M&A Deal Fatigue

olume 10, Issue 21, October 10, 2023

Mergers and acquisitions (M+A) are complex transactions that involve multiple parties, intricate negotiations, and significant financial investments. While the excitement surrounding potential synergies and growth/exit opportunities often takes center stage, there is a lesser-known, yet equally important factor that can significantly impact the success of an M&A deal: deal fatigue.

Deal fatigue refers to the exhaustion, frustration, and reduced enthusiasm that can set in over time among key stakeholders involved in an M+A transaction, both from the seller’s side and the buyers’ side. It is a phenomenon that can gradually erode the effectiveness of the deal-making process. If not managed properly, deal fatigue can ultimately jeopardize the entire transaction, which we at VERTESS have witnessed firsthand.

In this column, I will explore how deal fatigue can impact an M+A transaction and share some strategies to mitigate its effects.

The Phases of an M+A Transaction

To understand the impact of deal fatigue, it's important to first understand the different phases of an M+A transaction.

Pre-transaction — This phase involves identifying potential acquisition targets or buyers, conducting financial and operational due diligence, and structuring the deal.

Negotiation — During this phase, both parties engage in negotiations to agree on the terms and conditions of the transaction, including the purchase price, asset allocation, and any contingencies. It’s important to understand that negotiating the limited terms in a letter of intent (LOI) is only the beginning of negotiations. You or your advisor will likely be negotiating on behalf of your company throughout the entire process.

Due diligence — Once the deal terms are agreed upon and an executed LOI is in place, an in-depth due diligence process is initiated. The due diligence process involves reviewing financial, legal, operational, and cultural aspects of the target company. Due diligence varies from buyer to buyer and transaction to transaction, with the average time commitment around 90 days. On the shorter side, it can run 60 days. On the longer side, it can reach or even exceed 120 days.

Integration — Post-closing, the integration phase begins. This is where the two organizations involved in the transaction merge their operations, cultures, and systems to realize the anticipated synergies and benefits of the transaction. This can easily be a 6-12 month process and involves numerous departments working together to make it as seamless as possible for staff.

How Deal Fatigue Can Impact M+A Transactions

Now let's look at some of the more common hurdles brought on by deal fatigue.

Reduced focus and diligence — As an M+A transaction progresses, stakeholders may start to feel overwhelmed by the sheer volume of work and complexity involved. This is typically because sellers often haven’t been through the transaction process before and may not have a clear understanding of the work required. This can lead to a decrease in seller motivation and engagement, which can result in missed critical issues during due diligence or negotiation.

Extended timeline — Deal fatigue can lead to delays as exhausted parties may request more time to review documents, make decisions, or simply take a break. These delays can increase costs and disrupt the transaction's momentum. No two buyers are the same, and their processes for due diligence won’t be either. I would say 8 out of 10 M+A deals I have worked on at VERTESS require an LOI extension to extend the due diligence period. This can take a mental hit on the parties involved as well.

Erosion of trust — As fatigue sets in, trust between the parties can erode. This can manifest as increased skepticism or suspicion, making it harder to come to mutually beneficial agreements. This can also lead to what we call in the industry “re-trading,” where a buyer or seller changes terms or purchase price strategy or both shortly before closing. Re-trading is, at best, a difficult situation to weather and, at worst, a deal killer.

Deal breakdown — In extreme cases, deal fatigue can become so pronounced that one or both parties decide to walk away from the transaction entirely, leading to wasted time, resources, and opportunities — not to mention the costs associated with a transaction for both buyer and seller (e.g., attorney's fees, quality of earnings (QofE) accounting firms, third-party diligence vendors).

Mitigating Deal Fatigue

The right plan can overcome the toughest challenges in a transaction, even daunting deal fatigue. Here are some of the key elements of such a plan.

Effective project management — Implementing strong project management practices can help keep a deal on track and ensure that deadlines are met. Clear timelines, milestones, and responsibilities should be established and monitored. A strong advisor and M+A firm will vastly increase the effectiveness and accountability for both sides during a transaction.

Open and transparent communication — Maintain open and honest communication channels between all stakeholders. Address concerns and issues promptly to prevent them from escalating into deal-breaking problems, especially any legal woes the selling company has been party to.

Managing workload — Ensure key team members are not overburdened with excessive work. Consider bringing in additional resources or expertise when needed to alleviate pressure. When we run a transaction process at VERTESS, we recommend our clients bring in 1-2 additional staff that can help pull diligence materials.

Setting realistic expectations — Be realistic about the time and effort required for an M+A transaction. Overly aggressive timelines can contribute to deal fatigue. Setting appropriate expectations is another facet of a transaction a professional M+A team can walk through with you.

Flexibility — Be willing to adapt and make reasonable concessions when necessary to keep the deal moving forward. Rigidity can exacerbate fatigue.

Don't Sleep on Deal Fatigue

Deal fatigue is a formidable but often underestimated challenge in the world of M+A transactions. Its impact can be subtle, gradually eroding the efficiency and effectiveness of the deal-making process.

By recognizing the signs of deal fatigue and implementing proactive measures to mitigate its effects, companies can increase their chances of successfully navigating the complex terrain of M+A transactions and achieving their strategic objectives. Effective deal management, open communication, and a focus on the well-being of all stakeholders are keys to mitigating the negative impact of deal fatigue and ensuring the long-term success of M+A deals.