University of Twente Student Theses
M&A failure factors
Houwers, Renée (2016) M&A failure factors.
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| Abstract: | 1. Introduction This first chapter focusses on the provocation of this research, the research goal and research questions. 1.1 Provocation Mergers and acquisitions represent a complex phenomenon exemplifying an interesting paradox. On one side, growing M&A activity and volume can be observed while on the other side, a high failure rate of M&A is recognized. Fortunately, many academics from several disciplines are interested in the world of M&A (Birkinshaw et al., 2000), including the financial, strategic, behavioural, operational and cross-cultural aspects of this challenging activity (Cartwright & Schoenberg, 2006). Therefore, voluminous research data , both quantitative and qualitative, is available. Research indicates that approximately 40%-60% of all acquisitions fail to achieve their desired outcomes (Uzelac et al., 2009). Yet, some research even present a higher M&A failure rate of 60%-80% (Angwin, 2007, Groen & McCarthy, 2011; Johnson, 2006). Nevertheless, if more than half of M&A transactions are doomed to fail, the transaction risk is significant. Despite the enormous availability of M&A research, there seems to be little consensus as to the reasons for acquisition failure (Hitt et al., 2009). Having an understanding of factors contributing to acquisition failure is valuable, not only for the companies engaged in a M&A transaction, but also for the external financer(s) of the transaction. After all, if an acquisition fails, it does not only influence the business owner(s) or employees, but also the external financer(s). When management or bankers have a decent understanding of the factors causing M&A’s to fail, one can anticipate on these failure factors and mitigate the risk of a negative acquisition outcome. As a debt provider for the acquiring company, Moos & Nacho Bank (hereafter referred to as Moos & Nacho, unless specified) engages in the M&A transaction risk. If the acquisition fails, Moos & Nacho has the risk of not gathering back the invested amount of money nor the interest payments. The financial loss of a defaulted acquisition credit loan is high as there barely is a cover for the credit loan as opposed to a regular credit loan to a company. Thus, ideally, it would be the best if Moos & Nacho only grants credit loans to these M&A which are not doomed to fail. In order to mitigate the risk of an unfavourable acquisition outcome, a list containing acquisition failure factors can be valuable. 1.2 Research Goal The goal of this research is to investigate which factors caused acquisitions, financed by Moos & Nacho, to fail and how this is related to M&A failure factors found in the literature. This research helps to gain deeper understanding about why acquisition credit loans, issued by Moos & Nacho, become in default. Literature is researched and analysed in order to find M&A failure factors. In addition, case studies are conducted at Moos & Nacho in order to find specific failure factors concerned to the Moos & Nacho cases. By reviewing literature, a comparison can be made with failure factors found in the literature and failure factors found by the acquisitions financed by Moos & Nacho. This is interesting because these results give new insights for both practice and literature. The results of this research are beneficial for Moos & Nacho as these will help prevent an undesirable action, issuing an acquisition loan to a company with high risk of going default, from occurring. 1.3 Research Question The goal of this research is to uncover which factors causes acquisitions to fail. Therefore, the central research question of this thesis is: "How do the M&A failure factors found in literature relate to the failure factors identified in the M&A practice of the Moos & Nacho Bank?” The aim of this research is to present failure factors discovered at unsuccessful acquisitions financed by Moos & Nacho and to compare these failure factors with failure factors discovered in the literature. The results of this research are valuable for Moos & Nacho as these allow Moos & Nacho to anticipate on particular failure factors and by doing so mitigate the M&A transaction risk. Down the road this will lead to less issued acquisition credit loans becoming in default and a better financial position for Moos & Nacho. The central research question implies two parts, a literature part and a multiple case studies part. Therefore, the research questions that will help answer the central question are: 1. What are the M&A failure factors found in the literature? 2. What are the M&A failure factors of acquisitions financed by the Moos & Nacho Bank? These research questions are answered through reviewing literature and through conducting case studies. The answers to these research questions are used to answer the central question. 2. Findings This chapter presents the conclusion of this master thesis. i.e. answer is given on the central research question. Subsequently, attention is given to what the findings of this research mean for professionals in the field of M&As. Moreover, a section is dedicated to present recommendations for Moos & Nacho. Finally, suggestions for further research are presented. 