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Eleven risks for consumer products companies - 11. Failure of M&A - EY - Global

Eleven risks for consumer products companies

11. Failure of M&A

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Common pitfalls on the M&A trail

We have observed companies:

  • Insuffi cient due diligence
    Capital scarcity is driving a deeper focus on assessing deal opportunities, but where there is competition for the target assets, or the deal deadline is tight, the risk remains that corners are cut on due diligence. Both operational and financial due diligence are needed to correctly identify synergies as well as consideration of the tax efficiency of the deal and related disposals.
  • Miscalculation of synergies
    Overestimating the potential cost savings from combining two businesses can lead to paying too high a price to secure an asset. The difficulty of anticipating growth and profitability from emerging markets investments is a major risk factor. Rewarding senior managers for completing an acquisition rather than for delivering synergies is one potential source of such overestimation. But, equally, a too conservative approach risks losing out to rivals in competitive processes.
  • Underestimating the integration challenge
    Clinching the deal is the start of the process, not the finish. Integration is a full-time function and should be recognized as such, rather than added to a senior executive's existing workload. A tougher economic environment has given even greater importance to the achievement of cost synergies, but a focus on taking costs out risks losing key talent as one corporate culture is absorbed by another.

In a low-growth environment, the need for consumer products companies to make acquisitions is increasing.

As companies start to do more deals further from home, it becomes more challenging to find the right deal at the right price.

Identifying the right targets is a challenge

Improved M&A market conditions decrease the risk of failing to complete a deal, but companies must still identify suitable acquisition targets. Companies can do this through their own market intelligence or with the help of advisers.

Most companies identify targets themselves through existing relationships with trading partners or competitors. In the current environment, with capital scarce, boards are being more selective and more time and money is being spent assessing investment opportunities.

The advisor's role becomes more important when working with a company expanding into a new area. So companies working in emerging markets for the first time should look for a local advisor with the local knowledge the company needs.

Getting pricing right is a perennial concern

It's difficult for companies to find the right price for a deal in emerging markets because

  • Availability of information is lower
  • Price comparisons are difficult

Lower data quality potentially increases valuation risk and can slow down the deal process and increase the amount of due diligence required.

Still, paying the right price is subjective.

Common pitfalls
on the M&A trail

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