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Can Acquisitions Work?
Copyright (c) 2010-2023 Martin Harshberger
With annual merger and acquisition activity in the United States averaging about 1.5 trillion dollars that may seem to be uninformed strange question. Yet according to a number of recent academic studies, between 55 percent and 83 percent of mergers and acquisitions fail to add value to the acquirers.
Companies look to mergers and acquisitions for a number of sound business reasons. Among them are:
To gain market share.
To realize economies of scale especially in declining or stagnant markets.
To gain access to products or services.
To expand geographically.
To facilitate a faster growth rate than through pure organic growth.
If the reasoning behind the acquisition is sound why is the success rate so low?
A KPMG survey found that "83 percent of mergers were unsuccessful in producing any business benefits regarding shareholder value" (KPMG 1999).
A study of 150 major deals led Business Week to conclude that "out of 150 deals valued at $500 million or more about half actually destroyed shareholder value" (Feldman and Pratt 1999).
A major McKinsey and Company study found that 61 percent of all acquisition programs were failures because the acquisition strategies did not earn a sufficient return on the funds invested.
In the first four to eight months following a deal, productivity may be reduced by up to 50 percent (Huang and Kleiner, 2004).
It is not just large companies that fail at the acquisition game, small companies often witness similar results. Despite the reported failures, business combinations often do make sound business sense. It isn't the deal itself that causes the failure rate to be so high; it is the outdated implementation strategies that companies continue to use.
Vast amounts of time and money are spent on an acquisition, nearly all of it in financial and legal due diligence efforts. Typically far less time and effort is invested in pre-deal implementation planning and strategy. Key people issues such as communications, strategic planning review and functional organization are treated as afterthoughts. Most feel "those things will fall into place when we close the deal."
A merger of two companies is very much like any other partnership, just larger and more complex. There are cultures, values, work habits and attitudes that may be long standing and important to both parties. Failure to consider dealing with personnel issues effectively and early in the deal almost guarantees problems with retention of key people, productivity issues and, in worst cases, gridlock in the organization.
Companies that don't have a clearly articulated strategic plan and clearly defined goals, communicated to all levels of the organization, with understanding and accountability at all levels, have severely reduced their chance of success.
These integration issues are compounded exponentially if everyone in the acquiring company is not "singing from the same song sheet." They may well find over time that the acquired company's team isn't even in the same book.
In this situation, employees spend their time with rumors and fear of "waiting for the other shoe to fall." Management then is forced into a reactive "firefighting" mode, rather than a planned and proactive goal oriented mode of implementation.
Frequently, management's goals for the acquisition and its integration strategy (assuming that they exist) are not communicated below the top executive level, for reasons of secrecy. After the deal closes, the strategic direction and integration plans still are treated as closely guarded secrets with little if any communications directed at the department levels for a period of weeks or even months. No news is not seen as "good news," and productivity and employee satisfaction is reduced.
The corollary to reduced employee satisfaction is, of course, reduced customer satisfaction. If you fail to clearly describe the reasons for the acquisition and its expected impacts to your customers, your competitors will certainly do so for you. And the picture painted by your competitors will not be pretty.
In-depth planning and communications throughout involving both the acquirer and the acquire is key. If communications must be restricted prior to the deal closing--as may be the case with a public company transaction--a planned communications strategy must be put in place prior to closing the deal, and must be implemented immediate following closure.
Pre-deal due diligence must include cultural and value studies as well as financial and legal. A strategy must be in place before closing to insure that a strategic partnership of cultures and values is formed and that everyone understands the reasons for the transaction, the impact of their contributions and their roles going forward.
In many business combinations, some employees will be laid off or given new assignments. Bad news delivered quickly and effectively can be more beneficial than good news delivered late and ineffectively. It's all about establishing trust and credibility.
Thus the answer to the question posed at the beginning is: "Yes, if." Yes acquisitions can be beneficial. But they will be only if:
The acquirer has a clear strategic vision for the combined firm and a well considered integration plan;
Both the vision and the plan are shared broadly in the acquiring as well as the acquired company; and
Management rolls up its sleeves to actively lead the transition.
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Martin Harshberger is Managing Partner of Measurable Results LLC. Marty specializes in strategic planning, pre- and post-merger integration, as well as business process improvement. He can be reached at 662-844-9088 or by email at: mailto:info@bottomlinecoach.com His new book Bottom Line Focus is available on Amazon and his website: http://www.bottomlinecoach.com/
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