Pitfalls and Potholes of Acquisitions

“Double in size, easy-peasy.”

Early in my consulting career a client acquired a competitor. The post-acquisition process had fallen apart, people from both firms were leaving, combined sales declined for three straight months, and the exec didn’t know what he was losing because he closed down the acquired company’s systems before all the data had been migrated.

This leader vented. “’Double in size overnight,‘ the investment banker said. ‘Easy-peasy.’ The board bought it. I did too, but I’m stuck with this mess.”

At the time, I worked for an organizational consultant, who took senior people off for an ocean rowing exercise to demonstrate teamwork. It helped, but the relationship that formed there between the two IT managers and the controller produced the best outcome. Those three people left the seaside and worked through the weekend to “get some real numbers to manage the business.”

The numbers were worse than they thought, but they people’s attention. The execs called key customers and suppliers, and started a retention process to ensure that people with critical skills stayed. The firm survived.

“Mergers suck!”

Later during process improvement training in a serial acquirer, participants were asked to introduce themselves, “name, job, a little known fact about yourself to help us all get to know each other.”

“Hi I’m___ from____ department. Mergers suck!”

The hour we lost in discussion following demonstrated that this wasn’t  a “little known fact” in this company. Everyone had a story of short-sighted decision making, being “lied to” or disrespected, of waste,  loss of customer-focus, squeezing suppliers, and a general lack of trust of each other and management.

Conflict is natural when you combine two businesses. Conflict can better ideas. However, if you deny conflict, cover it up with superficial MNBS (this company’s acronym for “make nice bullshit”) conflict doesn’t go away – it intensifies.

“If you’re so great how come we bought you?!” This came bursting out repeatedly at the department head level in a what senior executives described as a “merger of equals.”

I witnessed the CEO of this Pittsburgh bank scream at the IT manager of the acquired Philadelphia bank, “When I said we’d pick the best systems, I meant OUR SYSTEMS!”

Mergers suck because they are founded on a lie; there are no mergers. There are only acquisitions; one company buys another company. Sometimes when the companies are the same size, the acquirer may take an enlightened view by treating the acquired firm equally than to protect value. It still isn’t a merger.

As a consultant, I did some work on customer-supplier partnerships, and once I created an alliance between two competitors going after a larger piece of business than either could have handled on their own. There are several differences between these structures and acquisitions, even those called mergers.

• The scope of these agreements is limited and spelled out. The scope may be restricted to certain areas of the business or may be limited by a fixed time duration, but there are limits to the combination.
• The interests of both parties, what each contributes and what benefits each expects are also clearly delineated.
• Even after the deal is closed, either party can walk away. There is often a requirement for notice or penalties for lack of delivery, but there a process for dissolution of the deal.

Compare this to an acquisition:

• Scope is total.
• Very often each party’s reasons for the combination are not even talked about. Acquirees who agree to be acquired to have access to investment often find that the acquirer has so borrowed so much to pay for the acquisition that they can’t afford any new investment.
• Once the deal is done, unhappy acquirees are told “You took the money. Deal with it!” Spin-offs do occur, but usually only after significant losses.

The Danger Zone – pre-close to the first 100 days

Executives may have signaled intentions to sell and interest to buy for years. Thorough due diligence may have gone on for months. Investment bankers may have conducted an auction or a detailed multiparty negotiation. However, once an acquisition is announced, chaos ensues. Fifty-two pick up, the cards are in the air.

1. Shareholders of the acquired company hold the stock as it rises and then sell just before the close. The acquirer’s stock often drops precipitously, making the deal more expensive.

• Customers worried about delayed deliveries and price increases lock in another source of supply.
• Suppliers worry about maintaining prices in the face of increased negotiating power.
• People worry about losing their jobs.
• Competitors worry about your increased size, sale or scope. They may buy each other or your largest supplier, or acquire your customers with deep discounts on long term contracts.
• Headhunters and area employers start recruiting your stars.

This all happens while the acquiring company is learning the acquiree’s business – things that didn’t show up in due diligence – and the acquiree is learning about the differences in “culture.”

