Keep an Eye Out for These Five Major M&A Transaction Risks

Risk is a utility function that carries a long series of uncertainties, so the cost of funds is more expensive for companies with limited resources than for companies with more free resources.

Anti-Crisis Measures to Avoid Risks

Among the main anti-crisis measures to get enterprises out of a difficult economic situation is the execution of mergers and acquisitions. This anti-crisis regulation tool promotes prolongation of the life cycle of companies and enterprises, increasing their competitiveness in the external environment. The lack of proper risk assessment methods in these transactions hinders the use of this important anti-crisis tool. 

Analysis of data rooms for due diligence risk shows that along with such functions of risk as regulatory, protective, compensatory, socio-economic, it also has an inherent innovative function. The latter is to stimulate the search for ways of non-traditional solutions to the problems facing the business entity. At the same time, most enterprises achieve success, become competitive through innovative activities associated with risk.

Recently (mainly abroad) a fuzzy multiple approaches to the analysis of economic phenomena has become widespread, therefore, the issue of using this method to take into account the peculiarities of domestic realities when assessing the risk of corporate mergers and acquisitions remains relevant. The main publications in this direction are carried out mainly abroad, the publications of domestic scientists in this area are not yet known to us. It is believed that the use of the fuzzy logic method, along with simulation modeling, is the mainstream in assessing the risks of corporate mergers and acquisitions.

Companies can also take content from the Internet and from their customers (i.e. user-generated content and observable customer behavior data) and transform that unstructured data into information that is useful to the business. Today’s analytics software continues to evolve and over time will provide increasingly accurate information based on an ever-growing volume of real-time and automated data processing.

Make the Decision Easier with the Correct Virtual Data Room Services

There are 5 specific M&A risks that include:

  1. Imperfect preparation of a strategic business plan for the development of the company, which leads to an erroneous direction of business development.
  2. Choosing the wrong (imperfect, expensive) form of business integration. So, expanding (strengthening) a business by acquiring an existing one is not always the most expedient way to achieve the assigned tasks.
  3. The wrong approach to determining the object of the transaction, starting with the choice of a strategic opponent and ending with the choice of structuring (shares or assets).
  4. Wrong definition of business attractiveness.
  5. Omissions in the implementation of the negotiation process (deterioration of the position of the strong/weak side, loss (diffusion) of deal management, erroneous determination of the decision-making group, etc.).

While these solutions are still new to the market, they can help companies improve price performance. Compared to the acquisition of infrastructure and software, the costs are quite low. However, implementing these cost-effective solutions will result in hidden costs that should not be underestimated. These include, for example, the cost of loading, maintenance, training, and technology versioning.

Thus, the fuzzy set method makes it possible to determine the dependence of the level of risk of corporate mergers and acquisitions on the likelihood of disruption of transactions, excess of transaction costs, and exceeding the timing of the transaction. The response surface is built taking into account logical rules, fuzzification of input variables, and defuzzification of an output variable.