An exciting part of corporate finance is M&A. M&A stands for Mergers and Acquisitions and can be a valuable way for businesses to grow, enter new sectors, or enter new markets.

There are significant risks with M&A, such as overpaying, overestimating synergies, failing to capture synergies, underestimating integration costs, not paying attention to culture and change management, and unexpected internal and external changes.

Another big risk is the phenomenon known as deal fever.

Deal fever is essentially getting carried away with the excitement of a potential deal, which can either lead to making a bad deal or paying too much.

If the activity involves a move into a new market or country, the deal team will spend numerous weeks studying the market. This would include understanding the legal and regulatory requirements, competitor analysis, understanding how to value potential targets, and collaborating with advisors.

The advisors, for example, an investment bank, will start spreading the word that the business is an interested party. Once the business is seen as a part of the universe of bidders, they may receive an invitation to participate in the auction.

Usually, this starts with the issuing of a Prospectus. This describes the business, the market, and the business environment but doesn’t give away any trade secrets.

This typically gives two or three weeks for responses, but generally the advisors for the potential bidder give a ‘heads up’ of interest to the vendor’s advisors.

If the potential bidder decides to participate, they will respond by the deadline with an NBIO, a non-binding indicative offer. Because the offer is made without access to key data from the vendor, it has to be a non-binding indication of the ballpark price.

It's not unusual for more than a dozen prospective bidders to be approached, but the NBIOs tend to be used to whittle down serious bidders to three or four at most.

This is when it gets serious. Due diligence is a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.

Bidders are given access to a data room. An M&A data room is a secure online repository that potential buyers and sellers use for due diligence.

A deal team can spend many hours and days assessing the information revealed in the data room, attending management presentations, where the existing executive team describes the business in an effective sales pitch.

The business will need to understand any goodwill element or strategic premium required in addition to any asset value to determine whether to bid and what the final price is over which they would walk away. They depend heavily on the work of the advisors and the deal team.

A typical M&A deal can run over several months with a small team working on the transaction day and night. It can almost take over their lives.

This is where deal fever can strike. The competitive spirit of the deal team can lead to obsession. They can become determined to get the deal ‘over the line.’ Sometimes, subconsciously, board papers can be ‘massaged’ to gain approval of the bidding price. This is deal fever and can be fatal to getting the optimal outcome.

One recommended remedy to deal with fever is to bring in an independent observer, usually from another department or subsidiary of the business. Their job is to ask all the difficult questions. They can check the data room, challenge assumptions, rework the financial calculations, etc.

There are many M&A transactions every year; many are successful, but some are disasters, costing the senior executives their jobs and sometimes resulting in the collapse of the business.