Investigating the deal making failure in M&A: deal makers' perspective in Brazil

Sales, Augusto Cesar Silva; Zanini, Marco Tulio Fundão

doi:10.1016/j.rausp.2016.11.002

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Revista de Administração (São Paulo)

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Sumário

Strategy and business economics • Rev. Adm. (São Paulo) 52 (4) • Oct-Dec 2017 • https://doi.org/10.1016/j.rausp.2016.11.002 copy

Investigating the deal making failure in M&A: deal makers' perspective in Brazil

Investigando o fracasso em negociações de F&A: a perspectiva de negociadores no Brasil

Una investigación sobre el fracaso en negociaciones de fusiones y adquisiciones: la perspectiva de negociadores en Brasil

Authorship SCIMAGO INSTITUTIONS RANKINGS

Abstract

Why do merger talks collapse? – an exploratory study about the contributing factors behind ‘wedding cold feet' and deal making failures in Mergers and Acquisitions according to the perspective of active deal making professionals in Brazil. One basic question has encouraged the present study: after all the effort, expectations and money often invested in deal making, why are M&A transactions simply abandoned, even when the benefits to the business, shareholders, customers and employees seem to be clear?

Keywords:
Mergers and acquisitions; Due diligence; Deal breakers; M&A failure

#	ID	Role	Focus	Transaction experience		Involvement level
				Total transactions	Non-deal
1	A1	Advisor	Strategy/BD	11+	11+	High
2	A2	Advisor	Strategy/BD	11+	11+	High
3	A3	Advisor	Deal Management	11+	11+	High
4	A4	Advisor	Deal Management	11+	11+	High
5	A5	Advisor	Due Diligence	11+	11+	High
6	A6	Advisor	Due Diligence	11+	11+	High
7	A7	Advisor	Due Diligence	11+	11+	High
8	A8	Advisor	Legal	11+	11+	High
9	A9	Advisor	Integration	11+	3-5	High
10	A10	Advisor	Integration	11+	11+	High
11	B1	Buyer/Seller	Strategy/BD	6-10	6-10	High
12	B2	Buyer/Seller	Deal Management	6-10	1-2	High
13	B3	Buyer/Seller	Deal Management	11+	11+	High
14	B4	Buyer/Seller	Due Diligence	3-5	3-5	High
15	B5	Buyer/Seller	Due Diligence	3-5	1-2	High
16	B6	Buyer/Seller	Due Diligence	3-5	11+	High

Qualitative ("soft") issues	Quantitative ("valuation") issues
Lack of information	Unrealistic expectations about the future of the business and its value
Informalities, lack of governance and questionable corporate practices	Tax-related risks, aggressive tax planning and over engineered schemes
Window dressing, hidden issues brought to light during the due diligence process or the non-disclosure of material items at the appropriate time	Failure on getting to an agreement concerning the adjustments proposed for the due diligence
Cultural differences and incompatibility of personalities	Quality of earnings and profitability
Deal fatigue due to the length of negotiations	Overvalued assets
Untied lose-ends and inconsistencies through the process	Other contingencies and hidden liabilities
Lack of conviction to close the deal	Resistance to share transaction risks
Unexpected departure of key executives and personnel
Integration risks
Lack of professionalism

Issue	Summary observations
Typical roles played in a transaction	Usually, there are two main actors in a deal: "buyer" and "seller". These actors are supported by a team of advisors or consultants who work in the pre-deal, on-going deal and post-deal stages.
Usual deal flow	The usual deal flow starts with (i) strategy formulation, which is followed by the (ii) identification of an acquisition target (from a buyer's perspective) or investor (from a seller's perspective), (iii) deal validation/evaluation, (iv) structuring, (v) integration planning and (vi) post-deal consolidation/stabilization.
Determination of the most usual merger talk collapse points	Merger talks usually collapse in some point between deal validation and structuring, particularly after the due diligence and before setting the agreement terms and conditions of the deal. "It is during the due diligence, when information is exchanged, that 'skeletons in the closet' can be unveiled".
Common factors contributing to deal collapses	The six main recurring topics have great influence on deal breaking: (i) window dressing; (ii) unrealistic expectations concerning the future of the business and its value; (iii) Aggressive tax planning and over engineered schemes to reduce tax burden; (iv) lack of preparation resulting in insufficient information during the due diligence exercise; (v) interpretation disputes and failure to reach an agreement on the adjustments proposed for the due diligence; and (vi) general lack of governance, informalities and questionable corporate practices.
Price for walking away from a deal	Walking away from a deal can leave a bad taste in the parts' mouths. It is not rare to cause frustration feelings, particularly in those who are emotionally connected to the deal. "Consequences can be disastrous" for deal makers who let the "deal fever blind objectivity or hijack reason".
Other considerations	Interviewees reported that cultural aspects in Brazil are often more underestimated than in developed markets. They also stated that investors trying to enter Brazil might accept to pay a higher price than domestic investors. Finally, overconfidence is commonly referred to as "deal fever" (in the M&A jargon), because it manifests as a contrary force pushing for deal completion and potentially leads to overvaluation and inadequate considerations of risks.

Departamento de Administração da Faculdade de Economia, Administração e Contabilidade da Universidade de São Paulo Avenida Professor Luciano Gualberto, 908, sala F184, 05508-900 São Paulo / SP Brasil, Tel./Fax 55 11 3818-4002 - São Paulo - SP - Brazil
E-mail: rausp@usp.br

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[1] * Corresponding author at: KPMG Strategy - Rua do Passeio, 38 - Setor 2 - 17° andar - Ed. Passeio Corporate. asales@kpmg.com.br (A.C. Sales).