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Can Acquisitions Work?
By Martin Harshberger, President, Measurable Results LLC
With annual merger and acquisition activity in the United States
averaging about 1.5trillion dollars, that may seem to be uninformed
strange question. Yet according to anumber of recent academic
studies, between 55 percent and 83 percent of mergers
andacquisitions fail to add value to the acquirers.
Companies look to mergers and acquisitions for a number of sound
business reasons.Among them are:
To gain market share.
To realize economies of scale especially in declining or
stagnant markets.
To gain access to products or services. To expand
geographically.
To facilitate a faster growth rate than through pure organic
growth.
If the reasoning behind the acquisition is sound why is the
success rate so low?
A KPMG survey found that 83 percent of mergers were unsuccessful
in producing any business benefits regarding shareholder value
(KPMG 1999).
A study of 150 major deals led Business Week to conclude that
out of 150 dealsvalued at $500 million or more about half actually
destroyed shareholder value(Feldman & Pratt 1999).
A major McKinsey & Company study found that 61 percent of
all acquisition programs were failures because the acquisition
strategies did not earn a sufficientreturn on the funds
invested.
In the first four to eight months following a deal, productivity
may be reduced byup to 50 percent (Huang & Kleiner, 2004).
It is not just large companies that fail at the acquisition
game, small companies often
witness similar results. Despite the reported failures, business
combinations often domake sound business sense. It isnt the deal
itself that causes the failure rate to be so high;it is the
outdated implementation strategies that companies continue to
use.
Vast amounts of time and money are spent on an acquisition,
nearly all of it in financialand legal due diligence efforts.
Typically far less time and effort is invested in
pre-dealimplementation planning and strategy. Key people issues
such as communications,
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strategic planning review and functional organization are
treated as afterthoughts. Mostfeel those things will fall into
place when we close the deal.
A merger of two companies is very much like any other
partnership, just larger and morecomplex. There are cultures,
values, work habits and attitudes that may be long standing
and important to both parties. Failure to consider dealing with
personnel issueseffectively and early in the deal almost guarantees
problems with retention of key people, productivity issues and, in
worst cases, gridlock in the organization.
Companies that dont have a clearly articulated strategic plan
and clearly defined goals,communicated to all levels of the
organization, with understanding and accountability atall levels,
have severely reduced their chance of success.
These integration issues are compounded exponentially if
everyone in the acquiringcompany is not singing from the same song
sheet. They may well find over time thatthe acquired companys team
isnt even in the same book.
In this situation, employees spend their time with rumors and
fear of waiting for theother shoe to fall. Management then is
forced into a reactive firefighting mode, rather than a planned and
proactive goal oriented mode of implementation.
Frequently, managements goals for the acquisition and its
integration strategy (assumingthat they exist) are not communicated
below the top executive level, for reasons of secrecy. After the
deal closes, the strategic direction and integration plans still
are treatedas closely guarded secrets with little if any
communications directed at the departmentlevels for a period of
weeks or even months. No news is not seen as good news, and
productivity and employee satisfaction is reduced.
The corollary to reduced employee satisfaction is, of course,
reduced customer satisfaction. If you fail to clearly describe the
reasons for the acquisition and its expectedimpacts to your
customers, your competitors will certainly do so for you. And the
picture
painted by your competitors will not be pretty.
In-depth planning and communications throughout involving both
the acquirer and theacquire is key. If communications must be
restricted prior to the deal closing--as may bethe case with a
public company transaction--a planned communications strategy must
be
put in place prior to closing the deal, and must be implemented
immediate followingclosure.
Pre-deal due diligence must include cultural and value studies
as well as financial andlegal. A strategy must be in place before
closing to insure that a strategic partnership of cultures and
values is formed and that everyone understands the reasons for
thetransaction, the impact of their contributions and their roles
going forward.
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In many business combinations, some employees with be laid off
or given newassignments. Bad news delivered quickly and effectively
can be more beneficial thangood news delivered late and
ineffectively. Its all about establishing trust and
credibility.
Thus the answer to the question posed at the beginning is: Yes,
if. Yes acquisitions can
be beneficial. But they will be only if: The acquirer has a
clear strategic vision for the combined firm and a well
considered integration plan;
Both the vision and the plan are shared broadly in the acquiring
as well as theacquired company; and
Management rolls up its sleeves to actively lead the
transition.
Resource box
Martin Harshberger is President of Measurable Results LLC, Marty
specializes instrategic planning, pre and post merger integration,
as well as business processimprovement. He can be reached at
662-844-9088 or [email protected] .
His new book just released November 1, 2009 Bottom Line Focus is
available at thewebsite below or on Amazon.
Website is www.bottomlinecoach.com
