which means deal problems will never be identical, and is hard to anticipate. 

However, through experience, you will realize that these challenges can be categorized into major categories. By understanding them, you will increase your chances of success, and will save you time and money in the process. 

We at DealRoom help companies organize their M&A processes. And from our vast experience, we have identified significant challenges that companies face during M&A. We have listed them all below, together with recommendations on how to overcome them, so you can make better decisions on your next deal.

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Top Challenges in Mergers & Acquisitions

1. Alignment on the deal thesis

M&A is not a strategy. It is a great and powerful tool to achieve the overall company strategy. However, more often than not, the M&A team doesn’t understand why they are pursuing the M&A transaction in the first place, especially the integration team who is in charge of value creation.  

In a perfect world, the deal thesis will dictate the integration strategy, which affects the valuation of the target company, and what the M&A team should focus on during the due diligence phase. YES, alignment is that crucial. 

Alignment also includes the target company. Most buyers do not include the target company into their integration planning. But the reality is, they have expertise in the business (which is why they were bought in the first place), and they will be an integral part of the merged entity.

If the incoming team does not like the post-acquisition plan, it could lead to insubordination, poor performance and key employees leaving the company.  

So, to overcome this massive M&A challenge, communication and transparency is key! All sides must have a clear understanding of the strategy and the deal rationale to bridge gaps in expectations. Kickoff meetings are a great way to ensure alignment with everyone, together with regular sprints to maintain alignment.

The same thing goes for the seller side. Communicate with them the deal rationale. It will help them understand why some changes are inevitable, and will make them more amicable to changes. After all, everyone wants a successful M&A. 

2. Building the pipeline

When starting out, building the pipeline can be tough. There are a ton of companies in the world, which can be overwhelming for first-timers. The worst thing to do is building a pipeline with the wrong target companies. 

To build an effective pipeline, corporate development must communicate with various stakeholders of the company and understand what they really need to foster inorganic growth. This will generate a better decision-making process on who to go after. 

Market mapping is also a great way to narrow down M&A priorities and have deeper alignment with the business unit on the M&A strategy. Companies can use this tool to identify strategic fits, map out competitors and their market shares, spot emerging trends, and facilitate long-term strategic planning. 

It requires collaboration with the business unit leaders, product team, corporate strategy team, and many others. 

After building the pipeline, it also requires constant updating and management. It’s not a one and done thing. It requires tedious monitoring of the target company and updating the database with any changes that have occurred. For more effective and easier pipeline management, use M&A tools like DealRoom. 

3. The knowledge chasm between Diligence and Integration teams

The knowledge gap between the diligence and integration team is arguably the biggest challenge in M&A. These are two completely separate teams inside an organization, with two different goals in M&A. The diligence team is in charge of assessing the value and risks of the target company, while the integration team is in charge of creating value post-acquisition. 

If both teams don’t communicate well, this can result in information silos. The due diligence team might have a view that is too optimistic of the deal, which may be far from reality. Without deep insights into the diligence phase, the integration team may not get all the information they need for an effective integration process.

This often results in redundancies during the integration process, as the integration team will end up asking a lot of questions that were asked already. The best way to address this challenge is to involve the integration lead as early as possible, especially in the due diligence process, to ensure continuity and understanding of goals and insights. 

As a matter of fact, there are companies that allow the integration team to lead the due diligence process for higher efficiency. 

4. Integrating cultures

When two companies merge with different corporate cultures, chaos will happen. This is especially true in cross-border deals. 

When there is a culture clash, the people from both sides are not happy working with each other. The acquired employees are not happy with the upcoming changes and will not be productive in their work.

It also applies to customers. When the customers are not happy with the changes, it can damage the company’s brand image and market trust, which may affect customer satisfaction and loyalty.

Billion dollar deals have been destroyed due to cultural differences, and buyers must be very mindful of this, as it can greatly impact how well the combined entity will perform.

To prevent this problem, buyers must first understand their core culture. This will help them set their non-negotiables, and in turn, find better targets. Finding a target company that will fit is extremely difficult if buyers don’t know who they are in the first place.

During due diligence, focus on cultural integration. Assess the company culture and understand what makes them special. If it's something that cannot be preserved during integration, then reconsider the deal altogether. 

5. Negotiations 

Negotiation is always a challenge in any M&A deal, whether it’s negotiating the price, purchase terms, key executives’ future roles, or potential liabilities. And the biggest culprit here is emotions. 

The most common source of conflict during negotiations is when the seller is too emotionally attached to the business. They have unrealistic expectations on the price and what their role would be post-acquisition. 

In other cases, conflicts happen when both sides cannot agree on the integration plan and how to run the business after the deal is closed. 

To be effective at negotiations, buyers must approach it with the proper mindset. Negotiating fairly and honestly. Enter negotiations with clear objectives and maintain flexibility in areas where compromise is needed. Always look for a middle ground that works for both sides. 

Aim to maintain positive relationships throughout this process. Understanding that the employees and management of the target company will become part of the acquiring company, is crucial to the success of the post-merger integration. 

