Why Mergers Collapse

After the exploratory work has been completed, somewhere between due diligence and the signed agreements the merger could fall apart. This is not the norm, but neither is it anomalous. Until the final paperwork is signed, nothing is final; which is why business leaders are extremely careful about disclosing merger information before the deal is done.

The three most common reasons mergers collapse are:

1. Financial Pitfalls – This can include anything from an acquirer being unable to secure appropriate funding, to the discovery of questionable financial practices. Previously undisclosed problems can be exposed when organizations take the time, and bring in the experts, to evaluate and reevaluate the stability of organizations.  When major problems arise, one or both companies have the right to invoke the “stop clause” to halt the merger.

2. Synergistic Differences – Organizations with seemingly transparent records could be exposed during a merger if experts uncover dubious reporting that might affect the long term stability of the merged companies. For example, if a company overstates earnings that have consistently been decreasing due to diminishing consumer demand; or perhaps the management team has misrepresented the condition of the organization by “adjusting” growth projections. Depending on the severity of the concerns, it may be cause to discontinue merger talks.

3. External Barriers – Whether it’s Sarbanes-Oxley, SEC regulations, FAA policies, or another regulatory issue, compliance matters can quickly become a “red flag” during an impending merger.  Regulatory setbacks lead to stockholder jitters which could lead to a slowdown or freeze of the merger activities.

Mergers, like marriages, go through ups and downs. Business leaders should seek professional advice before signing binding contracts. A merger plagued with financial pitfalls, synergistic differences or external barriers may be headed for even more problems once the merger is complete.

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