2.1 Conclusion – Central Research Question The aim of the research is to present failure factors discovered at defaulted acquisition credit loans issued by Moos & Nacho and to compare these failure factors with M&A failure factors found in the literature. Considering the aim of this research, the results of this research answers the following central research question: "How do the M&A failure factors found in literature relate to the failure factors identified in the M&A practice of the Moos & Nacho Bank?” The M&A failure factors found in the literature can be grouped into four categories (i.e. Human Aspects, Valuation Aspects, Managerial Problems and Integration Problems). The four categories and the corresponding proportions that the categories are mentioned in the literature are displayed at figure 1 (i.e. conclusion of the literature review). It is striking that halve of the time literature mentions a M&A failure factor, it concerns a failure factor related to Managerial Problems. While literature mentions a failure factor related to valuation problems only approximately 11% of the times. Figure 1. Failure Factors Indicated by the Literature Review. Composed by the Researcher. The M&A failure factors identified at the Moos & Nacho case studies can be grouped into five categories (i.e. Managerial Problems, Human Aspects, Economic Crisis, Valuation Problems and Other Factors). The five categories and the corresponding proportions that the case studies have indicated that that category can be mainly held accountable for the defaulted acquisition credit loans are displayed in figure 2. It is striking that managerial problems have been held accountable for approximately 60% of the defaulted acquisition credit loans. While the categories Valuation Problems and Human Aspects have not been indicated as a direct factor regarding the defaulted acquisition credit loan. Figure 2. Failure Factor Categories of the Case Studies. Composed by the Researcher Note that the individual failure factors of the literature review have been grouped into four categories while the individual failure factors of the case studies have been grouped into five categories. Though, some categories of the literature review and the case studies are the same and can therefore more easily be compared. Both the literature review and the case studies acknowledges the failure factor categories Managerial Problems, Valuation Problems and Human Aspects. Yet, the failure factor categories Integration Problems (i.e. literature review), Economic Crisis (i.e. case studies) and Other Factors (i.e. case studies) can be considered stand-alone categories. When one compares the results of figure 1 with figure 2, it is striking that the Managerial Problems category has been indicated most often (i.e. 50% and 60%). While the literature study only indicates how many times a category of failure factors has been mentioned, the case study analysis actually reasons that 60% of the defaulted acquisition credit loans are due to managerial problems. This is striking because it can hardly be coincidental that both studies indicate Managerial Problems most often. This would suggest that the factors being indicated most often as contributing factors regarding M&A failure are also the factors mentioned most often in the literature. Further, when one compares figure 1 with figure 2, it can be observed that the category “Valuation Problems” has been indicated the least at both figures. While Valuation Problems has been indicated approximately 11% of the total failure factors mentioned by the literature, none of the case studies has indicated that valuation problems was the determining factor regarding the defaulted acquisition credit loan. Therefore, both the figures are compatible regarding the factor being the least indicated or mentioned. Moreover, it is striking that figure 2 indicates that approximately 35% of the defaulted acquisition credit loans can be explained by the economic crisis while the category “Economic Crisis” has not been included in figure 1 as a separate category. While on the other hand, it is not surprising that the category “Economic Crisis” is not a separate category during the literature review as an economic crisis can be considered an incidental factor rather than a continuous factor regarding M&A failures. Another remarkable outcome resulting from the comparison of figure 1 with figure 2 is that the category “Human Factors” has been discussed by approximately 27% of the literature articles while none of the case studies indicated the category “Human Factors” as the determining factor of the defaulted acquisition credit loan. This indicates that the relatedness between the failure factors indicated by the literature review and the failure factors indicated by the Moos & Nacho cases concerning the category “Human Aspects” is out of balance. Furthermore, from the comparison of figure 1 with figure 2 can be observed that approximately 13% of failure factors mentioned by the literature review concerns the failure factor category “Integration Problems” while the category “Integration Problems” has not been indicated by the Moos & Nacho cases analysis, yet it is not even a separate category. Therefore, one could argue that the relatedness between the failure factors indicated by the literature review and the failure factors indicated by the Moos & Nacho cases concerning the category “Integration Problems” is out of balance. In conclusion, the M&A failure factors found in the literature relate to the M&A failure factors found at the Moos & Nacho case studies when it concerns the M&A failure categories “Managerial Problems” and “Valuation Problems”. Though, the relatedness between the failure factor categories “Human Aspects”, “Integration Problems”, “Economic Crisis” and “Other factors” indicated by the literature review and the failure factors indicated by the Moos & Nacho cases is out of balance. 2.2 Theoretical and Practical Implications This section discusses what the findings of this research mean in relation to the theoretical body of knowledge regarding M&A failure factors. The findings are contextualized in the general field through discussing the theoretical and practical implications of the findings. Additionally, this section addresses what the findings of this research mean for professionals in the field of M&As. 2.2.1 Theoretical Implications The introduction of this master thesis raises an issue regarding the world of M&As. Even though it is acknowledged that mergers and acquisitions represent an interesting paradox with on one hand a growing M&A activity while on the other hand a high failure rate, there is little consensus in the literature regarding the reasons for acquisition failure. The results of the literature review of this master thesis supports this matter of contention as the literature review resulted in an extensive list of M&A failure factors. The results of the literature review further indicate that the M&A failure factors are of a broad range. Therefore, the results of the literature review are in accordance with the contention regarding the little consensus in the literature as for the reasons behind acquisition failure. The results of this literature review support our understanding regarding the broad range of M&A failure factors. Yet, please be careful and conscious that the number of times a M&A failure factor has been mentioned by the literature should not be an indicator of the determinativeness of that failure factor. 