Merger Problems

As evidenced by the results of the merger mania of the 90s, many industry experts believe, as was the case in the previous decade, that as many as 80% of acquisitions do not succeed, resulting in billions of dollars invested in failure. Because the majority of acquisitions do not meet the original goals and objectives of the acquirers or other conditions change, some 40% of all businesses acquired will again be sold off within three to five years, according to available statistics.

Merger Syndrome

Failure starts with the merger syndrome. The merger syndrome is the common almost automatic reaction that most employees display when their company is acquired. The human reaction in the acquired company is usually suspicion and fear. This merger syndrome has a rapid, negative effect on business performance, and can have lasting effects if it is not addressed in a systematic way within 60 days of the acquisition. More often than not, it is not recognized or it is just ignored.

A Missing Link

During the 12 to 15 months of the acquisition process, a large army of internal and external specialists is available to negotiate and structure the transaction. However, once the deal is done, similar resources are not available to assist in the complex task of managing the transition. It is usually left to managers who have little or no experience in managing such a massive series of changes in the short time available.

The Missing Link in the corporate structure is the professional transition manager. This is the experienced person who understands the strategic goals, has the resources to gather the necessary factual data about the acquired company, and the know-how and track record to deal quickly and effectively with the complex issues of transition management.

Common Mistakes Made By the Acquiring Company

The following are common mistakes many acquiring companies make which contribute to merger failures:

Generally, there is inadequate evaluation of the compatibility of the acquired company in terms of style, structure and business practices. There is often a culture clash between the two companies.

Top management does not have the time to plan the transition in the period prior to closing.

Managers underestimate the negative reactions to being acquired because these usually are not openly expressed.

In an effort to reassure employees in the acquired company, statements are made like Nothing will change, or There will be no changes in management, which immediately undermines credibility.

Management does not appreciate how much effort is needed to gain credibility with the people in the acquired company.

Commitments are made which subsequently are not honored, thus undermining confidence in the new management.

The transition process is too lengthy and because decisions are not made quickly, the negative reactions in the acquired firm become a dominant force.

The transition manager or transition team cannot get access to objective information and are forced to make decisions based on misleading or inadequate data.

Management in the firm making the acquisition is inclined to try to assimilate the new subsidiary into their established way of working rather than adapt and recognize the merits and value of culture in the acquired firm.

The assessment of people to hold key positions in the new combined organization is biased toward employees of the parent and not based on an objective analysis of position requirements and the talents of all available staff in both companies.

Five Simple Rules

There are five simple rules for successful acquisitions, and they have been followed by all successful acquirers since the days of J.P. Morgan a century ago. (Peter Drucker)

Rule One:

An acquisition will succeed only if the acquiring company thinks through what it can contribute to the business it is buying, not what the acquired company will contribute to the acquirer, no matter how attractive the expected synergy may look.

Rule Two:

Successful diversification by acquisition, like all successful diversification, requires a common core of unity. The two businesses must have in common either markets or technology, though occasionally a comparable production process has also provided sufficient unity of experience and expertise, as well as a common language, to bring companies together. Without such a core of unity, diversification, especially by acquisition, never works; financial ties alone are insufficient. In social science jargon, there has to be a common culture, or at least a cultural affinity.

Rule Three:

No acquisition works unless people in the acquiring company respect the product, the markets, and the customers of the company they acquire. The acquisition must be a temperamental fit.

Rule Four:

Within a year or so, the acquiring company must be able to provide top management for the company it acquires. It is an elementary fallacy to believe one can buy management. The buyer has to be prepared to lose the top incumbents in the companies that are bought. Top people are used to being bosses; they dont want to be Division Mangers. If they were owners or part owners, the merger has made them so wealthy they dont have to stay if they dont enjoy it. And if they are professional managers without an ownership stake, they usually can find another job easily enough. To recruit top management is a gamble that rarely pays off.

Rule Five:

Within the first year of a merger, it is important that a large number of people in management groups of both companies receive substantial promotions across the lines that is, from one of the former companies to the other. The goal is to convince managers in both companies that the merger offers them personal opportunities.

The New York Stock Market certainly senses the importance of the Five Acquisition Rules. This explains why in so many cases the news of a massive acquisition triggers a sharp drop in the acquiring companys stock price.

Nevertheless, the executives of acquirers and targets alike still largely ignore the rules, as do the banks when they decide to finance an acquisition bid. But history amply teaches that investors and executives, in both the acquiring and acquired companies, and the bankers who finance them soon come to grief if they judge an acquisition financially instead of by business principles.