134. Managing Mergers and Acquisitions

Concept

Most mergers and acquisitions fail.³⁶ Typically, that means not meeting their stated financial goals within five years. In my consulting, I have worked with many companies who as a part of their strategic plans acquire and sell subsidiaries. The two main strategic growth patterns are by acquisition and by internal sales growth. At the same time, I have been surprised by apparent lack of a disciplined process for merging a new company into the parent.

I found a company once that had made 23 acquisitions in 18 years and in which four of those acquisitions were larger than the parent company itself. I spent two years interviewing people and learning how they had managed to be so successful in their efforts. They had a unique process, which I will describe here.³⁷ I came to believe that the process was extraordinary, well planned, and highly successful.

First, the senior management determined that they would never make a hostile takeover. They didn’t want to deal with employees of a company that didn’t want to be acquired.

Second, senior management wanted to manage the social aspects of the merger as well as the financial ones.

Third, the acquiring management team wanted to shorten the window of uncertainty for employees on both sides as much as possible. Their VABE was that the uncertainty about whether one had a job was de-energizing and detrimental to the firm.

Fourth, management wanted to use the best talent from both sides. They did not accept the usual notion that only the acquiring side’s managers would be in charge. They interviewed managers from both sides for every possibly redundant function to find the best talent.

Fifth, in order to keep the window of uncertainty as short as possible, they designed cross-company merger teams for every function or activity that was implicated in the merger as a possible redundancy. The team members were already being socialized into the new larger parent company.

Sixth, the merger teams, as many as 23 in one acquisition, began meeting as soon as the merger was agreed upon, but well in advance of the actual signing.

Seventh, they chose leaders of the merger teams from both sides depending on the perceived superiority of the individuals. Thus, the teams were led by managers from both companies, not just the acquiring company.

Eighth, the merger teams made plans to merge their corresponding departments that could and would be implemented within two weeks of the final, formal signing.

Ninth, when the final agreement was signed, the merger teams sprang into action. The guideline was, “if you have a job after two weeks, you can relax, the layoffs will be over.”

Tenth, the senior management of the acquiring firm (the COB and the CEO) visited every unit of the acquired firm. In these visits, they distributed to all employees a handbook describing the charter of the parent company. Then they held an all-hands meeting in which they introduced themselves and went through the charter of the parent company: its mission, its vision, its values, its strategies, and its measurements. Then in the afternoon, they went around the plant and shook hands with all the employees and answered questions. They repeated this process for every acquired unit, perhaps 30 to 40 times. You can see that this might take six months after the acquisition was finalized.

As a result of this process, the company’s acquisitions all folded into the parent company with a minimum of disturbance and resistance, passive or otherwise. One plant manager said, “This plant was built 50 years ago. This is the first time since then that a senior officer has set foot in the place. It’s really refreshing! They actually know who we are!”

My takeaway from this research project was that while most acquisitions fail, they don’t have to. And they are in fact likely the result of inadequate management preparation and planning. I worked with the MAC Group at one point, developing this sequence into a model for use in other firms, a summary of which appears below in the Diagram section.

There is a lot of interest these days in post-merger integration. See the additional references below. To my mind, the very phrase indicates the problem: post-merger is too late. The process outlined above shows that successful mergers begin well before the merger formally occurs. Of course, in some cases, one must comply with regulatory constraints about coordination with potential acquisitions.

Example

I had a client once who was growing by acquisition. Yet in the seminars, participants frequently mentioned how the acquired units seldom seemed to work well with their counterparts or the parent company. They described what seemed to me a rather ad-hoc and helter-skelter plan for the post-merger acquisitions. Like most companies, they focused on the financial redundancies, let the acquiring company managers dominate, and paid little attention to the collision of cultures that took place each time—the assumptions being ours is the best way, and they will become like us.

After one seminar in which there were many participants from various acquisitions, I submitted my invoice as usual. My counterpart came back asking me to prepare 23 invoices because they didn’t have a centralized way of billing for all of the new subsidiaries. That was very unusual for me. When I asked for their addresses, I was told that they didn’t have them. Hmm. So, I am supposed to find out on my own how to bill 23 different participants with no known address or contact information—because the firm had not adequately planned the post-merger integration of each acquisition.

On a larger scale, I am reminded of the events following the second Iraq war. The President declared “Mission accomplished” when in fact, the hard work was just beginning. Our apparent lack of planning seemed to magnify the problems that arose subsequently to the end of military operations.

Diagram

Source: Adapted from consulting work done by Jim Clawson with the MAC Group

Challenge

Additional References

In the end, leadership must be about creating results. What those results should be has become an increasingly challenging question. First, what are the intangible asset pools I have mentioned. Second, what do we mean by results?

Kaplan and Norton at the Harvard Business School developed a powerful way of thinking about the primary role of executives—the ability to transform intangible asset pools into tangible financial results. In the end, this is where the rubber meets the road, where an executive’s worth becomes apparent. This section will introduce the basics of recognizing what your intangible asset pools are and how you can think about converting them into financial results.

³⁶ http://lakeletcapital.com/blog/2017/3/15/success-and-fail-rate-of-acquisitions

³⁷ The case ultimately was not released, so I will leave the name of the company anonymous.