Question

How high leverage is a reason for failure of merger? Explain.

Answer 1

Consider the scenario of buying a used car – you can take a few test rides, carefully examine the exteriors and interiors and take assistance from trained mechanics to assess the car. Despite all due diligence, the reality of the used car – whether it’s a good buy or a lemon – will be evident only after you purchase it and ride it for some period.

M&A deals also follow similar challenges. You can examine the existing business based on visible financial numbers, assumptions of potential fit and advisory assistance from M&A advisors (the experts). But the reality will become evident only when the deal is through and you have to run the business forward