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6 M&A Challenges in 2023 - Accounting Executive Recruiters - Cowen Recruiters

6 M&A Challenges to Be Aware of in 2023

M&As are attractive to companies seeking to scale or expand their organization quickly without needing to establish their own foothold in a new market.

Businesses that have already “done the work” and align well with an acquiring company’s strategy are often targets of M&A’s, especially those with attributes that reduce their monetary value, like operating inefficiencies.

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Pursuing an M&A can benefit both the buyer and the seller, but it doesn’t come without challenges. Here are a few obstacles to M&As that executives should be aware of in 2023.

1. Lack of Access to Capital

It’s no secret that access to credit is challenging these days. Interest rates are sky-high, making borrowing much more expensive than just a few years ago. As a result, many organizations are holding off on their M&A expansion plans, waiting for more favorable economic circumstances.

However, the need for growth doesn’t always respond to business logic, especially for organizations that can’t afford to sit around, waiting to strike at the perfect moment. In such cases, executives may find it more prudent to:

Shore up their balance sheet.
Cut unnecessary expenses.
Keep an eye out for future M&A initiatives.

Organizations needing cash quickly should focus on revenue-generating activities with short life cycles. If there is existing debt, look for opportunities to refinance or rework repayment terms so you’ll free up more cash for future acquisitions.

2. Use of Technology in the M&A Process

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In the past, oversight of M&A transactions was primarily left to project management teams that ensured acquiring companies ticked all the boxes, from conducting due diligence to integrating teams. However, today’s companies are using technology for the entire M&A process.

Tools that track every part of an M&A deal, from identification of potential targets to accounting integrations, are much more prevalent — especially in companies where M&A is the predominant growth strategy.

Organizations interested in M&A are wise to use these tools to their benefit rather than attempting to manage the M&A process in a piecework manner.

M&A software can track every part of the deal, streamlining and shortening the acquisition process. It can also alert executives to opportunities ripe for picking, ensuring you get in early before competitors step in.

3. Combining Existing Workers with Acquired Teams

A successful M&A deal doesn’t end once the ink dries on the purchase contract. Once the acquisition deal goes through, the acquiring company must integrate the new team with its existing team members:

Employees of an acquired organization often question their status in the new organization, especially if there are significant differences in workplace culture or the acquisition results in layoffs.
Executives must communicate directly with their new and existing staff to ease worries and encourage collaboration among new teams.

Often, executives at both companies will have differing views on the organization’s future strategy. In such cases, senior leadership must obtain buy-in to ensure everyone works toward cohesive goals. Establishing early objectives during the M&A process and implementing them immediately afterward is vital to minimize friction.

CFOs are of particular importance during an M&A. They’ll need to:

Ensure the organization properly accounts for the transaction
Partner with the CHRO to reduce attrition of crucial players in both organizations.

Loss of critical employees can make integrating old processes into the new company structure challenging and may lead to future issues.

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4. Ignoring External Risks

Executives typically pay close attention to the internal components of an M&A, but they may fail to recognize external risks that can derail the success of a deal. Shifts in the economy and technological changes can quickly ruin an M&A deal that looks beneficial in every other aspect.

One of the most significant merger failures in recent history occurred when America Online purchased Time Warner in a major $165 billion deal in 1999.

Executives in both companies hoped to intertwine the online business with mass media. However, two years later, the dot-com bubble burst, and the merger resulted in over $99 billion in losses to AOL.

External risks aren’t always visibly apparent. Executives must pay close attention to industry and market news, especially when contemplating a new acquisition. Sometimes, what looks great on paper can result in a financial disaster.

5. Overestimating the Value of an Acquisition

One of the most common mistakes made by acquiring organizations is paying too much for a company. Sometimes, executives assume buying a company will add more value to their organization but overestimate its actual worth.

Senior leadership must account for the obstacles they’ll encounter following the merger transaction, such as loss of significant customers and accounts and employee attrition. Often, they’ll need to update the new company’s technology to properly integrate with their current processes.

These losses harm the acquired organization’s value to the company, resulting in a write-down of any goodwill and other assets from the business. If the overpayment is significant, the buyer may find it harder to compete in their market segment, resulting in lost opportunities that their competitors seize.

6. Remaining Intent on a Merger in the Face of Contrary Evidence

Once companies start the merger process, it often takes priority against other critical factors, like the health of the existing business. Completing a merger isn’t a simple process; it requires outside assistance from consultants, accountants, and the executives of the purchased company.

However, circumstances can change quickly, and the acquiring company may overlook them, especially when they’ve already put lots of work into the buying process. Doing so can have disastrous consequences for both organizations, especially if they allow the merger to continue.

It is essential to pay attention to signs that a merger isn’t the same great opportunity it was six months ago or even last month. Rather than allowing it to proceed, companies should halt the process while they revalue whether the merger is still beneficial or whether completing it could spell future problems.

M&As Aren’t Always What They’re Chalked Up to Be

Pursuing an M&A strategy can expedite growth that may be unfeasible otherwise. However, in 2023, there are particular challenges executives must understand before pursuing an M&A deal. They should be aware of the risks and proceed with caution.

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6 M&A Challenges in 2023 - Accounting Executive Search