Mergers and Acquisitions
Why they continue to be difficult and what to do to increase success
I don’t know this for a fact because I haven’t conducted the research myself, but my understanding from what I’ve read is that the failure rate of mergers/acquisitions still hovers around 66%. Failure means that the deal didn’t return the expected synergies, shareholder value, or retention of key talent essential to continued success. That’s a lot of disappointment in a global transaction market of $3.8 trillion, $1.8 trillion of that in North America alone. The failure rate is less among serial acquirers and in certain industry- specific sectors where the assets involved are familiar. Still, that’s a lot of risk to absorb. Since M&A activity has been steadily growing for decades, you would think we should all know how to make it work by now. Clearly, that’s not the case. Are we overly optimistic or just plain dumb?
Yes to being overly optimistic. Like entering into a marriage, companies are betting that they can beat the odds and not wind up in a divorce. For those who have tried it, marriage after the honeymoon can be quite different than one imagined. Partners may have different fantasies in their heads of what married life will be like, but chances are that neither partner was fully expecting the reality that their union produced. Whether the marriage survives the surprises depends on many factors, not the least of which is how hard the parties work together to overcome them. Only about 43% of first marriages last, and the numbers for second and third marriages are much worse. Apparently, learning from experience isn’t guaranteed.
Financial hardships and associated disagreements are the cause for many divorces but there are many other factors as well. Whatever the root causes, the problems are exacerbated by a lack of open communication which leads to more distrust and makes the future resolution of the underlying issues that much more difficult.
In mergers and acquisitions, deals are often talked up by brokers who steer away from any mention of the potential risks involved. As during dating, the parties are highly motivated to put their best foot forward. People don’t usually talk about their emotional difficulties, previous failed relationships and commissions of infidelity on their first date. First dates are anything but realistic job previews, just as is the case with exploratory discussions of the benefits of strategic combinations. We may walk away believing that we have found “the one” when we really don’t know who we just found.
So yes, being overly optimistic can lead to problems later on. However, companies that are experienced in M&A have developed more rigorous ways to assess opportunities so that they don’t get burned so often. There are many reasons why mergers & acquisitions fail, some of them purely financial and operational, such as:
1. Overpaying, often due to “deal fever”
2. Failure to understand the difficulty of integrating operating systems
3. A poor fit with the strategic intent of the firm, leading to de-prioritizing post-merger integration challenges
4. Over-estimates of customer demand for joint products or services
5. Failure to address operational issues as they become apparent
6. Underestimating the difficulty of achieving planned breakthroughs in operating methods
7. Lack of clarity concerning integration goals, timing and processes
8. Under-resourcing integration efforts (time and money)
9. Not addressing the need to align processes for serving customers, dealing with talent, compensation differences, supply chain management, and more
More often, we hear that it’s not the operational issues that cause a merger to fail but rather human issues that get in the way. While the following issues may be anticipated, it’s important to develop a plan to assess how the post-merger integration is going and to address these challenges should they arise:
1. Loss of key talent
2. Unresolved turf issues
3. Poor choices regarding who ends up in key positions
4. Poor communication of goals, timing and expectations
5. Not providing voice for acquired employees so that they feel seen and heard
6. Ignoring signs of resistance, hoping things will get better with time
7. Allowing the identity of the acquired entity to remain separate
8. Lack of confidence in new leadership as old leadership departs
9. A clear sense of there being winners and losers as the acquiring company imposes its culture and operating model
10. Declaring victory too soon and therefore not addressing emergent challenges
Firms that have followed a strategy of growth through acquisitions, like Cisco, have developed considerable expertise in these matters and have created teams of people who know how to manage the process from end to end. Their work begins early, as prospects are being considered, rather than waiting for the deal to be signed. Their work will involve assessing the culture and talent of the target acquisition, understanding its strategy and operations, and preparing for frequent and deep engagement of employees in understanding how integration will take place while also listening and responding to their concerns. They will engage critical stakeholders, conduct one on one interviews with key players, and engage familiar voices in helping people work through the process. They will monitor the entire process from end to end, devoting time and budget to making certain decisions are understood, systems are aligned, and stakeholders such as customers, boards and regulators are brought up to speed. They make an effort to leave no stone unturned, yet are prepared for the unexpected, since the unexpected should be expected in anything as complex as two organizations coming together to work as one.
The reason we continue to see a high rate of failures is that acquiring firms are under pressure to keep the costs of integration low so as to deliver on the promises of the deal. They don’t anticipate the real work involved and are sometimes unwilling to perform it, thinking things will work out on their own. Even after signs that things are going badly, there is a lack of awareness of the actions that need to be taken to recover. People without the necessary experience are given the responsibility to right the ship, but their efforts are ineffective or misdirected. Like the dynamics of a poor marriage, the acts of one party infuriate the other, making joint problem solving even more difficult.
All of this is predictable and avoidable. Failure is not a given.