3 Common Pitfalls of M&A Transactions

February 6, 2019by Brian Walsh

M&A deals can be very complex. First, you have to get buy-in from executives, board members, shareholders and other stakeholders. Even after the transaction is agreed to and all the principles are on-board; the two companies still have to be successfully combined. Hospitals can be particularly challenging to merge.

The recent merger attempt between Lakeland Regional and Orlando Health highlights  the potential challenges these types of deals can face.

Orlando Health Merger Goes South

 In recent years, not-for-profit Lakewood Regional Health in Florida has faced a financial downturn, to put it lightly. Reports indicate that the hospital went from an operating income of more than $41 million in 2012 to just $880,000 in 2018, a 98 percent decrease. To try to improve its situation, Lakewood Regional announced a merger with the Orlando Health hospital network, and the affiliation went into effect in October 2017.

The affiliation didn’t last long, however. According to reports, Lakewood Regional recently requested to dissolve the affiliation only a year after it started. Issues between the two entities arose weeks after the merger and only continued to increase. While Orlando Health officers claim they knew the state of Lakewood Regional’s finances, they didn’t foresee not being able to agree on a plan to turn that financial state around.

Common Pitfalls of Mergers

Mergers and acquisitions can be a great tool to quickly scale a business, as well as to help save a struggling business. When done correctly, the transaction can be beneficial for everyone involved. On the other hand, when companies fail to properly conduct research and design thorough plans for the M&A, things can go very wrong, very quickly. The failed Lakewood/Orlando Health merger should illustrate that every merger is not a successful merger. The following are only a few reasons these transactions turn sour.

Due diligence omissions – Even though you were extremely thorough and tried to seek all the necessary information during due diligence, it is very common to miss something important. The seller is trying to get you to purchase the business, so they will naturally want to present all information in the best light possible, sometimes omitting key points. You should always ensure to get proper warranties and representations from the seller as part of the M&A agreement in case they skewed information during due diligence.

Wrong positions post-sale – In the above merger, the agreement stated that the Lakewood CEO would continue her duties, as well as oversee HR and IT for both entities. Within six weeks, she quit her new duties. When making a plan for post-merger, you should always remember that someone who had the skills to run a stand-alone operation will not necessarily thrive when part of a larger corporate entity or with greater duties. Make sure you have a team in place that knows how to handle adjustments and design practical procedures for scalability.

Culture clashes – When two businesses merge, their environments and attitudes also merge – hopefully. Two companies will have two different cultures, and you need to make sure there is a plan for the two cultures to gel and become a new team. Continuous clashes of “us” versus “them” will not make for a smooth transition.

When you agree to a merger, you want to have all the necessary legal protections in case something goes materially wrong. Many owners are so certain of the merger that they fail to document everything necessary to prevent liability or losses. However, even the most certain owners have seen M&A transactions fail.

You should always seek the representation and counsel from an experienced M&A attorney at the beginning of the deal to to avoid and mitigate potential issues. For a free consultation

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