Introduction
M&A is one of the most crucial growth strategies for many firms. The industry is estimated to surpass $4 trillion in deal volumes in 2025, a 15% increase from the last year. Such a huge industry is obviously associated with major risks and trends, which shape its landscape significantly. In this article I’ll be covering some of these risks and showing how companies find mitigation strategies and adapt to them. M&A is a complex process, which involves several stages.
The deal is made of various stages, but there are three phases that can be outlined: acquisition planning and training, deal-making structure, and post-merger integration and control. Main risks identified in the deal process are litigation, reputational, geopolitical, and information asymmetry. Different deal phases are exposed to different risks.
Geopolitical Risks
Geopolitics plays a massive role in the decision-making of company management and leadership. The political situation in the home country of the company could significantly affect the firm itself. The political landscape alters the attractiveness of the market in the country and could result in investors’ wealth being diminished. This could arise from numerous reasons, such as regulatory changes, assets getting frozen, or a sharp decline in economic activity. For example, we could look back at the Russia– Ukraine war, which resulted in economic sanctions on the aggressor. This significantly altered the M&A deal volume in Russia. In 2021, the deal volume in the region was $45 billion, whereas in 2022 it only reached $24 billion. We could observe a similar trend in 2016 after the Brexit. Although the deal volume didn’t decrease in the UK due to the huge deals happening at the time, the number of deals decreased by around 25%.
Acquiring companies become more reluctant to merge or buy companies present in politically unstable states. Variations in legal frameworks for the companies’ countries and lack of economic transparency result in many difficulties in the deal-making process as well. For the target companies, this usually means lower M&A competition and less premium paid. Investors consider the volatility and uncertainty that arise due to the geopolitical risks present in the region. This is why inbound M&A deals are massively affected in the periods of geopolitical uncertainty.
However, one of the ways companies try to mitigate these risks is geographical diversification. This is why we usually see an increase in the outbound M&A activity due to the political risks present in the region. This is a great strategy for domestic firms to reduce their exposure to the potential issues present in the home country. Great evidence of this could be an increased cross-border M&A activity in the Eurozone. Due to issues such as the Russia– Ukraine war and Brexit, many EU companies diversified their businesses in relatively more attractive markets such as the US. In 2023, the USA saw a 155% increase in the IPO proceeds, whereas the London Stock Exchange experienced a drop from 74 in 2022 to 23 newly listed companies in 2023.
Another strategy adopted by firms is to commit to ESG factors. By raising their corporate social responsibility, firms strengthen their relationships with their stakeholders and try to navigate the negative effects of different political and economic policies. This could also include political donations and attempts to reduce the risk associated with being in the region. The effects of geopolitical risks on M&A will become increasingly more relevant due to President Trump’s office. Last week, the president announced reciprocal tariffs on virtually every country. This had a very negative impact on the stock market as the S&P 500 lost $5 trillion. Uncertainty brought by these decisions could significantly alter the M&A landscape in the near future. Although, we did see a huge deal between BlackRock and CK Hutchison Holdings in the Panama Canal amidst the pressure from Donald Trump.
A salient example of geopolitical risk affecting M&A activity emerges from the aftermath of Brexit and the Russia–Ukraine conflict. In response to these destabilizing geopolitical events, a notable trend emerged: a decrease in inbound M&A deals within affected regions and a simultaneous increase in outbound transactions. Specifically, the United States experienced a 155% increase in IPO proceeds, contrasting starkly with the decline on the London Stock Exchange, where the number of newly listed companies dropped from 74 in 2022 to only 23 in 2023. This shift illustrates how geopolitical instability compels firms to diversify geographically, thereby reducing their exposure to domestic political and regulatory uncertainties.
Moreover, recent developments, such as KKR’s bid for Telecom Italia, highlight the importance of maintaining strong governmental relations. In this case, close collaboration with the Italian government enabled KKR to navigate the regulatory scrutiny associated with the “Golden Power” rules, ultimately facilitating deal approval. These examples underscore how geopolitical volatility directly shapes deal volumes, premium valuations, and the strategic posture of acquirers.
Information Asymmetry
Information asymmetry is relevant in every economic transaction. It poses a massive risk to any M&A transaction as well. Information asymmetry arises from various sources such as organizational complexity, poor record-keeping, and rapidly changing market environments. It ultimately results in a target company having more information than the acquirer. Information asymmetry causes difficulties in valuation, negotiation, and post-merger integration.
For the initial stage, it has a profound impact on the company’s valuation. If the acquiring company doesn’t have full information on the customer loyalty, regulatory risks, or any major legal issues, it could significantly alter the valuation. This usually results in the overvaluation, as the acquirer won’t be able to truly assess the worth of the company. A great example of this was in 2011, when Hewlett-Packard acquired a British software company, Autonomy, for $11.1 billion. In one year, due to the accounting irregularities and other misleading financial information, HP had to write down $8.8 billion of the acquisition’s value.
