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What are the risks in merger and acquisitions?
Merger and acquisition is the process of joining two or more companies as one company either by combining them or by acquiring (one company purchases another company or companies) and form a larger business unit. Any transaction related to above deal is called as a Merger and acquisition deal.
In merger and acquisition deals companies will do months of research on potential targets and after shortening them they further go deep and understand more about the company or companies (about their finances, operations etc.) and check their financial viability.
Steps involved in M&A deal are as follows −
- Preliminary discussions.
- Evaluation and assessment of the target company or companies.
- Due diligence.
- Contract signing and deal closing.
- Post deal integration.
The advantages of merger and acquisition are as follows −
- Increased market share of newly formed business entities and geographical area is also increasing.
- Acquires new technology, new talent and overtake competitors.
- Cost and role duplication is minimized or reduced.
The disadvantages of merger and acquisition are as follows −
- Sometimes or in most cases merger and acquisitions takes years of time and due to this there will decrease in production rate, market share etc.
- Post integration will be challenging because different companies have different cultures.
- Failure rate is also high.
- Risks are properly evaluated before going for a deal because if anything goes wrong in process or in evaluation parent companies have to encounter huge losses and their market price may decrease.
The risks involved in merger and acquisitions are as follows −
Lack of proper information
Before Merger, the buyer company should get seller firm's information like financials, contracts, customers, patient information and insurance to get a deep understanding about the deal. Without the proper information about sellers' firms, it may lead to risk of merger like being caught up in litigation and tax issues etc.
Payments to sellers, intermediaries, and own teams (within the company) leads to overpayment to original value. There can be a lot of pressures both internally and externally which will lead to overpayment. This is the common risk faced in merger and acquisition.
Miscalculations lead to several problems like misguided and realizing synergies. They also lead to more payoffs, operational issues, more cost, unrealistic objectives, overpayment, etc.
Without proper integration, plan time taken to merge or acquisition takes a long time, till that it will work separately resulting in an increase in cost. It will face the cultural issues, which plays an important role in merger and acquisition. It also faces problems in values, norms, collaboration, efficiency issues and delay in consolidation procedure.
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