5 Simple M&A Mistakes That Wipe Out Company

When you invest in a business or do M&A (mergers and acquisitions), you have to avoid simple but fatal mistakes – mistakes that can kill your company. Let’s look at a real example that shows how even big companies can fail.

Take Revlon, the famous make-up maker. They went bankrupt in 2022. The direct cause? Huge debt. And that debt came from one fatal M&A mistake: they borrowed massive amounts of cash to buy businesses, but these businesses didn’t perform well. Unable to repay the debt, they went bankrupt.

Revlon always used buyouts to create “growth.” In 2016, they made their biggest mistake – buying their rival traditional make-up company Elizabeth Arden for $870M. To put this in perspective, Revlon’s total assets in 2015 were $2B, so this M&A was enormous for them.

The result was clear: Revlon made losses every year since the M&A, drowning in huge debt and interest costs. They ignored 5 warning signs that everyone should avoid. Let’s learn from their mistakes:

1. Don’t buy a company that is making losses: Elizabeth Arden was losing money for two years straight before the purchase. Why are you buying zombies?
2. Don’t buy a company with negative operating cash flow: This means the company is losing cash just by staying open. Elizabeth Arden barely avoided this, but only because their sales were declining. When sales drop, you need less inventory, which temporarily improves cash flow. If you want to know more about it read CCC (cash conversion cycle) article.
3. Don’t rely on synergy: “Synergy” means expecting two companies to work better together than apart. But you can’t know if this will work until after you buy the company. Each business should be profitable on its own merits. Revlon’s major mistake was betting everything on potential synergies with Elizabeth Arden, which ultimately failed. In fact, roughly 90% of expected synergies don’t materialize, leaving companies having paid premium prices for nothing. Don’t become another statistic.
4. Don’t buy a fundamentally flawed business: Many buyers think, ‘The previous owners ran it poorly, but I can do better!’ This is dangerous thinking. Some businesses are fundamentally broken and won’t succeed regardless of who runs them. No amount of good management can fix a fatally flawed business model.
5. Don’t buy declining businesses When sales keep falling but costs stay the same, losses get bigger and bigger. Elizabeth Arden’s sales were dropping for years – a clear warning sign that Revlon ignored.

These mistakes didn’t happen just by chance. They came from psychological traps that Robert Cialdini explains in his famous book “Influence.” These are natural human biases that often lead to poor business decisions. In Revlon’s case, three of these six principles of influence worked against them:

Liking: Humans naturally prefer things that are similar to themselves. In business, this makes companies more likely to buy similar businesses, even when the numbers don’t make sense. Revlon and Elizabeth Arden were both traditional makeup companies with long histories. This similarity made Revlon feel comfortable with the deal, even when the financials were warning them to stay away.

Consistency: People naturally resist change, especially when past strategies have brought success. This leads to the dangerous mindset of ‘Why change what worked before?’ As a result, companies often stick to familiar strategies. Revlon repeatedly used mergers and acquisitions for growth, which created a dangerous pattern. They became overconfident, thinking ‘We’ve done this before, we know what we’re doing.’ This led them to maintain their usual approach even when facing clearly riskier situations.

Additionally, acquiring similar businesses can help companies expand sales volume without restructuring their own organization. While achieving a 50% sales increase typically requires radical internal changes, growth through acquisitions can avoid this disruption

Authority: We tend to trust established names and long histories. Revlon has been a makeup industry leader for 110 years. This long history made them overconfident. They thought their experience and brand power could fix any problem. But even giants can fall – their history couldn’t protect them from bad business decisions.

These psychological traps are especially dangerous because they work together and feel natural. They can make even experienced business leaders ignore clear warning signs. That’s why it’s crucial to look at hard numbers and facts, not just follow our instincts or past patterns.