Why M&A Are Usually Costly Mistakes!

2017 was the biggest year for Mergers and Acquisitions (M&A) according to Thomson Reuters, setting the record for the most M&A in a calendar year. More than fifty thousand deals were executed worldwide, worth in excess of 3.5 Trillion US Dollars. The appeal for M&A is usually due to the potentially reduced costs of doing business along with the increase in revenue from a greater market share.

The 3 biggest deals that closed in 2017 were:

·      Telecom giant CenturyLink merged with service provider Level 3 Communications, a deal worth $34B, making it one of the nation’s largest network service providers.

·       Intel acquired machine learning company Mobileye for $15.3B in a bid for autonomous driving technology

·      Amazon snatched up Whole Foods for $13.7B in an attempt to dominate the market of fresh produce and become a more integral and routine part of their customers’ lifestyle. To that end, they immediately proceeded to slash the prices of Whole Foods’ items by up to 40% post-acquisition.

However, behind every success story is a host of failed M&A nightmares that cost CEOs their careers. Case in point:

·      Microsoft rued the acquisition of Nokia for $7.9B in 2014. They never recovered after the failure of their Lumia line of phones, in large part due to lack of developer and carrier partnerships needed for the phone to take off. Google regretted purchasing Motorola for $12.5B in 2011. After only 2 years, Google sold Motorola to Lenovo for $2.9B.

·       eBay acquired Skype for $2.6B, with the idea that more enhanced communication will help buyers and sellers better connect. The outcome was less than spectacular, with users of the website not having any real reason to communicate in any other way besides email. Time Warner’s $164B merger with AOL had an agenda of augmenting their value-add and becoming a powerhouse, but lack of a clear strategy and cultural mismatch eventually led to a $45 billion write-down followed by a $100 billion yearly loss.

Factors Affecting Success of M&A:

Depending on whose research you choose to rely on, mergers have a failure rate of anywhere between 50 and 85 percent. Professionals who have lived through it know that M&A are generally gruesome and traumatic experiences that make sense on paper but, more likely than not, end up as very costly mistakes. So why is this the case?

Financial Factors:

·      Oversight during due-diligence – Due diligence does not always unearth pertinent information due to the speed at which they are carried out. Furthermore, an entirely wrong set of people carry out this essential activity—bankers. Bankers are incentivized to push the deal through, and hence put everything in a favorable light.

·      Inaccurate evaluation of assets – The numbers and assets that look good on paper may not have the desired effect on the business. This could be due to the fact that the assets are dissimilar to what has been promised or are obsolete. 

·      Inaccurate estimates of integration and a high cost of recovery – Post-merger activities are arguably more crucial than all the steps that come before the merger. Costs that will be required to optimize the post-merger operations can be huge.

Human Factors:

·      Wrong motives – Mergers and acquisitions should be solely carried out in service to the addition of value to the company and not to stroke the ego of the CEO.

·      Momentum – Once the initial discussions get underway, it is tough to deter the inexorable momentum of the act. Many CEOs consider it a sign of weakness to pull back. Confirmation bias and peer pressure is a genuine threat!

·      Less involvement from owners – Appointing M&A advisors is the norm. However, if the business owners and stakeholders from both parties stop partaking in the formalities, it can spell disaster for the deal. 

·      Negotiation errors – Cases of overpaying for acquisition are also rampant in almost all industries.

·      Post-merger politics – Post-merger political quagmires with your new colleagues, is an utter waste of energy, resources, and company time.

Cultural Factors:

·      Cultural mismatch and lack of integration – Culture, essentially, is nothing but “The way things are done around here”. Organizations formalize all this in policies and processes and live it on a daily basis, wrapping everything in an intricate layer of relationships and mutual understanding topped off with a sprinkle of corporate politics. There is a deep-seated understanding amongst the various stakeholders. But do these understandings survive the merger? How many corporations do cultural due diligence before a merger? And, most importantly, what are the ways in which we can carry out corporate cultural due-diligence?

·      Inaccurate identification of core people and projects – It is not just a matter of identifying synergies at the start of the merger and convincing the people across the boardroom table that it would be in a mutual benefit to merge. Core people, processes, and projects need to be identified and given a priority.

Based on numerous studies, researches, and white papers, conflicting culture appears to be the single most important factor that leads to an unsuccessful merger or prohibits the delivery of anticipated synergies and benefits.

Cultural Due Diligence:

Why is organizational culture so important? Even in the rapidly changing corporate world of today, employees get used to doing things in certain ways. Organizations devise structures, systems, and procedures for getting things done, and they become part of the way of life.

However, if the way things are done in organization A is significantly different from the way things are done in organization B, one can immediately see the potential for conflict, disharmony, and confusion. We often see, in these situations, that the dominant partner or the acquirer tries to impose its way on the other party. However, there may be absolutely no evidence to suggest that their way may be right for the new partner. It may not even have been the best solution for the original organization in the first place!

In the mid-nineties, there was a much-heralded proposed merger between Swedish and French automobile manufacturers. As it happens, an early version of the Verax diagnostic tool “Organizational Transitions (OTI)” analysis showed that there was little compatibility between the two organizations in these areas. The Sub-Group Comparison Report identified areas of potential conflict about how things were done, where priorities differed, where different values or philosophies existed, and whether structural and systems (in) compatibilities existed. In the end, the merger was shelved.

There is little excuse for not undertaking such cultural due diligence!

How to Determine Compatibilities, and Define Needs?

An organizational analysis such as Verax’s Organizational Transitions will show the exact level of compatibilities between the organizational culture, leadership styles, and practices, strategies and values, systems, and processes of the merging companies.

It will also analyze the effectiveness of various market place strategies – of both organizations - and quantify in financial terms the added value. It will also show the resultant impact on various organizational results such as customer service, sales growth, staff satisfaction, etc.

While high-level plans are often made relating to production capacity, distribution methods, and marketing, other than in overview, little attention is typically paid to how the organization will actually operate and deliver.

Begin any merger with the end goal defined first!

The management of the organizations being merged can be proactive in defining what the new organization needs to look like – what is its vision, mission, and strategy and what values would or should underpin how things are done?

Any merger or acquisition by definition creates a “newco”. Once the Board has defined the mission, strategy, values, etc. of the newly merged organization they would then create the “Desired State OTI” which quantifies and represents graphically how things need to be done in order for the new organization to achieve its new strategic objectives.

With these defined, they can then articulate what the Desired State would look like in terms of structures, leadership, systems, processes, and procedures that need to be put in place in order to efficiently and effectively achieve their strategic goals.

The Actual State of the whole new organization produces a Full Report and Gap Analysis showing clearly what has to be done and where in order for the whole new organization to achieve the new set of strategic objectives and to reap the most benefits form the merger.

This would almost certainly result in a more functional organization that does not waste a lot of energy on debilitating infighting. It would mean that the merger actually unites rather than divides. This approach provides the opportunity for leaders to lead and to get people excited about the vision of the new organization for the future.

“Organizations are people as well as cultures.” And both need to be addressed for a successful merger.

Gopal Sharma is Managing Partner at Score Advisory, focusing on improving organizations' performance through diagnosis, strategy management, Balanced Scorecard deployment, and Business Excellence. For any comments, feedback, or inquiries, please write to [email protected].   

Shashank Sharma is a graduate from IESE Business School (Globally Ranked 3rd, Bloomberg 2017,) having had experience in the construction, IT, and management consulting industries across multiple geographies. Please visit his website or write to [email protected] for any comments or feedback.