How Common Are Demergers in Business and Why?

Throughout history, companies have utilized mergers and acquisitions (M&A) to consolidate their businesses for a number of reasons. Whether it’s an opportunity to gain new product lines, customer bases, human capital, or even just to absorb some of the competition, M&As have been carried out for decades. In 2022 alone, over 18,000 M&A deals closed in the United States. Yet according to a recent report by Harvard Business Review, between 70-90% of M&A transactions fail.  Why?  Experts explain the reasons often fall into two categories:  (a) an incorrect valuation or (b) inadequate integration. 

Two businesses attempting to join forces can be more complicated than one might think and brings some areas of vulnerability and risk, regardless of how thorough a business is in their due diligence and negotiations processes. Yet hidden financial problems can prove fatal when lofty projections and promising valuations can’t be defended, and the real financial state of the company is exposed.  “Sunk cost fallacy” is a form of implicit bias in which an individual or team of individuals are so far along in a process, having invested so much time, effort, and resources, that they feel they simply can’t cut bait.  Financial due diligence, therefore, is best undertaken with emotional independence and objectivity.  Simply put:  be willing to walk away.

Integration is also a notable issue in M&A activities, as the combination of two entities is far less messy on paper than it is in real life. If there is no concrete plan in place for the integration of operations, workplace cultures, and personnel, a merger or acquisition becomes exponentially more likely to fail. M&A’s have also been known to diminish morale among employees, which can lead to diminished returns -  in productivity, engagement, and efficiency. Integration issues are perhaps the most tricky obstacle of M&A activity, and thus should be planned for ahead of time and handled with care and intentional communication strategies.

Leadership often considers the value of M&A from a financial perspective, and so the majority of diligence is financial. While financial due diligence is a key aspect of M&A activity, sometimes there's no one on the team coming at it from a "people perspective." That’s where we come in; at De Novo HRConsulting & Business Advisory, we work in concert with your financial advisors, so that the human capital component of pre-M&A due diligence and post-M&A integration is not neglected. As a member of your M&A team, we'll follow a critical path through each phase of the process. Contact us today to learn more about what we can do for you!