Mergers and acquisitions represent a large and strategically important element of business growth. The number and value of deals has been increasing in the past two years, and this trend is expected to continue until at least 2016, according to Deloitte’s 2014 M&A trends report. In Q1 this year, according to Mergermarket, global M&A activity was valued at around $600bn, an increase of over 30% from Q1 2013, partly thanks to mega-deals like Time Warner/Comcast (currently under review by the FCC) and Facebook’s acquisition of What’sApp.
Yet over 50% of such deals continue to fail, and at least 80% do not achieve their goals, although this does not seem to dampen the enthusiasm of executives to jump into big deals. Sometimes, of course, these are desperate moves to stave off bigger problems, such as the Nokia/Microsoft deal or various AOL acquisitions since the 1990s. In the tech sector, acquisitions are often driven by a desire to send a signal to the market or to acqui-hire talent, rather than to build a better combined business or repay purchase costs through new revenue. But in most M&A deals, there is a genuine need and a desire for the combined companies to achieve something greater than the sum of their parts, and executives go into them with rational analysis and due diligence telling them synergies, savings or force multipliers are achievable.
So what goes wrong?
There is a whole world of potential legal and financial M&A issues that can impact on their success or failure, which is why such deals are a great opportunity for lawyers and bankers. But the biggest area of avoidable issues by far is on the operational level of integration.
Back in 2010, looking ahead to a “new generation of M&As”, Clay Deutsch and Andy West of McKinsey wrote:
“Even M&A veterans will require new tools for analysis and integration to manage these deals for maximum benefit – new organizational efficiencies, market expansion, employee development, product innovation, and profit…”
“Great integrators understand that two very different types of value can emerge in most mergers – combinational and transformational. But because identifying and capturing transformational value requires a different and more difficult approach, most deal teams concentrate on the combinational at the expense of the transformational.”
Yet in the majority of cases today, the practice of integration has not changed significantly, and often fails to get the combinational integration right, let alone unlock added value through transformational integration. Why?
We know that the rather amorphous term ‘culture’ is mentioned in most stories of M&A failure, whether in relation to a culture gap between firms trying to integrate or a failure to recognise just how hard it is to change an acquired firm’s culture, especially when the people involved feel threatened by integration and cling ever more tightly to the old way of doing things. Worst of all, in some cases, the acquiring company may not even be aware of the problem because everybody pays lip-service to the agreed new way of doing things, but in reality continue to work as before. This McKinsey graphic from the report shows just how widespread the problem is from the point of view of executives involved in integrations:
But perhaps one of the most common anti-patterns in problematic M&A deals I have witnessed is the department-by-department battle for which side’s managers and methods ‘win’ and get imposed on the counterparty. Rather than rationally assess what both parties bring to the table and select the best, or better still combine them to create an even better option ‘C’, integrations often waste a lot of time on street fighting between departments for control of key processes or departments. Nothing is more demoralising for a high-performance team than having to integrate and re-organise around what you believe to be an inferior way of working simply for political reasons. Been there, got the t-shirt, as they say.
The physician’s mantra ‘first do no harm,’ is often forgotten in the rush to create a new integrated structure. If two organisations are working well, rather than dismantle and re-assemble them, sometimes it makes sense to let them continue to operate whilst weaving connections and links between them until integration feels like a natural thing to do. This is one area where social tools can really help by enabling the benefits of integrated working (connections, ambient awareness, common protocols and standards, etc) but without the pain and risk of premature re-organisation.
In essence, the many ways in which combinatorial integration fail often come down to a simple failure to integrate people and culture first, in order to de-risk the subsequent integration of processes and structures. An obvious starting point would be to set up a common social platform and encourage people to begin getting to know each other and weaving connections within and between the social networks of the entities that are merging, but even this simple step is often ignored in favour of a top-down, directed integration approach that steamrolls over snags, inconsistencies and challenges in the name of declaring victory within the allotted timescale. Let people find each other, talk and share from day one and all other challenges will be easier to address.
That is why we were so interested to learn about Thoughtfarmer’s new M&A edition, which establishes a single, common employee directory with single sign-on across otherwise unconnected networks, and allows firms to focus on the people and networks elements of integration in a neutral space, with Q&A features, leadership communications and other features that can help de-risk the process. We will be working with Thoughtfarmer to use this social merger software with clients who face the challenge of integrating newly acquired companies, or merging with other companies, as it can provide a common platform on which we can use our Post*Shift framework to create new and better organisational structures and practices. See our introductory service page and also Thoughtfarmer’s white paper about their product for more information.
Our goal of course, is not just to de-risk the combinational integration, but also to enable the transformational integration McKinsey predicted back in 2010. We are interested in how we can use our framework for building Twenty-First Century business structures to open up a space for simpler, more agile ways of working that build on the practices of the merged organisations to create something greater than the sum of its parts. We want to take the opportunity for change afforded by the integration process to do things better, for example by building networked structures around the minimum viable hierarchy needed to organise process work, with less bureaucratic overhead and more opportunity for talent to shine in the newly merged entity.
There is another, longer term challenge that we are interested to address. Some large companies do a lot of M&A deals to grow and develop new capabilities, but struggle to integrate small firm ‘startup’ culture into the host company culture without destroying it. This sometimes means that integration destroys the very value the firm sought to acquire in the first place, and the recent history of tech sector acquisitions is littered with broken dreams as a result. We have some specific ideas about how to solve this, and we will be exploring them further in our Foundry offering.