ראשי » ניהול שינוי וצמיחה ארגונית » מיזוגים ורכישות M&A » How can you predict pre and post M&A (mergers and acquisitions ) problems?

How can you predict pre and post M&A (mergers and acquisitions ) problems?

 Yagev Ben Itzhak, President, Adizes USA

In the last few years, growth through acquisitions and mergers has become a critical part of the success of many companies. This is no surprise since acquiring is much faster and less expensive than building.

In today’s economy, execution is everything.  Speed is critical.  The longer the merger and post integration takes, the greater the costs.  There is far less margin for error.

And the results?  Despite the popularity of M&As, the history of this type of corporate growth is replete with dramatic failures and disappointments. Many studies show that most mergers and acquisitions do not turn out as well as expected. A study published in Business Week analyzed 150 deals valued at $500 million or more.  It showed that about half of them destroyed shareholder value and another third created marginal contribution (1). According to a European study, in 60% of the large mergers, the merged organization performed poorer than the industry average, synergy was never achieved and integration process takes way longer than expected. (2)

It seems that M&As that look great on paper often turn out to be disappointing for all sides involved in the deal.

Can we predict some of these problems even before they arise?

The critical difference between success and failure is in mastering the integration process:

 

  1. Fountain of youth
  2. swallowing the gopher
  3. Diagnose gaps and differences

 

 

Begin the Integration Process Early 

Mergers are like marriages.  Would you marry someone you didn’t know?  The differences that attract can later end in divorce unless the marriage is managed correctly.  Understanding the patterns of normal, abnormal or even pathological behavior can be the difference between a successful merger and a bitter divorce.

Cisco is known as one of the most aggressive and successful acquirer of the 90's. Cisco used to look for companies that met the following criteria:

  • They had to be fast -growing, focused, entrepreneurial companies
  • They looked for excellence in R&D and marketing
  • The company's model of belief and future vision had to be similar to Cisco's.
  • The product strategies of the two companies had to be complementary

Not too many companies qualified to meet the Cisco criteria.  More companies were rejected than actually acquired.  Although this may seem like an inefficient strategy, it actually is a very effective one:  Cisco's management understood that only a perfect fit could create a reasonable probability of success (3).

In the Cisco case, Integration began long before the deal was closed.

 

Cultural Compatibility and Phase of the Lifecycle 

Experienced organizations look for "Cultural Compatibility" before they make the decision on the deal. Cultural compatibility is not just a matter of geography or Corporate Culture but also is a function of much deeper aspects.  Cultural Compatibility depends on the Organizational Maturity (the Phase on the organizational lifecycle) of both organizations.  It is also dependent on differences in Management style and Corporate Values.

Dr Ichak Adizes developed a holistic model that analyzes organizational growth and development. According to this model, Organizations, just like people, have lifecycles: birth, growth, maturity, old age, and death.

Unlike people, however, organizations however do not have to decline and age. Some organizations remain at or near the high point of their vitality for a very long time, perhaps indefinitely. They can even return to those peaks from stages of decline.

So which organization is growing and which is aging?

1 When Aging Companies seek the Fountain of Youth

Organizations in early aging are usually more than cash-rich. They are cash-heavy. They are conservative and liquid. Their internal units make few demands for investments. The prevailing sense of organization-wide complacency overpowers aggressive aspirations of any individuals. People rarely propose a risk-taking endeavor.  So what type of companies do aging organizations seek?

The aging organization seeks the fountain of youth.   They use their cash to acquire young, aggressive, entrepreneurial companies. And the young ones, tired of trying to get organized, and having to use their own resources to grow, are receptive to their offers. They figure the older company can make things easier because it is bigger, richer and more organized.

What really happens after the merger?  The newly acquired, aggressive, young company spots an opportunity in the marketplace.  It submits a budget and business plan to the board. Because it always takes the board of an aging company a long time to do anything right, by the time it approves the action, it is too late:  the opportunity has evaporated.  The young company- accustomed to doing things quickly – becomes frustrated by the lost opportunity.

.

It then does not take long for key managers of the young company to begin to take off. The young company’s greatest asset, their people, walks out the door at the end of the day, never to return.  The entrepreneurs leave and the aging company appoints one of its own administrators to manage the young company.  It soon kills most of the remaining entrepreneurial spirit.  The acquisition fails and fingers are pointed.

2 The Snake can also swallow the gopher.

However, aging companies are not always the acquirers. Being cash-heavy, they themselves become attractive takeover targets. And what kind of company will want to acquire an aging company?  Usually a young, aggressive company.  In their eagerness to grow, and with arrogance as to their capabilities, young companies have limitless appetites. The actual integration process is like a small snake trying to swallow a large gopher. If successful, the digestion will take a very long time.

In either case it is difficult to make a good marriage. The gaps are too big. When the aging company buys a young one, the latter suffocates. Rituals, budgets, approval procedures and very, very slow decision – making processes replace excitement, flexibility and quick decision making. When the young company tries to digest its prey, it may sacrifice its own growth momentum and orientation for several years.

3 Diagnose the gaps and differences

Diagnose the gaps before the deal is signed. Cultural gaps, lifecycle gaps and top management mentality gaps should be diagnosed before the merger takes place.  Smaller gaps will allow the creation of a smoother and less painful integration process.

