After a Merger, These 3 Inefficiencies Can Actually Be Assets

Strategic inefficiencies play a surprising role in the success of technology acquisitions. Research involving hundreds of organizations and interviews with executives reveals that certain inefficiencies in post-merger integration (PMI) can actually propel growth. Key inefficiencies identified include: mirror teams where staff from both companies work together, increasing complexity but enhancing integration; double incentives, offering additional rewards post-merger to align goals at the cost of higher expenses; and co-location, prioritizing costly in-person meetings for better communication and relationship building. The study concludes that these short-term inefficiencies can lead to more effective long-term corporate growth, challenging the traditional focus on efficiency and redundancy reduction in corporate mergers and acquisitions.

Technology acquisitions — such as Facebook’s acquisition of WhatsApp, IBM’s acquisition of Redhat, or Broadcom’s acquisition of VMWare — are increasingly common and are particularly powerful for propelling growth. They account for approximately 20% of all acquisitions, help firms control nascent markets, pursue strategic renewal, gain access to new knowledge, and advance technological capabilities.

For more than a decade, we have been studying why some acquisitions are more successful than others. We have collected data on hundreds of organizations and interviewed dozens of executives on three continents, with a special focus on the post-merger integration (PMI) of the acquiring and target firms. Our research, which is forthcoming in the journal Strategy Science, reveals the surprising insight that inefficiencies in the PMI process are often effective when trying to grow. So what lessons does this insight hold for leaders wishing to effectively manage corporate growth?

Inefficiency #1: Mirror Teams

Mirror teams means that both the acquiring company and the company being acquired assign their managers and employees to work together on the same teams. Mirroring occurs to effectively merge the two companies. In one case we looked at, the company formed mirror teams for combining the businesses by selecting a leader from both the acquiring company and the company being acquired. These leaders, called “synergy realization owners,” directed mirrored functional teams comprised of leaders from both companies. This mirrored approach helped ensure the two distinct organizations blended well together and allowed both companies to actively lead the integration process, rather than one following the other.

Of course, mirror teams are an inefficient way of organizing and staffing integration teams. Compared to a more conventional integration team staffing that solely relies on an existing team of employees from the acquirer, and thus on an existing proven reporting structure or way of interacting, mirror teams involve more staffing from separate companies (acquirer and target). The mirrored nature of teams means more people and often more novel types of teams and teamwork between the two companies. Having mirror teams can therefore be time-consuming, complex, and costly since there aren’t established ways of working together or clear reporting lines. However, having mirror teams during the merging process can be helpful in mitigating common coordination challenges during PMI. The reason? When managers from both companies work together, it helps to build trust, create important networks, share knowledge, and uncover fresh and fruitful ways to collaborate.

Inefficiency #2: Double Incentives

Double incentives refers to the practice of adding new rewards after a merger, on top of what employees already receive, to encourage teamwork. This approach means that efforts to work together, which weren’t rewarded before, and might have been overlooked due to focus on individual or departmental goals, are now recognized and rewarded. This strategy helps align the goals of the acquiring and acquired companies, fostering better relationships between them and decreasing reluctance to collaborate.

In one acquisition we explored, each firm had incentives in place to improve its own performance. But following the acquisition, the acquirer initiated additional new incentives to promote the sharing of sales leads across the companies to fulfill a major objective for this acquisition — the pursuit of revenue synergies through cross-selling. The double commissioning provided financial motivation for employees to collaborate and cross-sell, while at the same time, existing incentives meant that managers still pursued their own firm’s sales.

Once again, double incentives are inefficient since they add significant expenditure for the overall company. They lead to the company sharing a higher proportion of the income generated with their managers and employees, compared to the baseline of merely providing the incentive that existed in both companies before the acquisition. But, while inefficient, double incentives are effective since they focus the combined team on producing synergistic revenue in addition to the standalone revenue. A leader working on the acquisition remarked: “[Double incentives] increased cost…but we were much more focused on…revenue….” Double incentives also appear to reduce friction and increase understanding between managers of both the acquiring and acquired companies, leading to better teamwork.” A manager involved in the deal stated: “The double-commission thing, I think, helped a lot [in getting people to work together].”

Inefficiency #3: Co-location

Being in the same location is also very important. In one merger we studied, the managers from both the buying and the target companies met in person frequently, sometimes every week. A leader mentioned, “We met once a week, usually at the office of the company we acquired.” These meetings helped build personal connections as they talked about merging processes, coordinated their efforts, and figured out solutions to problems. One manager said, “Meeting in person was key to building strong relationships…it definitely helped.” Another executive noted that when counterparts don’t know each other, or necessarily trust one another, being able to read body language becomes crucial. Meeting people in person, face-to-face, is much better for this than a video conference or a phone call. It’s easier to make difficult strategic decisions, for instance, when you can see the other person’s emotions and reactions, like if they are fidgeting, smiling or rolling their eyes.

Given the abundance of virtual communication tools available — not to mention the cost of getting dispersed staff together in the same spot-— in-person communication is an inefficient way to organize interactions between acquirer and target managers. It not only increases the direct integration cost, and is thus financially inefficient, but it also takes up critical time of managers to travel and (re)adjust to time zones, which is further inefficient for both managers and firms from a productivity perspective. Yet, co-locating managers of the acquirer and target during post-merger integration enables them to communicate more successfully with each other, while facilitating knowledge flow, and helping them to build trust and relationships.

Overall, our counter-intuitive insight is that more short-term inefficiency in resource commitments post acquisition can be more effective in the longer term. Although research and practice suggest that firms should use their resources efficiently to maximize performance, our work suggests that an overemphasis on reducing redundancies leads to lower, not higher, corporate growth.

FOOD STRATEGY INSTITUTE NEWS

As a food industry business owner, CEO or CFO, what likely keeps you awake at night, especially in the second half of the (fiscal) year, is the profitability level of your company. How are you going to increase your profitability? Take a look at the four most common approaches food manufacturing companies take to try and increase profitability that never seem to work very well… And one that does.

Read the article: https://foodstrategyinstitute.com/insideout/