Top 10 Reasons M&As are Significantly Delayed or Fail

allisonhushek
Mar 20, 2023
3 min read

Top 10 Reasons M&As are Significantly Delayed or Fail

Get Your Legal Ducks in Order

By Allison Hushek on March 20, 2023

With the market in its current condition, valuations are on the downslope, buyer confidence is eroding, and due diligence is being doubled down. Opportunity still knocks, however, for those companies who have their ducks in a row. Global M&A volumes and values declined in 2022 by 17% and 37%, respectively, from record-breaking 2021 levels, although both remained above 2020 and pre-pandemic levels, according to a 2023 PwC report.

Top 10 lists of why M&A deals fail vary, but the primary reasons include price disagreement, overestimating synergies, misunderstanding the target company, lack of integration strategy and priorities, poor communication, lack of transparency regarding bad news, leadership and resource challenges, lack of cultural fit, flawed data and incorrect analysis, wrong time in the industry cycle and uncontrollable external factors. There’s one item that never varies. Every top 10 list of why M&As fail includes lag or surprises in due diligence and poor record-keeping, which can lead to lack of confidence and trust, and even indicate shady dealings. Time can kill a deal.

Preparation and strategic planning are the keys to ensuring deals don’t fail or get significantly delayed. During a transaction, CEOs and CFOs are busy making certain financials are accurate, not misleading and provided in a timely manner. The CLOs | GCs job is equally important to ensure a transaction is closed, as quickly as possible, so profits and innovation can return to center focus. Below are areas of concentration to get legal ducks in a row in preparation for the moment so maximum value can be achieved in an M&A.

Due Diligence. If this is your first rodeo, the initial step to researching a target company is sending a due diligence checklist requesting documents for inspection. This request can be up to 15+ pages long. Upon receipt of initial documents, multiple more pages are sent requesting additional items. This back-and-forth process can last for several months. Each staff member is assigned items on the list for a quick response; and all documents are dropped in a shared, protected data room. The CLOs | GCs role in a transaction is to have the legal documents ready and updated at all times so responding to due diligence is a mere click of a button. This preparedness increases confidence and trust in the target company.

What legal documents are typically requested in due diligence? It’s impossible to list them all, but notables include: organizational charts (e.g., entity, personnel) and entity documents (e.g., certificates of good standing, by-laws, minutes of board meetings for the last 5 years); capitalization chart; security holdings chart; asset tracking chart in association with the CFO; real estate | leases charts; intellectual property charts; insurance policies list; government | regulatory approvals (or citations) chart; litigation (former, pending and threatened) chart; chart of material, live contracts; financing | loan agreements and liens chart; list of contracts with material clauses restricting competition; sample forms with key clauses; proof of a calendaring system for contracts to track option | expiration dates; employment agreements, employee benefits, employee handbooks and collective bargaining agreements; policies list (e.g., privacy and data erasure policies; Terms of Use; EULA; DMCA; DRP; Code of Business Conduct & Ethics; and Insider Trading); and any SEC correspondence. One of these areas of concentration deserves a notable mention below.

Lawsuits. There’s nothing that can kill a deal quicker than a surprise litigation threatened or filed during diligence. There’s no foolproof solution, but it’s also not a hope and pray situation. Limiting risks of lawsuits takes careful strategy and years of implementation. It includes having clear and thorough Confidentiality & IP Assignment Agreements with employees and Vendor Service Agreements with robust IP ownership | assignment clauses, positive and authentic relationships with employees | vendors | customers, routine anti-harassment training and other legal seminars for employees on industry-related matters, and communicative and thought-through employee plans of assistance or subsequent terminations.

In closing, diligence can be overwhelming for C-level executives also handling day-to-day business matters. Outside M&A counsel want to spend their time on the transaction itself. With the right in-house systems and documents in place well before the moment, diligence can become an opportunity to raise valuations and shorten transaction timelines.

Playbook Law provides in-house legal consulting services from the outside in the gaming, technology, entertainment + sports industries.