2.2.2 Practical Implications The findings of the Moos & Nacho case studies feature more consensus regarding the contributing factors of the defaulted acquisition credit loans as 95% of the defaulted acquisition credit loans can be explained by only two failure factor categories (i.e. managerial problems and economic crisis). Therefore, the results of the Moos & Nacho cases are controversial regarding the little consensus regarding the M&A failure factors identified in the literature. The findings of the Moos & Nacho case studies might have a confusing influence regarding our knowledge on the field of M&A failure factors. Considering that a significant part (i.e. 35%) of the defaulted acquisition credit loans can be explained by a failure factor category that is not, or barely, mentioned by the literature review, indicates that our understanding regarding the field of M&A failure factors is underdeveloped. A practical implication of this study derives from the findings of the case studies. Especially if one takes into account that the M&A failure factor category “Economic Crisis” could be an incidental failure factor category, it appears that the bigger halve of the defaulted acquisition credit loans can be explained by “poor management”. This suggests that acquisition specialists can benefit from the results of this research by refining and improving their assessment of the manager(s). 2.3 Recommendations for Moos & Nacho This section will shortly discuss the level of difficultness of the implementation of the recommendations. A distinction is made between “relatively easy to implement” and “relatively difficult to implement”. Table 1 displays the recommendations of the summary being distinguished between “ relatively easy to implement” and “relatively difficult to implement”. Yet, please note that the boundaries between these two categories are not always clear. Table 1 is presented to encourage MOOS & NACHO in the right direction and as an indicator that not all recommendations are easy to implement, let alone be realistic recommendations. Moos & Nacho can be further encouraged regarding the implementation of the recommendations by table 1 since table 1 presents an overview of recommendations that Moos & Nacho could relatively easy implement, this reduces possible obstacles as a first analysis of the recommendations has already been made. Subsequently, some recommendations are easier made than implemented, this is also presented by table 1. Recommendations are placed in the categories based on the Researcher’s perception of difficultness. Time and cost needed to implement a recommendation, impact of the recommendation and willingness of the stakeholders involved are examples of factors taken into account while making the decision to place a recommendation into “relatively easy to implement” and “relatively difficult to implement. For example, the recommendation that Moos & Nacho’s Acquisition Specialists should be careful with issuing acquisition credit loans when multiple shareholders are involved is placed into the category “relatively difficult to implement” since Moos & Nacho’s Acquisition Specialists would probably not be very willing to comply with this recommendation as the total number of acquisition deals would decline significantly. Additionally, the recommendation that Moos & Nacho should employ an extended data storage system is also placed into the category “relatively difficult to implement” since that implementation will take a lot of time and will cost a lot of money. While the recommendation that Moos & Nacho’s Acquisition Specialists should consider the negative effect of having the former entrepreneur involved is placed into the category “relatively easy to implement” since the costs and time needed of this recommendation are likely to be low (i.e. one could think of training costs). Table 1. Level of Difficultness of the Implementation of the Recommendations 3 Research Method As this master thesis is conducted to assess the failure factors of acquisitions financed by Moos & Nacho and to compare these failure factors to the generalizable failure factors of M&A found in the literature, the foundation of this thesis will be a literature study in combination with case studies. 3.1 Data Collection Literature Review The literature review is conducted based on secondary research. Desk research has been performed on published papers by experts on the field of M&A failure. The literature on mergers and acquisitions is extensive, thus it is of essence to specify search terms in order to find literature that is of added value for answering the research question. The search terms employed in this research include various synonyms or related terms in order to find enough and appropriate information on the concept. Given my problem statement, I decided to use the following main sources of information for the literature part of this research: • Google Scholar, a simple way to search for scholarly literature. • Scopus, the largest abstract and citation database of peer-reviewed literature. This database includes collections of scientific journals, books and conference proceedings. • Web of Science, a comprehensive and versatile research platform providing access to data, journals, proceedings and patents. • EBSCOHost, which offers a broad range of full text and bibliographic databases designed for research. • Books. An example of a book used is “Corporate Finance, European Edition“ by Hillier et al., (2010). These sources of information are of high academic quality. Throughout the literature search keywords as “Mergers & Acquisitions”, “M&A”, “failure, unsuccessful”, “pitfalls”, “takeovers” and “challenges” are employed among others. This resulted in an extensive list covering 50 articles which indicate factors regarding M&A failure. 