GE Capital's experience is a good reflection of this point:  "For many years, GE Capital, like many other organizations, proceeded under the assumption that integration starts after the deal is closed…. Unfortunately, that approach to integration was less than effective. Integration was slow and costly. There were constant surprises about peoples' reaction to being acquired, and financial returns were often hindered by delays in putting the companies together. In some cases, when the acquisitions did succeed, it was…because the acquired company was left alone and not integrated intoGE Capital"(4). Today, GE Capital begins to plan for integration as the very first discussions regarding the acquisition begins.

The way to achieve this is through a methodology that allows both organizations to map existing potential improvement points and analyze where is the organization on the lifecycle. Diagnosing both organizations will allow top management and owners to look for elements of compatibility and create the necessary plan to close the gaps that can be closed.  Thus, before the merger agreements are signed, the initial integration plan should already exist. In an organizational merger it is not a sin to live together before you get married.

But, finding the right person does not guarantee a successful marriage. You've got to "work on the relationship" to make it a successful one. Same thing is true for the M&A process. Once the documents were signed, that's when the real work begins.    

Structure, Structure, Structure

Structure is the key to success: After an acquisition, people are worried:  "What happens to me?" is critical for everyone. This issue must be addressed.  If we view organizational in terms of a needs hierarchy, people first need to have certainty about their position.  Then they need significance.  They need to know they matter to the organization and that have value in the larger scheme of the enterprise.  If they don’t get their significance from the organization, they will take it themselves.   The result:  jockeying for position, power plays and political infighting.

Thus it is extremely important to explain to the people the process to determine the new organizational structure. It is imperative to build the new structure in a participative team that will include some of the brightest and most influential people. Obviously, everyone has some level of self-interest in the discussion and is not totally objective. However, with skillful facilitation of the process and the right structural methodology, this problem can be overcome.   Only then can teamwork take place which will create strategies that will lead to results. 

 

Organize around Profit Centers to create clear Accountability

Experience has shown that structuring around profit centers (by Markets, products, geography, or combinations of these parameters) is the best way of maintaining focus in the merged company while not losing the necessary contact with the market. Accountability is a key factor to create a clear and workable structure. Accountability will be achieved by continuously striving for transparency at all organizational levels of the merged entity.

Create a parallel structure (because Integration management is a full time job) 

Some organizations form transition teams that report to the newly formed Executive Committee, others appoint a full time Integration Manager. One thing is clear: a lot of work needs to be done in a very short period of time. Integration is time consuming and demands a lot of management time. The best possible mechanism is a Parallel Structure. This is a management team composed of key executives and managing the transition process. We can not forget that the merging organizations must compete in the market, preserve its customers and revenue and at the same time build its foundations rapidly.  The job is a tough one and many are unsuccessful. When Northwest Airlines and Republic Airlines merged in the 80's, departures on time dived from 85 percent in both Airlines to 25 Percent in the merged Airline (5). The threat is a real one. Thus the Executive Committee runs everyday decision – making and the parallel structure manages the transition. Obviously some of the members of these 2 teams are the same. This assures the organization that the two management structures are aligned. The left brain and the right brain speak to each other.   These two mechanisms are needed to conserve energy rather than letting it escape and cause de-focusing. You should keep the two management processes separate so that the Integration process gets the energy level it deserves.

The Critical Short Term: Fast is never fast enough when it comes to the integration process. Since anxiety grows and rumors start spreading, speed of implementation is a critical factor. The longer it takes to create clarity, the lower is the probability of a successful transition. “Change is expensive and delay can be catastrophic. A prolonged transition adds cost, slows growth, destroys profit and decreases cash flow. It prolongs the pain and reduces or postpones the payback. There is no value in prolonged transition” say merger experts Feldmann & Spratt (1999). To quote John Chamber from Cisco "One calendar year  (in transition) is equivalent to seven years of normal growth and so you have to move at an unbelievable pace"

Customer Retention:  A prolonged transition has a detrimental effect on customer satisfaction and retention. Energy focused inward into the organization comes at the expense of satisfying customer needs and expectations. Customers who notice the post- deal deterioration will quickly find alternatives.

People Retention: people will be concerned with key personal issues such as "do I still have a job? Is my job the same as before? Can we trust what people from the other companies tell us, can we trust top management, can we trust the new owners?" This is a great opportunity for competitors who try to recruit professionals with all kinds of offers, bonuses and incentives.

 

Communication, language and culture

Making the information diffusion into the organization is a critical priority of the Parallel Structure. It requires the creation of dialogue and interaction to create clarity and work on the cultural differences between the merging organizations. Common language is critical and will be created by reinforcing the integration process through shared management workshops, team building processes, shared (and simple to communicate) goals.

 

Conclusion 

A huge percentage of M&As fail due to inadequate integration efforts. Looking at the process with the marriage analogy allows management to identify the critical issues for a successful marriage and partnership:

Selecting the right partner, diagnosing differences and creating a plan to deal with them, creating a full time parallel structure to manage issues of structure, customer and people retention, communication and processes are all critical for a successful integration process. But even more critical is the understanding that the integration process is actually a matching process that should start much earlier than the actual “marriage” and also end much later than the merger act itself.

Bibliography

(1) Feldmann & Spratt, 1999, Five Frogs on a Log.

(2) A.T. Keearney, Global PMY study, Dagbladet, Denmark

(3) Ashkenas, Demonaco & Francis, 1998, Making the Deal Real: Hoe GE Capital Integrates Acquisitions. Harvard Business Review.

(4) Adizes, 1998, Managing Corporate Lifecycles

(5) Anslinger &  Copeland, 1996, Growth Trough Acquisitions: A Fresh Look, Harvard Business Review

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