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Something To Sleep On Newsletter From 06/03/2018

Quote I am pondering: “Corporate culture is the only sustainable competitive advantage that is completely within the control of the entrepreneur.” – David Cummings, Co-Founder, Pardot

Planning a business merger OR a marriage?? Without the proper steps, both are doomed to fail.

In 2017, a record 50,000 M&A deals were done globally, according to Thomson Reuters. These deals were valued at an eyepopping $3.5 trillion. However, a KPMG study from several years back indicated that 83% of mergers fail to increase shareholder returns (and that does not include those that fail before they’re even consummated). Other studies have borne this out. According to Harvard Business Review, “M&A is a mug’s game, in which typically 70–90% of acquisitions are abysmal failures.” Others have suggested these numbers are inflated. But when you think about it, even a 50% failure rate would be unthinkable with most endeavors. We can assume that no CEO embarks on a merger expecting it to fail! Business leaders set out to “consummate the deal” with optimism and the best of intentions, only to end up with an outcome that falls far short of expectations.

A myriad of reasons have been cited as factors contributing to M&A failures, including, for example: inadequate due diligence (market, operational and financial), false sense of security, lack of involvement of low-level management, lack of understanding of value add, and a failure to recognize cultural synergies/differences.

My contention is that the overarching factor that is often given short shrift is people … culture and talent. And this factor is important on both sides of the deal, the pre-merger due diligence side and the post-merger integration side. One of the reasons for this, in my opinion, is that an inordinate focus is placed on “doing the deal”, on the financial aspects of the transaction, without adequate consideration for planning and integration. This is due, in part, to the fact that the process is often driven and managed by “dealmakers” and investment bankers, not the people responsible, day-to-day for ongoing business success. The problem is exacerbated by the fact that business leaders are, more often than not, “left-brain, analytical” thinkers who focus on dollars and cents, organizational numbers, staffing levels, redundancies, etc. and not culture. Also, in almost all business combinations one merging entity (let’s call it the “acquiring organization”) prevails; there is a corresponding tendency for the people and culture in that organization to prevail without due concern for the culture and talent in the “acquired organization”. This has been referred to in the past as the “winner’s curse” … mergers are rarely “mergers of equals”.

It’s all about people!! Ignore people … culture and talent … of both organizations as well as the combined entity, at your peril!

Indulge me for a moment, while I go out on a limb and draw a parallel with our personal lives. Let’s shift gears away from business and to the home front. According to CDC, the divorce rate in 2017 was 32% (based on reported data from 44 states and DC). Now you can argue that this is much better than a 70-90% failure rate (and it has been falling since 1980) but it’s still disappointingly high. To what extent is this phenomenon due to similar factors as with M&A failures … inadequate “due diligence”, a false sense of security, a lack of understanding of what each party brings to the table and failure to recognize cultural and personality synergies/differences? We seem to focus on “doing the deal”, i.e. “getting married” (driven in part by the “Hallmark effect”) and not enough on planning before the fact and doing the hard work long after the champagne glasses have been put away.

Eight out of 10 business leaders agree … cultural integration is critical

Check out this article from Financier Worldwide, “Cultural integration in M&A” [emphasis mine]. The “money paragraph”:

“[C]ultural integration is one of the main factors that can destroy value once a deal has been completed. Mergers, such as those between AOL and Time Warner and Sprint and Nextel, for example, collapsed in part due to significant cultural differences between the parties which emerged post-close. According to a 2015 Mercer study, 85 percent of companies believe that failure to address culture is a key barrier in failed M&A transactions. Frequently, both parties will be keen to retain and maintain their own culture.”

Weekly Question: Do you have examples where people and culture contributed to the success, or failure, of a merger? What parallels can you draw with day-to-day business leadership? With your personal life?

Mike Cobb

Mike has provided strategic, operational and financial leadership to small and medium-sized firms, as well as Fortune 500 companies and large government organizations, in a broad range of industries.


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