Apart from the initial planning, information asymmetry also severely affects later stages of the transaction. Due to the information gaps, acquiring companies may want to tie part of the purchasing price to the future performance using different warranties and earnout provisions. Although this provides some sort of protection for the acquirer, it makes the deal structure complex and sometimes results in litigation and potential disputes.
Information gaps have a massive impact on post-merger integration. As the lack of information limits accurate identification of organizational weaknesses and advantages, it’s harder to fully integrate the target company into the buyer’s operations. Sometimes it can be observed that there are unrealistic synergy expectations and unexpected financial burdens that deteriorate shareholder value.
In order to mitigate the risks posed by information gaps, companies go through rigorous due diligence. This involves increasing the coverage of financial analysts, auditors, and legal experts. As the size and risk of the deal increase, due diligence is more extensive and takes longer. There has been evidence of an inverse relationship between the time period of due diligence and the completion rate of the M&A deals. Although, with the use of new technologies such as blockchain and AI-driven tools, it has become easier to verify different transactions and legal records. As mentioned in the section above, the political landscape greatly influences risks from information asymmetry and thus the need for due diligence. Firms that operate in countries with reliable legal frameworks ought to be relatively more trustworthy targets.
The acquisition of Autonomy by Hewlett-Packard (HP) in 2011 exemplifies the dangers of information asymmetry in M&A transactions. HP acquired the British software company for $11.1 billion, paying a 64% premium due to Autonomy’s apparent profitability and growth trajectory. However, post-acquisition, HP uncovered extensive accounting misrepresentations, including inflated revenues and misclassified hardware sales. This discrepancy necessitated an $8.8 billion write-down and caused HP’s share price to fall by 12% upon announcement.
Beyond the financial losses, the acquisition exposed HP to litigation, with the firm suing Autonomy’s executives and its shareholders filing claims against HP’s management for inadequate due diligence. The case reveals how limited visibility into regulatory, legal, and customer-related information can distort valuations, hinder integration, and precipitate reputational and legal repercussions.
Investor Protection and Litigation Risks
Investor protection and possible litigation issues are significant in the industry. As M&A deals are complex, high-value transactions, they profoundly affect investors and shareholders. Due to the potential conflicting interests and different stakes between shareholders and management, M&A deals could lead to legal disputes. The fiduciary duty of loyalty and care obligates the board of directors to act in the best interests of the shareholders. If the broad shareholder base observes that the executives didn’t act in their best interest or didn’t fully inform them about a major decision, they have the right to seek legal remedy. This was actually the case in 2013 with the Dell Technologies. In response to declining PC sales and increased competition, the CEO, Michael Dell, along with private equity firm Silver Lake Partners, decided to take the company private via a management-led buyout. This was done in order to restructure the company without the additional pressure from the company trading on public markets. Shareholders weren’t happy with the decision as they claimed breach of fiduciary duty. They accused Michael Dell and management of not seeking better offers and accepting an inadequate price.
Apart from legal disputes with the shareholders, litigation may arise from misrepresentation or any kind of fraud during the deal. Acquiring firms expect that all the information provided by the target company is accurate and legitimate. If the facts provided are false or misleading, the acquirer might find themselves with financial or legal liabilities they hadn’t anticipated. All of these link back to the previous section about the information asymmetry risks, and the deal between HP and Autonomy could be a great example to show this. After the merger, HP accused Autonomy of inflating revenues and misleading them about the company’s financial health. This led to lawsuits from shareholders of HP, claiming management was unable to carry out adequate due diligence.
Big causes of many legal disputes are earnout structures. As mentioned previously, these are used to tie a part of the purchasing price to the firm’s future performance. Sellers sometimes claim that the management purposefully didn’t report (or didn’t achieve) targets being met in order to avoid future earnout payments. In 2016, Allergan acquired Exemplar Pharma, a pharmaceutical firm focused on developing inhalation therapies. Part of the purchasing price was dependent on FDA approval of certain products. Exemplar Pharma’s former shareholders claimed that Allergan purposefully delayed FDA approval in order to avoid making payments. This example underscores possible threats from deal structures that involve earnout payments.
Legal disputes are a big distraction for management, reputational damage, and a source of uncertainty for investors. Firms employ different strategies in order to enhance shareholder protection and avoid potential litigations. One of the approaches adopted is getting an independent fairness opinion. This can be done by employing third-party financial analysts, who make sure shareholders are getting a fair deal, and appointing an independent committee that oversees the transaction. Thorough and enhanced disclosure using proxy statements and regulatory filings is crucial in order to give investors a clear view of the potential benefits and downsides of the deal. Additionally, representation and warranty insurance are used in order to provide additional protection for the buyers. These allow them to recover losses in the case of hidden liabilities or critical misrepresentations.
