Since the late 1990s, acquisitions have become as commonplace as the reengineering crusades of the early/mid- 1990s and the quality improvement programs of the 1980s. When the economy is strong, acquisitions, often paid for with inflated stock, are seen as the “growth engine of choice.” When the economy turns south, executives from healthy companies, in a quest to solidify market positions in preparation for the return of good times at the cycle’s end, pick up companies at prices too good to resist.
I use the term “acquisition” because I believe that mergers are purely a public relations fabrication. All unions announced as “marriages of equals” (e.g., Daimler and Chrysler, Travelers and CitiCorp, AOL and Time Warner) were either acquisitions at the time of the nuptials or morphed into them over time.
Research has shown that over 65 percent of acquisitions fail to add shareholder value and nearly a third actually destroy it during the first year.1 The remainder of this paper outlines the causes of failure and the actions that can be taken to avoid them.
Pitfall #1: Failing to capitalize on the strategic reasons for the acquisition.
An acquisition is warranted if it is the fastest and/or least expensive way to accomplish one or more of the following strategic objectives:
- Add products/services to the portfolio.
- Add markets (individual customers and/or entire industries, demographic groups, or geographies).
- Add or expand a distribution channel (e.g., branches, the Internet).
- Broaden or deepen capabilities (skills, business processes, equipment, facilities).
- Enhance brand equity.
- Develop the critical mass and/or economies of scale necessary for success.
- Eliminate a competitive threat.
You will note that “fulfill executive ego needs” is not on this list.
So, the first set of questions for the acquirer is:
- Why did we make this acquisition? What did we buy?
- Why do we need to strengthen ourselves in this area? (e.g., Why do we need new services or new markets or new capabilities or new channels?)
- Why did we decide to acquire these services/customers/capabilities rather than growing them ourselves?
- What synergies and conflicts are there with our legacy business?
With the backdrop of the answers to these questions—which are as important to the acquiree as to the acquirer—the executive team must, as soon as possible, get on the same strategic page by answering these questions:
- What services will we and will we not offer?
- What markets will we and will we not serve?
- In which of our services and markets will we invest the most money and time?
- What competitive advantage(s) will enable us to win?
- What capabilities do we need to fulfill this vision?
- What indicators—financial and non-financial, lagging and leading— will we use to measure our strategic success?
Without the underpinning of a strategy, acquisition integration is a journey in the wilderness.
Pitfall #2: Assuming that integration is solely a matter of financials, legalities, structure, and staffing.
By the time the deal has closed, the lawyers and accountants have slogged through the mind-numbing due diligence process. Any accounting irregularities and legal exposures have been identified and factored into the purchase price.
Even if the objective is not economies of scale, the opportunity for employee reduction or redeployment has undoubtedly been considered. So, too, have questions regarding who will run the new organization and the reporting structure in which people will work.
However, most acquisitions fail for reasons that are not in the numbers, the contracts, the organization chart, or the headcount.
The acquisition critical success factors are displayed in the Enterprise Model that appears in Figure 1.2 Triumph in the external environment—defined during strategy formulation—is a function of the nine variables that appear in the box labeled “The Business.”
- Leadership: How will we align the roles, abilities, and personalities of those who will take the combined organization into the future?
- Strategy: How will the two companies agree on a unified strategy that answers the questions listed under Pitfall #1?
- Business Processes: How will the fundamental flows of work—service development, loan processing, back office operations, relationship management, financial reporting, recruiting and hiring, planning—be aligned without undue time and expense?
- Goals/Measurement: What will serve as the indicators of strategic and operational success and how will those metrics be cascaded throughout the organization?
- Human Capabilities: How will the skills, knowledge, and values of the two companies’ workforces be integrated, deployed, and developed?
- Information/Knowledge Management: How will the automated and manual information systems be dovetailed without years of pain and mountains of investment?
- Organization Structure: What structure will best support the strategy and business processes?
- Culture: How will the ways the two companies do business—in areas such as participation, trust, risk orientation, pace, communication, and rewards—be melded? (This is the 900-pound gorilla of acquisition success or failure.3)
- Issue Resolution: How will the two companies solve strategic and operational problems, make decisions, and implement plans?
While all of these variables are critical, some are more important than others in a given marriage and some need to be addressed before others. It is essential that representatives from both the acquirer and acquiree participate appropriately in the diagnosis, planning, and action addressing the priority variables.
Pitfall #3: Underestimating the resource commitment necessary for integration success
Estimate the resources required to integrate the nine variables. Then, triple it.
Even if the businesses are synergistic or will run independently, the time consumed by integration can bring an organization’s day-to-day business to its knees. And, it doesn’t just make demands on senior executives and staff people in Finance, Corporate Development, Planning, and Legal. An acquisition requires a significant commitment from those in Operations, Marketing/Sales, Human Resources, and Information Technology.
The only way to circumnavigate this potential sinkhole is through rigorous project management. A high-powered executive should be dedicated, perhaps full time, to leading a cross-company, cross-functional team that:
- Identifies and sets priorities on the full portfolio of integration projects, beginning with the categories listed under Pitfall #2.
- Defines the objectives, activities, and resource requirements of each project.
- Assigns the “best and brightest” as project sponsors and project managers. (These are the people who everyone wants for every initiative; however, what endeavor is a better use of their time than the successful melding of these two companies?)
- Establishes a realistic sequence and schedule of projects and activities within them.
- Surrounds projects with insulation by continually asking:
- What could go wrong?
- What can we do to prevent it from going wrong?
- What will we have ready to minimize the damage if it does go wrong?
- Monitors progress like a hawk and quickly makes the inevitable mid-course corrections.
- Ensures that the skills, culture, and structure support effective, efficient project execution.
Figure 2 displays the factors that influence the success of acquisition-driven projects.
Pitfall #4: Failing to balance the structural and human dimensions of the change effort
Acquisition integration involves a structural dimension that is made up of components such as:
- Business processes
- Reporting relationships
- Policies
- Information systems
- Compensation plans
Perhaps even more important—because it has as much impact and is easier to overlook—is the human dimension that encompasses:
- Communicating the what/why/how of the integration
- Building commitment to the changes
- Installing the culture (values, rules, rituals, practices, norms, expectations, reward systems) that will support the newly-combined organization
Figure 3 displays the Performance System, a template for addressing the needs of the teams and individuals embarking on the acquisition journey.
If the systems are in place, but the people aren’t on board, the acquisition will stumble and most likely fall. If the people are energized but forced to do battle with irrational systems, they will retreat to the old way of doing business.
Myriad acquisition activities lie beneath these four pitfalls. However, they represent the initial buckets of integration effort. Though the acquisition challenge is (and should be) humbling, its threats and opportunities can be addressed by deploying the right people, armed with the right tools. What is more important than capitalizing on the full potential of this acquisition?