Navigating the drawbacks of mergers and acquisitions

Mergers and acquisitions can elevate a company to soaring heights but also have the potential to drag it down. These transactions have inherent risks associated with them because a wrong merger results in serious consequences for shareholders. Some of the drawbacks of mergers and acquisitions are: 

• Impact at the operational level 
• Financial risks of M&A 
• Impact on brand and stakeholders 
• Effect on workforce 

Below, we go into more details on each point:  

Impact at operational level  

Mergers and acquisitions can have a negative impact on the operations in a number of ways:  

Resource diversion 

Mergers and acquisitions can sometimes lead to diversion of resources and uncertainties such as job security concerns, roles and responsibility changes, leadership management disruptions which can lead to reduced employee productivity and even loss of a key talent. 

Mismanagement 

Often, mergers and acquisitions lead to employee mismanagement which causes disruption of work process and lack of job role clarity. These issues result in decreased productivity and potentially high turnover rates. 

Regulatory hurdles 

Mergers and acquisitions require myriad legal and regulatory approvals which are complex and can cause delays. These could originate from industry-specific laws and regulatory compliances. Regulatory approvals sometimes take years to get through, and such prolonged delays disturb important integrations resulting in a decrease in employees' overall productivity in the company. 

Integration issues 

Cultural misalignments can influence the company’s ability to function smoothly. Every company has its own leadership styles, culture and employee expectations. If the merging companies are not aligned, employees may be resistant to the changes, resulting in decreased productivity. Additionally, there are often issues when it comes to the integration of disparate technologies. An expensive and time-consuming operation can result in missed business opportunities and disruption to workflows. Therefore, merging dissimilar enterprise systems such as ERP, CRM and databases becomes problematic as they are expensive and time-consuming. Delays in merging working systems result in dissatisfied service.  

Financial risks of M&A 

M&As can pose a number of financial risks including: 

Devaluation of assets 

One of the major disadvantages of mergers and acquisitions is the potential for asset devaluation, possibly hindering the merged entity from securing business loans. This is often the result of poor due diligence. 

Increased costs 

Mergers and acquisitions may lead to increased costs, as a result of operational inefficiencies, technology, infrastructure integrations and regulatory and compliance measures. This unfortunate situation includes reasons such as high acquisition and integration costs, operational inefficiencies, technology and IT integration costs, regulatory and compliance costs etc. 

Impact on brand and stakeholders 

M&As have the potential to negatively impact brand identity and stakeholder confidence: 

Erosion of brand identity 

There are plenty of reasons behind the erosion of the brand identity through M&A and some of them include brand dilution, inconsistent messaging, cultural clashes, customer alienation and loss of distinctiveness. All this can lead to a decline in brand trust and credibility, competitive disadvantage, weak market positioning, increased rebranding costs and even risk of market exit.  

Loss of competitive edge 

An undesired but often observed effect of mergers and acquisitions is the loss of competitive advantage. During mergers and acquisitions, the focus often shifts to integration, leading to neglect of customer needs, operational inefficiencies, talent loss, technology incompatibility, and market perception issues. These distractions slow down the core business, causing the brand to fall behind in the market. 

Loss of stakeholder confidence 

Stakeholders lose confidence in mergers and acquisitions when there is a lack of transparency regarding the deal's objectives, concerns over financial risks like high debt and integration costs, and unclear brand identity. These issues lead to speculation and scepticism among stakeholders during M&A proceedings. 

Effect on workforce 

The workforce can be affected by the M&A in the following ways: 

Job loss and decreased morale 

Workforce restructuring is an important part of mergers and acquisitions proceedings. However, it can lead to job losses. Structural, cultural and operational changes make some job roles redundant reducing morale throughout the company. The shift in organisational priorities and business strategies often brings an increased workload for the remaining employees. Such occurrences make employees feel undervalued, dissatisfied and negatively affect their self-confidence in the workplace. 

Talent drain 

Due to uncertainty and cultural misalignment, employees may choose to leave the company. This can lead to issues such as long adaptation periods by new employees, reduced workforce efficiency, knowledge gaps, and high onboarding and recruitment costs. 

Culture clash 

Culture clash challenges such as leadership misalignment, regulatory obstacles, resource diversion and technology integration can lead to significant productivity losses and missed business opportunities. 

Advantages and disadvantages of M&As: Making the right choice 

Know the possible advantages and disadvantages of mergers and acquisitions before you choose to go ahead:  

Undoubtedly, there are enormous opportunities for business when it comes to mergers and acquisitions, but there are significant risks to be aware of. There is a need to weigh the pros and cons in great depth for companies heading for M&A deals. Innovation potential, financial strength and market expansion should be carefully balanced against operational disruptions, cultural clashes and investor scepticism. 

Mitigate M&A risks with effective financial management 

There are significant challenges in mergers and acquisitions proceedings that demand expert financial management. Blockers include regulatory compliance expenses, high acquisition costs and debt burdens. A financial management solution that can offer seamless financial reporting, with robust accounting and compliance tools is an essential need in M&A undertakings. 

OneAdvanced Financials is a comprehensive tool designed to address these challenges and more. It offers automated cost tracking, compliance management capabilities, and real-time financial insights. With Financials, businesses can avoid financial pitfalls and ensure smooth mergers and acquisitions through effective financial planning.

Discover the benefits of Financials today!