A pertinent example of litigation risk in M&A can be observed in the 2013 management-led buyout of Dell Technologies. CEO Michael Dell, in collaboration with Silver Lake Partners, proposed taking the company private to facilitate restructuring away from public market scrutiny. However, shareholders initiated legal action, claiming a breach of fiduciary duty. They contended that the management failed to seek superior offers and accepted an undervalued deal. In response to legal and shareholder pressure, the offer was revised upward from $13.65 to $13.88 per share.
Another illustrative case is the acquisition of FerroKin BioSciences by Shire in 2012. The deal involved an earnout structure contingent on the initiation of Phase III clinical trials. Shire later argued that ‘Fundamental Circumstances’ had prevented trial initiation. However, the Delaware Court rejected this defense, compelling Shire to pay the agreed $45 million milestone payment. These instances reflect how earnout provisions and perceived breaches of fiduciary responsibilities can culminate in protracted legal battles and financial penalties.
Reputational Risks
For every firm, its reputation is one of its most crucial assets. It takes huge amounts of money and time to strengthen and could quickly deteriorate with a single scandal or mistake. In the event of M&A, acquiring or merging with a firm has substantial effects on one’s reputation and image. If the target firm has some reputational issues, it could greatly affect the post-merger performance of the business.
Reputational risks are prominent when the target company has unresolved ESG problems. Any sort of public scandals, labor abuses, or controversies quickly spill over to the buyer. Stakeholders associate the past of both companies with the newly combined one, meaning any sort of reputational damage affects both sides of the deal. This is increasingly relevant in today’s world, where stakeholders demand high social responsibility and strong ESG credentials. Companies involved in unethical behaviors like child labor, discrimination, or environmental negligence face boycotts, loss of consumer trust, and a decline in the share price. Great examples of this in recent times are Balenciaga and Starbucks.
The effects of reputational risks were clearly seen in 2018, when Bayer acquired Monsanto. Bayer is a German pharmaceutical and chemical giant, whereas Monsanto is an American agrochemical company. The deal was valued at $63 billion. By the acquisition, Bayer was expecting to become the largest supplier of seeds and agrochemicals. Monsanto already was known for its bad reputation due to aggressive marketing of glyphosate-based herbicide, Roundup, which has been linked to lawsuits involving cancer. The company has also been regarded as “Big Agriculture Evil.” Despite knowing this issue, Monsanto management underestimated them and didn’t see them as a huge issue for the company. However, shortly after closing the deal, Bayer was targeted by numerous lawsuits, public backlash, and investor revolt. Their stock price plunged by 40%, and they ended up paying a $10 billion settlement to resolve Roundup lawsuits. This deal shows how quickly a target company’s image can transfer to the buyer and the significance of the risks it poses to the post-merger performance.
In order to avoid the above-mentioned difficulties, firms employ heavy reputational and ESG due diligence. Buyers not only analyze the acquiring company’s financial health but also do extensive screening for any social, environmental, or ethical misconduct. These issues are taken more seriously and could very well be a reason for the acquisition to fall apart. This implies that in the latest years reputational risks don’t represent secondary concerns, as firms know that it can strain stakeholder relationships and deteriorate brand image.
The acquisition of Monsanto by Bayer in 2018 starkly demonstrates how reputational liabilities can transfer during M&A activity. Despite Monsanto’s notoriety for its aggressive promotion of glyphosate-based herbicides—specifically Roundup, which had been linked to cancer lawsuits—Bayer proceeded with the $63 billion deal, aiming to dominate the global agrochemical market. Shortly after the transaction, Bayer faced extensive public backlash, legal challenges, and a revolt from investors. The resulting reputational fallout led to a 40% decline in Bayer’s share price and compelled the firm to allocate $10 billion in settlements related to the Roundup litigation. This case affirms the profound strategic importance of ESG and reputational due diligence in contemporary M&A, especially as stakeholder scrutiny continues to intensify in a socially conscious investment environment.
Conclusion
The issues discussed above emerge as significant risks to the M&A industry. These risks are well interconnected with one another. For example, geopolitical uncertainty is usually the cause of the increased information asymmetry. Due to the weak institutions and unreliable legal frameworks, companies’ reported information and documentation lose trustworthiness, giving rise to information asymmetry and gaps. These issues fuel litigation, as shareholders find their firms subject to lawsuits and unknown liabilities. To address these risks, companies usually have similar strategies for all of them: enhancing due diligence, increasing analyst coverage, ethical and ESG screening, and contractual protections such as earnouts and indemnities. Although these strategies mitigate the risks, they usually increase the time, cost, and complexity of the whole deal—making the process across all of its phases. These exert downward pressure on both valuation and deal volume. To reflect the risks that are present, buyers are prepared to pay lower premiums, whereas mitigating strategies that prolong the due diligence and amplify the complexity of the deal structure result in more transactions falling apart.
Authors: Luca Scevola, Aleksandre Keratishvili
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Bocconi Students M&A Circle 