Why Do Acquisitions Sometimes Fail?

Introduction

When a firm proposes to buy the shares, stocks, or assets of another similar firm it is called acquisition. The process of acquisition is complete only when there is a concrete agreement signed by two or more parties. The acquisition process requires huge financial input because; firms have to hire lawyers, auditors, and attorneys to witness the agreement. However, these benefits in acquisitions make this huge financial input worth the chase.

When these acquisitions are concluded, it is done based on the goals and agenda prepared by the buying firm. The business acquisition has its challenges that limit the success of acquisitions and hamper the success of the business deal (Charles, 2010).

Why do acquisitions sometimes fail?

There are many reasons for mergers and acquisitions in the business market. The advantages include overhead cost reduction, building financial strength, globalization. However, many acquisitions fail for different reasons these reasons include

1. Business orientation: Every market has its trends, and each firm must develop a business strategy that would support the objectives of the organization. Thus, market information is a factor in the growth of the organization. The buyer must understand the market dynamics and why the acquisition must continue. The market strategy of the target firm must be examined, and the reason for selling her assets must be carefully studied (Giddy).
2. Logical reasoning: The acquisition process is a delicate phase for the buyer; the business transaction is built on a solid foundation. The buyer must develop a strong acquisition plan before venturing into the acquisition of another firm. For example, the merger between Compaq and Digital suffered setbacks because the firms were struggling to survive when the acquisition process was signed. The merger became a failure as both companies lost their market strength and capital.
3. Power control: It’s rather too late at this point because the transactions are sealed and signed. Power tussle reduces the rate of growth in the organization. Job cuts would raise emotions in the organization, and this would slow business activities necessary for growth.
4. Communication and integration gaps: Lack of cohesion in the organization would lead to communication gaps; this would reduce teamwork and affect the growth of the organization. Benz and Chrysler suffered management issues after their merger, thus, affecting the objectives of the acquisition.
5. Cultural diversity: Acquisition leads to cultural diversity. This factor influences the success or failure of an acquisition. Cultural conflict affects the communication process in the organization. What decisions are taken into the firm and how the decisions are reached are some issues that arise where cultural conflicts exist.

Hubris hypothesis

Hubris hypothesis is an act that contributes to the acquisition process. It is a tactful strategy, which is influenced by pride. The buyer may pay more than necessary due to individual justification. It is a personal problem and a business flaw in any acquisition process (Rouge, 2009). The hubris hypotheses follow three steps, which include:

1. The buying company examines the selling firm.
2. The buying firm audits the selling firm; the information gathered is used to estimate the value of the firm.
3. The cost of the firm is analyzed using the current market value of the organization.

References

Charles, T. (2010). Global Business Today (7th ed.). N.p.: McGraw-Hill Learning Solutions.

Giddy, I. Mergers & Acquisitions: An Introduction. 

Rouge, M. (2009). The Hubris Hypothesis. Web.