Why Mergers & Acquisitions Fail
Industry consolidation is one of the gambling sector’s biggest trends. But many high-profile deals continue to fall through. Why? Mark O’Sullivan of Exacta Solutions is on hand to explore.
When scrolling through merger and acquisition (M&A) news on any given day, you’re likely to come across a headline announcing the next big deal. Indeed, data released by EY1 shows that global M&A activity in the first half of 2022 amounted to a whopping $trn, with billions being attributed to acquisitions occurring within gaming. It’s no secret that M&A deals have been on the rise since the Covid-19 pandemic, with the two most significant video gaming acquisitions ever happening in January 2022 – Microsoft’s notice bombshell of acquiring Activision Blizzard for $68.7bn and Take-Two interactive announcing its consolidation with Zynga for a $12.7bn deal.
Companies tend to join forces for valid reasons, though it doesn’t always generate the expected results. Common reasons include economies of scale, boosted corporate performance, increased market share and differentiating the company’s portfolio. While M&A can be a highly fruitful process if successful, several studies put the failure rate somewhere between 70% and 90%, making the odds of success extremely unfavourable.
In this article, we explore the common reasons for M&A transactions failing, or just simply failing to close. Below, we present some examples of well-known M&A transactions that fell through, as well as the reasons and repercussions.
Reasons why M&A transactions fail
1. Substandard future planning
It goes without saying that strong leadership is key to a company’s success. This becomes particularly crucial when closing an M&A deal effectively. Leaders of both companies need to champion the integration milestones, leading their respective teams into a seamless transition. But before even attempting to merge with another company, management must ensure its company is built on a strong foundation, sharing a united vision while practising open and effective communication. Lacking such measures will inevitability lead to a disastrous M&A transaction.
This is evident in the failed deal between PlayUp (an Australian sports betting company) and Bahamas-based crypto firm, FTX. FTX approached PlayUp with a bid of $450m in 2021 as an attempt to expand its operations into sports betting. However, such negotiations collapsed due to perceived differences in the picture that had been painted versus the reality of the company’s leadership and management. What could have been a rewarding acquisition ended in a series of lawsuits.
Another classic example of this is the acquisition of Motorola by Google in 2011 for $12.5bn. Although arguably this deal was the perfect opportunity for Google to tap into a new market, that of developing high-quality mobile handsets to match its top-of-the-market Android operating system, in reality, the outcome did not live up to the expectations set. The handsets delivered by Motorola did not meet the quality standards set by Google and Google ended up contracting other players (including Samsung and LG), to develop its Nexus headsets. Resultantly, Google sold Motorola to Lenovo for $2.9bn
2. Competing bids and outside influences
Another reason for M&A transactions failing to see the light of day is interference from activist investors and competing bids. Although competing bids can result in a positive impact on the seller’s share value, bidders can end up blocking each other, ultimately interfering with the chances of any deal being finalised. A clear example of this is the ‘bidding war’ over Playtech’s proposed acquisition.
Playtech’s shareholder Gopher Investments offered to buy Playtech for $4bn, followed by a $2.8bn offer by Aristocrat Leisure and a final approach by JKO Play Ltd announcing the exploration of funding a possible bid. However, after Gopher Investments decided to shelve its offer, JKO Play quickly followed suit. What started as a three-way battle ended up being a failed M&A transaction when 45% of Playtech’s shareholders (which was below the minimum set threshold of 75%) voted against the acquisition proposed by Aristocrat, arguing that the offer undervalued the business.
3. Fluctuating valuations
An M&A process has many steps and may take up to several years to be finalised. A lot can happen during this time that may cause the value of the seller’s company to decline. The pre-acquisition valuation exercise during the due diligence process could lead to a reduced valuation of the seller’s business causing the buyer to re-think the investment. Alternatively, to enhance its business operations, the seller might decide to implement new business approaches that could prove to be damaging – resulting in a decline in business performance rather than the intended increase. Such instances will more likely than not force the buyer to extend their due diligence procedures if not retract their bid altogether.