This is a critical time. It is a time when neither party has as enough information. The temptation for leaders of both companies is to hide their ignorance with secrecy, double-speak and platitudes.  This never works.

Things Leaders in Mergers & Acquisitions Should Never Say

• “Don’t worry.” (Of course, people will worry. Maybe they’ll worry less if they have information, but they’ll worry anyway.)
• “Nothing will change.” Of course, things will change. Otherwise why did you do this deal. Trying to lessen worry with an untruth isn’t helpful.
• “No one will lose their job.” Come on. Even with the best redeployment plans, there will be redundancies. If you must promise something – promise that those let go will be notified as quickly as possible and treated fairly.
• “This is a merger of equals.” Even with the best of intentions, even with the best integrations processes, this will turn out to be a lie.
• “We will share information on a need to know basis.” Yeah, that might work in the CIA, but in business, people resent being told that they aren’t important enough to be informed. Sure, some strategic information will need to be kept close to the vest, but a much better posture is “If we have information that affects you, we will tell you what we know as soon as we know it.”
• “Don’t believe the rumors.” When my wife worked for a small hospital acquired by a large University healthcare system, she had an epiphany. “the rumors are always true.” No matter how much you try to hide information, people talk and the secret is blown. It’s also true that, in the absence of information, people make stuff up that is worse than the truth. Get a handle on rumors. Create an anonymous rumor hot line where people can record a rumor and you can respond within a day.
• “We are looking for synergies.” The word synergy means a combination greater than the sum of the parts. Unfortunately my consulting brethren have changed the meaning to cost reduction and specifically “people off payroll.”
• If it ain’t broke, don’t fix it.” By definition an acquisition “broke” all processes from both legacy companies. Use the opportunity to redesign and improve and ensure ownership by all parties.
• “The integration is complete.” I have seen companies where, years later, I found legacy company uniforms, letterhead, logos, and old processes reverted to after redesign. Some of that is fine. People need to remember where they came from, but if it gets in the way of everyone working towards shared goals and feeling a part of a united company, this memorabilia needs to go.

Leadership Integration Priorities

In my work life I was personally around fourteen acquisitions. In two I was a part of the acquired company. In six I was engaged as a consultant to help with the integration. In six, I was engaged on other work where I had to do some de facto integration in order to complete my brief.  It’s my view that acquisitions can be harder than organic growth. The challenges are certainly different and the risk of company-shaking disaster is higher.

Every few years some consulting firm does a study of large acquisitions over a recent period and determines that 70-80%. of large public company mergers fail,  that is the merged company’s total share value is less than the combined value of the two legacy firms. By this measure less than five percent actually increase in value.

Given this why do companies continue to acquire? Remember the opening quote “Double in size, easy-peasy,” top line growth ignoring difficulty and value destruction. There may be something about CEOs, loving the media spotlight around the acquisition, while abdicating the mess and blaming their minions

Failure is often blamed upon “culture clash.” Integration processes should be inclusive and rational as a remedy to the “clash,” – join the cultures by doing real work together.

People are important, but real work is more so. Leadership priorities are in this order:

• IT systems first –you need real data that people believe in, P&L, management accounting, sales, production, and HR. Run both sets of systems until you are sure the integration has lasted for three months.
• Customers – this isn’t just data, but relationships and sales should not the only point of contact.
• Suppliers – I have seen too many supplier agreements thrown out for “synergy,” which crippled the company’s delivery to its customers
• Operations -operating processes can always be improved, but they need to be maintained and integrated slowly. Often both manufacturing and service quality decline during integration.
• People, Organization, Culture – Why does a “change guy” like me put culture at the bottom of the list? Especially when companies may have twice the people we need in some functions?

Most of the people issues can be addressed as you do other work. Shouldn’t you get to know the people you acquired before you sacrifice them to “synergy?”

Leaders, if you take one thing away, please stop thinking that acquisitions are easy.

Change is always tough. It’s tough for an individual to lose weight, or quit smoking.  Breaking old habits and doing something different is hard.

Organizational change means that many people have to break habits and do something different, but at least they know each other and can support each other in the process.

In an acquisition, two groups of people must act differently, and are starting from different places and they don’t know each other.

Easy-peasy it is not.