When a merger or acquisition is well planned and properly executed significant value can accrue to the combined organizations.
The fact is, however, the results from most business acquisitions and mergers are disappointing. Management covets the gains that consolidation and economies of scale are expected to bring, but the great majority of M&A’s do not live up to their promise. This has been demonstrated by dozens of studies covering hundreds of companies across all industries.
Some thought provoking comments follow:
“70 percent of mergers fail to achieve their anticipated value.” - Weekly Corporate Growth Report
“Most [mergers] fail to add shareholder value-indeed, post-merger, two-thirds of the newly formed companies perform well below the industry average.” – Harvard Management Update
“One-third of the transactions provided marginal returns, while only 17% provided substantial returns to shareholders.” About these figures, one expert said: “That’s a staggering number. That means those organizations were better off before they merged than after they merged.” – Best’s Review/Property-Casualty Insurance Edition
Why do the majority of M&A’s fail to live up to expectations? Mergers and acquisitions fail for a variety of reasons. First, a deal can fail because it was simply not a good idea to begin with. Management may get caught up in the ego-boosting idea of an acquisition, and try to combine two organizations that are better off left alone.
Other times not enough research is done beforehand. Maybe speed is thought to be essential. Maybe internal managers and external agents are discouraged from pointing out potential pitfalls, and a deal goes through without any serious examination and challenge.
Confusing and/or conflicting directions from organizational leadership often leads to poor execution on the part of those directly responsible for implementation.
Frequently there is a failure to manage the “human” or “cultural” side of organizational integration. By definition, all organizations include people; people with skill sets, uncertainties, self-interests, and needs. A great number of organizational integration efforts proceed with too little effort to integrate the people aspects of the businesses. When this happens, the likelihood of failure becomes greater. Study results seem to bear this out:
“By some estimates, 85 percent of failed acquisitions are attributable to mismanagement of cultural issues.” – Industrial Management
“In acquisitions that do fulfill their promise — that really make two and two equal five — leaders paid a great deal of attention to the integration process and, not surprisingly, involved people at all levels of the process.” – Academy of Management Executive
Overall, the costs of an unsuccessful merging of two businesses are significant; including higher expenses, lower morale, increased employee turnover, poor productivity, customer complaints, loss of reputation, and a decrease in “owner” value. Considering the great amount of work necessary to put a deal together, and the heady sense of optimism formerly experienced among the dealmakers, the financial cost of losing anticipated merger savings may be minimal compared to the loss of respect for leadership and general organizational turmoil.
Identifying a target business, structuring the deal and obtaining the financing are all important and difficult aspects of any M&A transaction. Arguably however, the most difficult part of any such transaction is the effort to combine two or more separate organizations into one, efficient organization that can deliver the positive operating results originally envisioned for the combined business.
The effort to integrate different organizations and successfully manage through the transition period generally requires actions above and beyond those required for managing normal business activities. If you find yourself to be part of an organizational integration effort, please consider the seven key imperatives identified below:
1. Leadership must articulate a clearly defined vision for the future of the combined organizations
2. Potential difficulties related to the blending of different cultures must be recognized
3. Both transition and ongoing roles and responsibilities must be quickly and clearly defined
4. The skills and abilities of the people involved have to be accurately assessed in a short period of time
5. Formal project management activities must be established to ensure thoroughness, timeliness and accountability
6. Leadership must provide a vehicle for “steering” the integration process
7. Formal, open and integration specific communication channels must be created and maintained for use by everyone involved to facilitate quick and informed decision making
The effective integration of two or more organizations requires vision, careful planning and open communications. When organizational leadership takes steps to ensure an effective integration process at every level of the business the chance to realize promised results, and build value added competencies throughout the new organization, will be greatly improved.