Four rules to avoid failure in mergers and acquisitions

Investors want companies to grow as it increases the value of their investment, develops economies of scope and scale, and delivers increased market power.

However, they often view organic growth as too slow. This puts pressure on boards to run the gauntlet of mergers and acquisitions (M&A) to satisfy their investors’ demands.

M&A allows companies to expand more rapidly, but carries much greater risk. Research shows that between 70 and 90 per cent of M&A fails to deliver expectations.

Worse still, 60 per cent destroy value and 50 per cent of acquired assets are sold off again within five years.

Just Eat Takeaway’s (JET) decision to buy Grubhub following the COVID pandemic is a prime example.

European-based JET bought US equivalent Grubhub for $7.3 billion in June 2021 after demand for food delivery soared during lockdown.

At the time, JET was valued at £30 billion. But the acquisition proved a costly mistake for both parties as Grubhub’s share of the US takeaway delivery market shrank to just eight per cent (down from 70 per cent at its peak in 2015).

As a result, JET spent more than two years trying to ‘dump’ its dire investment, before finally selling Grubhub for just $50 million in November 2024.

By that time, JET’s value had plummeted to $3 billion. Investors were so relieved at the sale that the company’s share value immediately increased.

JET’s acquisition of Grubhub may have been a disaster, but it is not alone. The pages of the Financial Times provide evidence that many ambitious business owners have more of an aptitude for destroying, rather than creating, the value their investors crave.

Yet it doesn’t have to be this way. There are general rules that firms can follow to avoid such a dismal outcome. Here are four key lessons to avoid common value traps.

1 The timing of M&A is crucial

JET’s deal for Grubhub was confirmed in 2021 in the aftermath of the COVID-19 pandemic. The timing of the deal contributed to its failure.

The previous year saw a surge in the number of people resorting to takeaway and grocery delivery services during a series of  lockdowns. Grubhub made its one and only quarterly profit in 2020 as a result.

Optimists believed this level of demand would continue to increase after the pandemic, but that was not the case. Instead, demand for both takeaway and grocery delivery fell back to almost pre-COVID levels.

As a result, JET struck its deal with Grubhub at the top of the takeaway delivery market. Since then, losses have flowed across the entire industry.

Alongside this, the timing couldn’t have been worse in terms of the M&A cycle.

Following the pandemic, pent up demand outstripped the supply of businesses that were available for acquisition. The result was that  prices were ‘driven through the roof’.

A record $6.1 trillion of transactions were completed globally during 2021. Many of those acquisitions were overpriced and so the new owners were destined to  struggle to generate any sort of value from their subsidiaries.

The same businesses, making the same returns, would likely sell for around one third less in 2024. The lesson is that you should pick the timing of your deal carefully.

2 Beware high prices in M&A

It wasn’t just poor timing that elevated the price JET paid. It believed Grubhub had also been talking to its rival UberEats about a potential sale. That pushed the price to astronomical levels.

During JET’s subsequent attempts to divest Grubhub, UberEats showed no inclination to bid for the company. One wonders whether it was ever really interested.

The lesson is that price really does matter. A high price makes subsequent value creation unlikely and allowing yourself to be spooked into bidding against a ‘ghost’ is inadvisable.

3 M&A must fit with a firm’s strategy

Looking at JET’s decision to acquire Grubhub begs the question, what was their strategy?

It appears that it was to become the biggest company in the industry outside of China. However, being the biggest player in the market is of little value unless it yields economies of scale or scope, or increased market power.

In the case of Grubhub and the takeaway delivery industry, it seems unlikely that any such benefits were created as the US is such a separate market to Europe.

Instead, being the biggest is about ego and legacy. Neither of these create value for shareholders.

Unless there are clear benefits from a strategy, ask why it is being pursued. JET’s failure to do this led to a needless destruction of value.

4 Size matters in M&A

We know most large acquisitions fail however exciting and transformational they may seem.

High acquisition prices, culture clashes, and the scale of integration required often result in a disappointing outcome. Businesses may find themselves wrestling with the problems and extent of debt for many years afterwards.

As a result, deals worth 30 per cent or more of the acquirer’s value have a strong likelihood of destroying value. These large deals are often the result of limited strategic choices.

Evidence suggests that a strategy of acquiring smaller businesses is far more effective in creating value. Prices are lower, integration is easier, and the creation of value more assured.

However, this needs a sufficiently broad strategy to identify plenty of targets.

Choice allows for lower prices and reduced risk. If either seems unacceptable then simply move onto the next target. This is a tactic that private equity and many more successful corporates pursue.

With large targets, there are few options and so major risks and high prices tend to be swallowed, with potentially disastrous consequences.

Private equity shows M&A can be more successful

While corporates have a mixed record with M&A, private equity has been successful with its buy, improve, sell model for several decades.

These groups are attracting such enormous amounts of investor cash that Western stock markets have been losing businesses for 20 years or more.

The US stock exchanges have halved in the number of business listings over the last 10 years, while other stock exchanges are declining at a similar rate.

Meanwhile, private equity now accounts for 35 to 40 per cent of all corporate transactions globally – and that figure continues to increase.

In effect this simple, largely misunderstood approach, is taking over investor cash due to its consistently high returns.

Many believe that the model is largely built on borrowing and cost reduction. In reality it is much more sophisticated than that.

Private equity is so successful because it follows the four rules outlined above before completing an acquisition. Once the deal is complete, it creates value through governance, incentives, discipline, growth and rapid change.

In my new book, The Unwritten Rules of M&A, I establish a series of guidelines to reduce risk and improve outcomes in M&A.

These rules are based on my research and my own extensive experience of M&A while chairing listed, private equity, and family-owned businesses over nearly 30 years.

They are indispensable for anyone who is likely to be involved in integration, due diligence, strategy, or any other activity connected to M&A.

Following them will help acquirers to make sure the costly mistakes made by JET and others are not on the menu.

The Unwritten Rules of M&A: Mergers and Acquisitions that Deliver Growth - Learning from Private Equity is written by John Colley and published by Palgrave Executive Essentials. Buy it now.

Further reading:

Six tips to find hidden benefits in tech M&A

John Colley and Koen Heimeriks will reveal how private equity consistently achieve high-level returns from mergers and acquisitions in a free webinar From Risk to Reward: Private Equity's M&A Playbook on 12 March, 2025. Register now.

Learn how to add value and avoid common pitfalls in M&A with the three day programme, Mergers and Acquisitions: How to Maximise Success, at WBS London at The Shard.

Discover more about Finance and Markets by subscribing to our Core Insights Newsletter.