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Why mergers and acquisitions fail: lessons in success

News + Events : Why mergers and acquisitions fail: lessons in success

08/19/2010

If 75% of all mergers and acquisitions fail to achieve their desired
financial or strategic results, what makes the other 25% successful?

Management Professor Mitchell Lee Marks, Ph.D

Management Professor Mitchell Lee Marks, Ph.D

On November 4-5, Management Professor Mitchell Lee
Marks, Ph.D, will lead a workshop for executives on successfully merging
companies.

Making Mergers and Acquisitions Work: Managing the Human, Cultural and Organizational Issues

This intensive day-and-a-half seminar will be held
at the SFSU Downtown Campus at 835 Market Street. Professor Marks has
advised in more than 100 mergers and acquisitions and is the author of
six books on the subject, most recently Joining Forces: Making One Plus
One Equal Three in Mergers, Acquisitions and Alliance
(Jossey-Bass
Publishers), to be released next month. He is a frequent speaker to
business groups and has lectured at Harvard Business School and the
Smithsonian Institution.

For more information about the seminar, see Making Mergers and Acquisitions Work

A study of corporate combinations by my colleague Philip Mirvis and I identified important differences between the “successful” and “typical” cases over the three phases of a combination of entities.

1) The pre-combination phase, when the deal is conceived and negotiated by executives and then legally approved by shareholders and regulators.

2) The combination phase, when integration planning ensues and decisions are made.

3) The post-combination phase, when implementation occurs and people settle into the new organization.

Identifying Strategies: The Pre-combination Phase

In this first phase, as the deal is conceived and negotiated by executives and then legally approved by shareholders and regulators, much of the emphasis is typically on financial implications. Buyers concentrate on the numbers: what the target is worth; what price premium to pay, if any; what the tax implications may be; and how to structure the transaction. The decision to “do the deal” is thus framed in terms of the combined balance sheet of the companies, projected cash flows, and return on investment.

By contrast, in successful cases buyers bring a strategic mind-set to the transaction. However, there is more to this than overarching aim and intent. Successful buyers also have a clear definition of the specific synergies they seek in a combination and concentrate on testing them well before momentum builds. Sensible buyers consider carefully the risks and problems that might sour a strategically sound transaction. This does not mean that financial analyses are neglected or that they are any less important to success. To the contrary, what puts combinations on the road to success is both an in-depth financial understanding of a proposed combination as well as a serious examination of what it will take to produce desired financial results.

Planning Trumps Politics: The Combination Phase

As the two sides come together, politics typically predominates. Oftentimes, it's power politics: the buyer decides how to put the two organizations together.

Meanwhile, individuals jockey for power and position, and management teams fend off overtures for control from the other side by hiding information or withholding information. In the typical situation, transition teams are convened to recommend integration options, but personal empire building and group dynamics block efforts to seek out and capture true synergy. Meanwhile, culture clashes rear up as people focus on differences, and fixate on which side wins what battles, rather than joining together to build a united team.

In successful combinations, there are still politicking and gambits for self-preservation, but much of the energy typically directed into gamesmanship is now more positively channeled into combination planning. Executive leadership clarifies the critical success factors to guide decision making and oversees the planning process to ensure that sources of synergy are realized. Managers and employees come together to discuss and debate combination options; if the process is well managed, high-quality combination decisions result.

Team and Culture Integration: The Post-combination Phase

I have received calls 18 months after a combination from executives bemoaning that their best talent has bailed out, productivity has gone to hell in a handbag, and culture clash remains thick. Often this is because the executives grew impatient with planning and hurried implementation, to the extent that their two companies failed to integrate, resulting in serious declines in everything from employee morale to customer satisfaction. Steps can be taken to put things back on track, but it is obviously better to preclude the need for damage control by following the successful path from the onset.

In successful combinations, managers and staff from both sides embrace the strategic logic behind the combination and understand their roles and responsibilities in making it work. To facilitate this transition, I've witnessed combining companies engage thousands of their employees in integration planning and, later, in the implementation efforts that they helped to shape. This phase sees successful companies intentionally go through the work of organization and team building in combined units and functions in order to forge a common culture. I have also seen a few companies undergo a successful midcourse correction and turn a potential disaster into a winning combination.

While many factors account for the eventual success or failure of a corporate combination, research and personal experience show that it is the process through which the two companies are integrated which has the most impact of the outcome of a merger or acquisition.


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