On the other end of the spectrum is overvaluation. Reasons for overvaluing an acquisition could be many, ranging from a rush of leadership to tap into a new market, to misjudging the future of a market or having fraudulent accounting practices. Overvalued transactions will often lead to significant write-offs by the purchasing company, which could ultimately destroy its shareholder value. In 2007, Microsoft paid $6.3bn for aQuantive only to write-off $6.2bn of the transaction amount six years later. Although abandoning a transaction is always painful, in this case, as the saying goes – it’s better to be safe than sorry!
4. Market conditions
Naturally, M&A activity tends to increase in times of economic growth and favourable markets, and decrease in volatile market conditions. Currently, investors are possibly facing the most uncertain and complex market conditions in recent history, which could result in several M&A deals falling through, even when the deal makes perfect sense.
An example of this is the failed merger attempt between multinational lottery operator Allwyn and special purpose acquisition company Cohn Robbins Holdings Corp. At the start of the year, the two companies reached an agreement to merge (estimated at $9.3bn) and publicly list on the New York Stock Exchange (NYSE). However, the significant market volatility that emerged throughout the year combined with strong predictions of inflation, led the two companies to jointly decide not to go ahead with the transaction. Nevertheless, going against the crowd and braving the storm could prove to be the best investment. This falls in line with findings from a PWC study, which shows that buyers who enter M&A deals during an economic downturn tend to achieve better returns and outsized growth from the transaction.
5. Poor cultural and strategic alignment
Whether it be technical, cultural, or some other factor, missteps in M&A integration can be disastrous. In the case of an acquisition, not only can poor integration affect the company being acquired, but it can also have huge repercussions on the acquiring company. The acquirer may well be a company in great shape, simply looking to grow through synergies with another company in the same industry. However, the nuts and bolts are important.
Often, the issue with M&A is that, at some point in the process, both sides need to take a leap and sign the deal. While many months may have been spent on due diligence and leadership meetings, often the perceived synergies begin to unravel at a management or resourcing level. There may be unidentified issues in the acquired company. Perceived synergies and cultural similarities may no longer exist due to other demands on management and staff in both companies. The result is a situation wherein a perfectly healthy acquirer can shoot itself in the foot and end up spending huge amounts of time patching up previously ignored or unseen issues in the acquired company. This can also happen the other way around, whereby the acquirer may have painted a lovely non-corporate picture of their group, but the reality may be far from that. The message here is that the extra time spent will be of value down the line, quite often for both sides.
This can be seen in Microsoft’s acquisition, and ultimate closure, of Lionhead. The company went on to spend $75m on Fable Legends before ultimately cutting the cord. Sources from Lionhead alleged that the team at Lionhead was at creative loggerheads with Microsoft on which game should be developed at the time, Fable Legends, a new foray into F2P, or Fable 4, a continuation of the proven Lionhead model. This difference in approach to the market ultimately spelled the end for the studio.
The resulting consequences of entering a deal that fails or fails to close are many. Waste of resources and loss of funds top the list. Equally devastating are cases where companies face public scrutiny or loss in share value after an already announced deal falls through. A good example is the case of the operator Entain. On 26 October 2021, US sports and gambling firm DraftKings announced that it is withdrawing its $22bn offer to buy Entain. Upon the release of the news, Entain’s shares fell a drastic 10%.
Over the years, Exacta has built up a vast network of professional contacts, particularly within the online gaming sector. This network puts us in an optimal position for setting up the introductions needed for a fruitful deal. Built on a wealth of experience and knowledge, our team is equipped to help you find the perfect investment opportunity, while supporting your investment efforts on the path towards growth and success.
Mark is an experienced professional who has spent the last five years working in the video games, sports betting and iGaming industries. As M&A Manager at Exacta Solutions, he is responsible for all investment and M&A-related services, including introductory services, valuation analysis, deal structuring and data room development. Mark also holds a Masters in E-Commerce and a Bachelor’s in Business Studies. He previously spent four years at KPMG, managing the delivery of several significant projects in that time. He regularly contributes to industry thought leadership and is the Secretary General of the Malta Esports Association. Through specialist knowledge of industry best practices, he strives to offer practical insights and strategic support to his clients. Mark is a results-driven individual and supports several companies seeking to sell or raise new investment. Core to such boutique services is Mark’s strong and diverse network of investors and acquirers alike, which he frequently leverages in favour of clients.
This article was originally published on Gambling Insider.