Poor Strategy

• The most common problem with acquisitions is simply poor strategy. Acquiring companies may try to enter markets that it managers don't understand and can't efficiently manage. For example, in 2009 Cisco Systems purchased Pure Digital Technologies for $590 million to get into the consumer electronics business with the Flip Camcorder. However, Cisco did not know how to effectively manage the company and closed it down only two years later. The firm had to write off its purchase as a loss.
  
  

Poor Integration

• Sometimes, management has a poor time integrating firms just due to a difference in culture and trouble with combining staff. This can have dramatic consequences. For example, French telecom equipment firm Alcatel and Canadian firm Lucent merged in 2006. One year after the two firms merged, combined sales plunged and the value of the company went from $36 billion to $23 billion, wiping out a tremendous amount of value.
  
  

Failure to Complete

• Another example of a shareholder risk is the failure to complete an acquisition. For example, in 2008 Microsoft offered to buy Yahoo! for $31 per share which immediately sent the stock price rocketing upward. After months of negotiations, Yahoo! spurned the offer at which point its stock promptly dropped into the teens and stayed there for the next several years. Long term shareholders lost confidence in Yahoo! management and felt that the company would never achieve lasting value.
  
  

Fees

• Another important factor to consider in acquisitions is the tremendous amount of fees that are involved. Firstly, bankers charge between two and five percent of the total acquisition value as its success fee. Secondly, lawyers spend hundreds of hours drilling down on the details of the merger. This can range from hundreds of thousands to millions of dollars in fees. Thirdly, accountants are called in to do an audit and offer financial opinions about each firm. Fourthly, the bank requires a fee to issue a "fairness opinion" on the valuation. Altogether, a merger could result in millions of dollars in fees before the acquisition if final.