Three Reasons Why Your Merger Model Misses the Mark
- Tim Christie
- Jun 25
- 3 min read
Again and again, research confirms a troubling truth: M&A deals often fail to deliver financial returns for acquirers (see Figure 1). But why?
Most postmortems point to operational missteps—flawed integration, missed red flags in diligence or a key employee quitting. And while those factors matter, there's another culprit hiding in plain sight: our own financial modeling process.
Finance teams build the assumptions, frame the upside, and often define what “success” looks like. But in doing so, we are often introducing biases that distort reality—and ultimately drive value destruction instead of creation.
Figure 1. M&A Failure Rates
Before blaming execution, consider this: could the real problem be baked into the model from the start? Take a closer look at the assumptions below—and ask yourself whether Finance is unintentionally setting the deal up to succeed… or to fail?
Why is the Financial Model Reliably Optimistic?
Success is often measured by comparing the acquiring company’s actual performance to its deal model. Did revenue and cost synergies materialize? Were cross-selling targets hit? Was customer retention sustained? In most cases, the answer is no. Attrition tends to be higher, synergies fall short, and cross-selling is slower—or never fully realized.
Why is it that experienced financial modelers continue to over-estimate that enterprise value of acquisitions? I would suggest that some or all of the following explanations are at play:
Winners Curse - The Winner’s Curse is a well-documented phenomenon in auction theory, where the winning bidder in a competitive process tends to pay more than the intrinsic value of the asset. This overpayment typically arises in high-stakes, information-asymmetric environments—such as investment banker-led auctions—where bidders must rely on limited or imperfect data to formulate valuations. Contributing factors include estimation errors, behavioral biases (e.g., over-optimism or anchoring), and competitive pressure. As a result, the highest bid often reflects not just a bullish view, but a systematic valuation error—leading to post-transaction underperformance or value erosion.
Cost of “Holding” Cash - All companies face the risk of holding excess cash. In the case of private equity, uninvested capital must be deployed to meet return targets, creating a natural bias toward deal-making—even in the absence of high-quality opportunities. This bias can be driven by optimism or by a scarcity of suitable targets. For publicly traded companies, surplus cash theoretically should be returned to shareholders if available investments cannot meet required return thresholds. However, acquisitions often serve as a convenient justification for capital deployment, with financial models adjusted—or stretched—to meet internal hurdle rates and support the strategic rationale. Further, having significant excess cash on the balance sheet leads to a company becoming an acquisition target itself, as acquirers leverage their cost of acquisition with the very cash on the target balance sheet.
The Arrogance of Acquisition - Acquisitions can create a sense of strategic affirmation, particularly among less experienced CEOs and Boards. The prevailing rationale often centers on a narrative of strength: “We are acquiring to drive growth; our organization is stronger, and theirs is underperforming.” This perspective, coupled with managerial overconfidence in their ability to lead, integrate, and extract value, frequently results in overly ambitious synergy forecasts. Revenue and cost synergies are not merely estimated—they are stretched to align with the acquiring management team's self-perception of capability and control, rather than grounded in operational reality or empirical precedent.
While these tendencies are almost universal, CorpDev Consulting believes in creating an environment of awareness for these acquisition fallacies. We start with a very simple concept: Know thyself. Understand who you are and how value is created in your business, because every business is different.
Conclusion and Key Takeaways
To improve M&A outcomes, organizations must move beyond surface-level explanations for failure and confront the deeper, often invisible flaws embedded in their deal models. By recognizing the behavioral and structural biases that distort financial assumptions—such as the pressure to deploy capital, competitive overbidding, and leadership overconfidence—companies can approach acquisitions with greater discipline and realism.
Success starts not with the target company, but with a clear-eyed understanding of your own organization’s value creation engine. When financial models are grounded in self-awareness and operational truth, they become not just forecasting tools, but strategic guardrails that protect against value destruction and guide smarter dealmaking.
If your organization is pursuing acquisitions or planning for future growth, now is the time to challenge the assumptions built into your financial models. Invite fresh perspectives, stress-test your forecasts, and ground your strategy in a deep understanding of how your business truly creates value.
At CorpDev Consulting, we specialize in helping companies build more disciplined, reality-based M&A models that drive sustainable outcomes. Contact us today to learn how we can help your team avoid common pitfalls and set your next deal up for long-term success.
Written by Tim Christie
June 2025
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