We have seen it again and again – even the best M&A business cases fail to deliver the value that was originally presented to the Board in an ever so convincing PowerPoint presentation.
It is not the legal or financial due diligence that overlooked important aspects of the merger. Nor is it the product/service that failed, and often the market for our product/service is still there when we analyze the M&A case post mortem.
The indicator that often shows up is “delay in implementation”
Conclusions from multiple studies agree that the “soft factors” are in most cases responsible for the deal not delivering the planned value. The indicator that most often shows up, with a ‘red light’ is “delay in implementation” of the integration. Digging one step deeper, analyzing the root courses for the delay, a set of common shortcomings emerge:
1) Failure to clearly convey why the merger makes sense
2) Lack of involvement of middle managers
3) Underestimating the importance of company culture
4) Failure to recognize a merger as a change project
5) Misapprehension that all key people should stay on-board
6) Too little attention and encouragement during difficult times
By taking a closer look at each of these root courses, we will hopefully learn more about what to look out for – when we plan our next acquisition.
To whom should it make sense?
An acquisition or a merger is often driven by a strategy to grow or expand the business. This is what shareholders and owners are looking for because this will increase the value of the business and thereby also increase their shareholder value. Often, shareholders are the top management or they have a bonus or incentive program closely tied to the value of the business.
For shareholders and top management – an increase in the value (through an acquisition) makes a lot of sense – as they will benefit from this financially. However, for middle managers and employees, the situation is different. They will often see an acquisition as extra workload and as a disruption to their well-known and normal work routine.
The key challenge here is to convey why the acquisition makes sense. ‘Doubling the size of the business’ or ‘expanding into new markets’ may not necessarily appeal to ‘employees on the floor’. Basically what top management needs to do – is to translate the overall strategic rational into attractive and motivational elements so employees can see “what’s in it for me” and why it makes sense to work hard(er) for this to become a success.
For Middle managers – timing is key to success
Top-management is deeply engaged in due-diligence, valuation, and negotiations, which is often a long and exhaustive process running over several months. Once the deal is signed – top management is excited and proud and they celebrate the signing as a victory at the exact same time where the rest of the organization hears about this for the first time.
The CEO and his small M&A team are often exhausted right at the time where they need to bring middle managers on board to execute the closing as well as plan and drive the integration. Experience shows that many companies fail during this critical phase. Failure to truly involve middle managers and allow time to ‘digest’ the news, fully understand the rational and translate this into ‘what it means for daily business’ is a common mistake. Top management has worked with the project for six months, and now they expect middle managers to comprehend and take ownership of the integration after a one-day workshop!
Successful integrations need a strong team of key people (from the buyer and the target) that jointly develop their own integration plan. Top management’s role is to explain and exemplify the deal rationale and then let middle managers translate this into action plans they believe in and which they will subsequently execute together with their teams.
Importance of company culture
Most agree that company culture is very important for a company’s success. However, it is a difficult topic to deal with. Ideally, we would like to know if two company cultures (in a merger) are compatible or not. Unfortunately, company culture is not something that is easily measurable. Often it exists as unwritten rules and one cannot rely on the company value statements telling the full story about the company culture. However, there are more systematic ways to evaluate company culture, such as cultural due diligence, company culture assessments, and culture workshops just to mention a few.
Some mergers have shown that two different company cultures are simply not compatible and that the merged company never got to work as one organization. One indicator of how successful cultural integration is – can be seen in the canteen after one year. Have the employees mixed, or can you still observe the former companies at the lunch tables?
Successful mergers have a clear understanding and a plan for cultural integration – be it that: a) ‘the target adapts to the buyer’s culture’ or b) ‘they define a new culture together’ taking the best from both sides. Rephrasing the old Peter Ducker statement one could say: ”Culture eats poorly planned integrations for lunch”.
Culture eats poorly planned integrations for lunch
A merger is a change project
Taking scope and size into account, a merger should be considered as a change project. In many ways, we see the same challenges and mistakes with other projects – such as a restructuring of a company. The major difference between a merger and a restructuring is that the restructuring is in most cases driven by a ‘burning platform’. This means that the sense-making and the why– are often obvious – if we don’t change, we risk losing our jobs.
In a merger, often it’s not obvious to employees why this is happening – and it’s not clear what is ‘expected from me’ in relation to changed behavior, additional duties, new initiatives, etc. As we know from change management experience, introducing new behaviors or roles in an organization requires a whole series of carefully planned initiatives. First of all, employees want to know why. Once this has been explained and accepted – then we can move on to the what and how we are going to change. Sustainable change is conceptualized and implemented by the affected employees themselves, with support and encouragement from their managers – not the other way around!
The key to successful change is involvement. Engaging the employees in the “what and how” not only ensures that the change will happen – it also produces much better solutions than top-management could ever conceive in a management meeting.
Act on resistance
Maybe the most common error in integrations is a misapprehension that we need to make sure all key-people stay on board. Of course, key-people are important to the success of a merger. In many cases, the real value in the acquisition is actually the know-how and experience that sits with they key-people in the target organization. This is also the reason why we often offer retention programs and earn-outs to management and key people.
The point isn’t to do away with retention programs and the like – the point is that we should always have a way out if the person becomes more of a ‘pain than a gain’. Realizing that successful integration is not necessarily when everyone stays on board, but rather ones’ willingness and ability to contribute positively to the newly merged business once they receive the support they need.
Over an over again we see so-called key-people that will never really embrace the change required to make the integration a success. Management’s failure to act on such passive resistance is a massive burden to the rest of the organization and in the worst cases – like an invisible toxin that can infect the entire atmosphere in the organization. Facing such behavior head-on and demanding from these individuals a change in their behavior and attitude, or alternatively agreeing to part ways, comes much too late in many cases.
Recognition is like fuel
Usually, we give reward and praise once a team or an individual has obtained a target or a KPI. This behavior has been ingrained in managers – for good and for worse – through many years of focus on performance management and annual appraisals. Many studies show that end of assignment recognition or even bonuses based on well-defined targets is good – but they don’t really motivate extra effort. In fact, recent studies claim that end of assignment bonuses may even have a demotivating effect on performance.
Executing a successful integration is a lot of hard work. In cases where synergies have to be harvested, it’s not only hard work, it may include parting with long-term colleagues who performed well for years but ultimately were not needed within the new set-up. In such situations, on the spot recognition for the effort and hard work put in by middle managers and employees, is much more valuable and motivating than end of assignment rewards.
Acknowledgment from top management that they see and recognize that it is a difficult journey and that they appreciate the dedicated effort put in – provides motivation and offers ‘fuel’ for the coming months of hard work. In most cases, it’s not about bonuses or more money – it’s about a basic human need to be acknowledged and appreciated when we put in the extra effort.
Erik A. Nielsen is a Senior Executive Advisor at Global PMI Partners, an M&A integration consulting firm that helps mid-market companies around the world bring their operational, technical and cultural differences into alignment. Global PMI Partners has a reputation for delivering exceptional consistency, speed & customized execution on the complex operational, technical and cultural issues that are so critical to M&A success.