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.
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 also has 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 is 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 don't want to be “division managers.” If they were owners or part owners, the merger has made them so wealthy they don't have to stay if they don't 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 company's 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.
The Merger Syndrome - Employee Reactions: Seven Key Areas Of Concern
Any merger, regardless of size, can be difficult and challenging. Failure to recognize and deal effectively with the merger syndrome can lead to failure. The following key areas of concern must be dealt with.1. INFORMATION
The first reaction by managers and employees is a feeling of powerlessness and ignorance. They are unable to understand the new environment of their work situation and its implications for their day-to-day activities and employment future. Mistrust, cautiousness and lack of credible information often lead to the development of rumors, speculation and uninformed half-truths, which can be given abnormally high levels of credibility.
2. CONFIDENCE
The announcement of an acquisition - regardless of timing - is sudden and often an unexpected event. Confidence and trust in management is diminished and credibility may be severely undermined. Communication with all employees must be immediate and precise without making empty promises.
3. INSECURITY
In an environment of uncertainty, management and employees are liable to focus their energies increasingly on their own personal job situations, to lobby and react emotionally and even vindictively to their loss of security in the new situation.
4. PRODUCTIVITY
As employees become increasingly distracted by concerns over uncontrollable and unforeseen events which will influence their lives, they become unable to concentrate as fully on their work activities, manifested in procrastination, avoidance of decision making, absenteeism, tardiness and increased sick time.
5. SELFISHNESS
Because employees and managers are acutely aware of their individual vulnerability, they frequently back away from previous commitments to group or team participation, in the fear that their members may lead them to be identified with a group which is at risk.
6. POLITICAL PLAYS
The merger or acquisition will usually result in some changes in the structure of power and influence, and this may be a major realignment. During the period before new organizational changes are announced, individuals may focus most of their energies and efforts in trying to devise ways of promoting their personal position, often at the same time attempting to sabotage or undermine those of colleagues they perceive to be rivals.
7. LOYALTY
Because the new structure is unknown and company goals and objectives may change, loyalty to both individuals and old ongoing projects and programs is diluted. Managers may even assume an ongoing responsibility will be changed and that it therefore deserves little or no further attention.
E-mailrick@ceostrategist.comto request a free copy of TEN BEHAVIORAL GUIDELINES FOR MANAGEMENT WHEN ACQUIRING ANOTHER COMPANY.
