Reasons mergers and acquisitions fall apart
Reasons mergers and acquisitions fall apart
Deal fatigue refers to a condition during negotiations where parties on either side of the negotiation begin to feel frustrated, helpless, or exhausted by the unending negotiation process. Sometimes, members of negotiating teams tend to experience the feeling of giving up, either due to the endless negotiations or failure to reach a consensus.
Deal fatigue is common in mergers and acquisitions where parties tend to become adamant in their proposals and positions, which often prolongs the negotiation process. As a result, the parties may want to resign or exit the negotiation teams and focus on other more fulfilling tasks.
The end result of deal fatigue is often different from and less beneficial than what the negotiating teams had hoped for at the beginning. Negotiations may even be abruptly abandoned just because the parties are exhausted. In a negotiation where one party feels disadvantaged, the parties may become involved in a bitter exchange of words and lose the gains already made in the negotiations. If parties in a negotiation experience deal fatigue, deal advisors should intervene to help the parties continue to negotiate without losing patience and work towards achieving a win-win outcome.
The following are some of the common causes of deal fatigue in business negotiations:
Sometimes, negotiations may keep moving from one step to another without adopting a clear timeline of when the process will end. This usually occurs when there is no consensus on the timeline of the negotiations from the start, and parties are just moving from one step to another without making any definitive progress.
Prolonged negotiations may be caused by miscommunicated requirements and objectives, frequent proposal alterations, and changing team leaders. As a result, negotiations may end prematurely as the parties become exhausted from being involved in an unending process without a clear foundation and direction.
In negotiations that require technical expertise, the absence of subject matter experts may cause deal fatigue among participants. Negotiating parties will perceive that they are handling something that they do not completely understand, and continuing to participate in such discussions will only frustrate them even more.
For example, in negotiations for the acquisition of a healthcare company, the negotiations would require the involvement of experts such as business valuation specialists, healthcare specialists, specialist attorneys, and investment bankers. The absence of any of these subject matter experts when they are needed complicates the process and prolongs the negotiations.
Proper negotiations require that all parties on either side disclose all material information that may help in getting a win-win outcome. However, some buyers and sellers may give incomplete critical information, either knowingly or unknowingly. As a result, negotiations will take longer and create an atmosphere of distrust if one party or the other discovers foul play in the negotiations.
For negotiations that take longer to complete, any significant events or circumstances will affect the duration of the talks. Some important conditions include loss of key customers, the exit of key employees, profit warnings, lawsuits against the target company, and failure to achieve sales targets.
When such conditions arise, some buyers who were interested in the negotiations may change their terms or pull out of the negotiation even when they are at an advanced stage. This means that the deal process will take longer than expected, and the parties will be fatigued.
Deal fatigue may lead to any or all of the following:
Deal fatigue may result in either the seller or buyer compromising on their initial terms as a way of moving the deal process forward. This means that the seller or buyer will need to agree on a lower/higher price than they initially anticipated.
Where negotiating parties fail to agree on certain issues, the deal process may be terminated prematurely without a winner. This may occur when neither the buyer or seller is willing to change their price expectations or make other concessions to move the deal process forward.
Deal fatigue often results in premature termination of negotiations because the parties are frustrated by the pace and complex nature of the negotiations. Here are some of the steps that parties can use to mitigate deal fatigue:
The first step in avoiding deal fatigue during negotiations is to name a dedicated project manager who will be tasked with coordinating meetings and task lists. The project manager continually follows up to see how far the parties have gone in achieving specific tasks and action points by a given time. Tracking the task lists helps to keep the parties focused on delivering the next item on the list and knowing how far they are into the outcome, rather than getting into negotiations without having a clear goal in mind.
Business negotiations such as M&A deals often involve busy team members who are likely to forget some tasks when their schedules are filled up with other activities. Setting up status calls either weekly or monthly often results in better engagement and smoother negotiations since parties know what needs to be accomplished before the status calls. Regular status calls also keep the negotiating parties updated on the progress of the deal.
In deals that require technical know-how, consider taking a core team approach that integrates subject matter experts into the negotiation process. Such experts may include key members of the executive team, business valuation experts, financial consultants, deal attorneys, and investment bankers. Including such experts in the negotiation often helps keep the deal on track and provides solutions to technical problems that may arise during the deal process. The experts bring different levels of expertise and points of view into the process, and they should be ready to participate in areas that require their input.
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:
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