3.2 Data Collection Case Studies The case studies at MOOS & NACHO refer to the acquisitions financed by MOOS & NACHO which needed assistance from Financial Restructuring & Recovery (FR&R) within six years. Therefore, the unit of analysis are businesses to whom MOOS & NACHO granted an acquisition credit loan during the time frame of 2010 - 2015 and which became in default (i.e. transfer to the FR&R department) within 6 years (i.e. until mid – 2016). The data regarding a case study analysis is obtained in 7 steps. These 7 steps are presented below. Step 1: The first steps concerns the selection procedure. An overview of all issued acquisition credit loans by MOOS & NACHO during the time frame of 2010 -2015 is composed Step 2: The second step is to evaluate which of the issued acquisition credit loans during the time frame 2010 – 2015 “failed”. During the case studies, “fails” implies issued acquisition credit loans which became in default within six years. Step 3: The third steps concerns the collection of data procedure regarding the companies which became in default. This data is collected through a combination of interpreting application data and semi-structured interviews. Step 4: The fourth step concerns the identification of the respondents. The FR&R advisor has been chosen as a respondent of the interview as the FR&R advisor is considered to be an unbiased person regarding the businesses of the case studies. Step 5. The fifth step concerns conducting the interview (i.e. data collection method). The information retrieved from the interview with the FR&R advisor concerns semi-structured interviews. Step 6: The sixth step concerns the interpretation of the data. While the data retrieved from the documents can be easily interpreted in the context, the information retrieved from the interview with the FR&R advisor can less easily be interpreted as it concerns self-reported data . Step 7: After elaborating the 20 case studies, a further analysis regarding the identified failure factors had to be made. In the context of interpreting the information regarding the defaulted acquisition credit loans, I developed a table presenting the failure factors of the defaulted acquisition credit loans. 4 Suggestions for Further Research Despite the enormous availability of M&A failure factor research (Hitt et al., 2009) and the satisfactory results of this thesis, multiple suggestions for further research can be thought about. Further research regarding the literature review could be conducted on specific regions of the Netherlands. As this master thesis assesses the relationship between M&A failure factors found in the literature and M&A failure factors identified at Moos & Nacho, it could be interesting to take into account literature concerning M&A failure factors of specific regions of the Netherlands in order to find out whether or not regional differences exist concerning M&A failure factors. Though, as the Netherlands is small, I do not expect that substantial differences exist regarding M&A failure factors between regions of the Netherlands. Therefore, this research might lack theoretical and practical implications. Further research could be conducted through comparing the M&A failure factors of several corporate banks (i.e. Rabobank, ABN AMRO, ING Bank). However, this is probably not interesting as I expect that the identified M&A failure factors of the corporate banks will not differ notably since, in general, the corporate bank is just an external factor rather than a determinative factor regarding M&A failure. Further research could be conducted through comparing the different sources providing information regarding the defaulted acquisition credit loans. For example, it could be interesting to compare the opinions of the account manager, FR&R advisor and the entrepreneur regarding the transfer to the FR&R department. Even though it is likely that these three sources have different views regarding the contributing factors of the defaulted acquisition credit loans, it is not of high added value to compare the different opinions of the three sources. Therefore, this research will probably lack theoretical and practical implications. Yet, it would be noteworthy to conduct further research within Moos & Nacho through comparing the defaulted acquisition credit loans with the total M&A portfolio. This research would be related to the qualitative part of this master thesis, only the non-defaulted acquisition credit loans would be taken into account. By also taking into account the non-defaulted acquisition credit loans, stronger results regarding M&A failure factors can be provided as similar businesses can be compared. For example, one could compare a defaulted business with a non-defaulted business operating in the same sector (i.e. both received an acquisition credit loan) and should assess how one business became in default while the other stayed healthy. This is interesting as factors as “sector” and “economic crisis” are eliminated since both the defaulted and non-defaulted businesses operate in the same sector and same economic circumstances. As a result, more determinative factors might arise regarding the defaulted acquisition credit loan (i.e. problems within the management team). |
| Item Type: | Essay (Master) |
| Faculty: | BMS: Behavioural, Management and Social Sciences |
| Subject: | 85 business administration, organizational science |
| Programme: | Business Administration MSc (60644) |
| Link to this item: | https://purl.utwente.nl/essays/70883 |
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