If things get a little too complex, bring in neutral third parties like experienced M&A advisors who can provide solutions that internal negotiators might miss. When all is said and done and the terms are agreed upon, then is the time to prepare and plan for post-deal integration.

6. Managing risks between signing and closing

Signing and closing simultaneously rarely happens in M&A, especially in public deals. And the gap between signing and closing poses a lot of risk for both companies. The longer a deal takes to close, the higher the risks. 

One of the biggest challenges in this phase is the operational risk. Even though a deal has been signed, it hasn’t been finalized or closed yet. The target company needs to keep running the business operations and not be lazy, to prevent any decline in its performance.

The buyer, on the other hand, cannot control the operations before closing, due to gun-jumping law. If there is material change to the target business during this time,  the deal can still fall apart and parties can legally walk away. 

Regulatory approvals are also a massive risk during this stage of the M&A process. If the regulators deems the transaction inappropriate, the deal will fall apart and both parties must walk away from the deal. Not to mention the delay it causes in the timeline of the deal. 

Lastly, closing requirements also pose threats to the M&A deal, if any of the parties fails to obtain the necessary approval.

To overcome this challenge, buyers must use interim covenants for protection. Interim covenants are rules in a contract to make sure everything goes smoothly. For example, the seller has to make sure the buyer is doing their part to meet closing conditions. If not, the buyer could end up knowing sensitive details about the company without finalizing the deal.

Also, buyers can put performance metrics around the target company, to avoid the seller slacking off and destroying the business before closing. If the metrics aren’t met, they can walk away from the deal.  

Legal safeguards are also essential to protect the company against potential liabilities discovered between signing and closing. These include warranties, indemnities, and representations in the acquisition agreement.

7. Employee retention

Employee retention is the most common challenge in deal-making. No one likes to be bought, and employees did not choose to work for the acquiring company. In addition, employees are worried about potential layoffs, changes in their roles and responsibilities, and compensation. The new management might impose big changes in their work conditions, which might transform their entire workflow.  

More often than not, if these concerns are not addressed immediately, these employees will go looking for new job opportunities elsewhere. And losing people is a massive disruption in the acquired business. Aside from the lost talent, buyers will spend more time and resources to retrain the replacements of those who walked away. This will hurt the timeline of value realization. 

It is why it’s crucial to have a proper change management plan and focus on employee retention. Address their concerns very early, before fear kicks in, and spreads throughout the organization. 

Middle managers are also key to employee retention. They are the bridge between front line employees and upper management. Convincing them that the acquisition will be for the benefit of everyone, will greatly increase employee retention.

8. Getting the right valuation

Getting the valuation right is crucial for buyers. Every M&A deal has to make financial sense, and it was approved because of certain assumptions with a corresponding price tag. But if that valuation turns out to be wrong, then the entire deal might not be viable after all. 

We’re not here to teach you how to do valuation. There are a ton of good M&A advisory firms out there that can help with that. But there are things that most companies overlook, like the importance of integration budgeting. 

Buyers often are too focused on synergies but what they forget is that Integration costs money. Those costs must be included in their financial modeling to avoid unrealistic expectations when it comes to synergy realization. Buyers must consider all the post-close integration changes, which are broken down into two categories; one-time costs and recurring costs.

For instance, buyers are planning to merge the supply chain of both companies for cost savings. It sounds good on paper, but it requires a massive one-time cost to achieve that synergy. That should be included in the computation of the deal.

9. Performing due diligence without overwhelming the seller

Due diligence is a tedious process that requires a massive team. It involves reviewing financial records, legal documents, operational processes, and more. This process gives the buyer a picture of the value and risks associated with the acquisition.

What usually happens is that the buyer will have 500 questions, or more, to the seller. In addition to this overwhelming list, there would be 30 to 50 people coming in and performing due diligence on the target company. This causes massive stress and distraction to the seller. 

It can demand much of their time and resources, which can affect their normal business operations. 

What buyers can do is filter the due diligence list, and triage based on urgency. Don’t give them all at once. Set priorities based on the deal rationale and go from there. It also helps if you explain to the seller why you are asking the questions. 

10. Deal fever 

Many people fall into deal fever during M&A due to their excitement and pressure to complete a deal. This happens to everyone, especially when we get too emotionally invested in the outcome we expect from the deal. There are also instances where the buying party has invested too much time and effort into the deal, so backing away is no longer an option. 

In some cases, companies become too overly confident due to past deal successes, and forget that the current circumstances are different. Sometimes, this results in decision-makers unconsciously seeking information that confirms their initial positive impression and ignoring warnings or potential setbacks. This is where acquisitions fail. 

One proven strategy to combat deal fever is to implement a Red Team Exercise to challenge a deal’s assumptions and find potential flaws in the plan. 

Form a red team to examine all the possible angles of the deal. Their job is to dissuade the deal-makers and executives to pursue the current deal.  The members of the red team should be those who are not involved in the initial negotiations.

External advisors’ unbiased opinions on the deal may also help give buyers a different perspective on the potential acquisition. It’s important to look beyond just the financials, and avoid moving forward without considering the integration aspect of the deal.