When the financial goal falls short of the desired number, mergers or acquisitions should not be used to fill the difference and round out the plan. The tendency to use an acquisition to make the num- bers is a dangerous flaw in thinking. Repeatedly we see the use of an acquisition as a planning convenience. This gets the team off the hook of explaining how they plan to make up the long-term goal.
This is either an avoidance behavior by management to avoid the planning pain or just capricious business behavior.
Given what is known about mergers and acquisitions failures, this avenue of revenue must be given careful thought. A wealth of intellectual capital exists on the problems of bringing two organi- zations together. The information is very clear. Billions of dollars are spent annually on acquisitions with very little return. In fact, the lost ground is a hidden cost that needs to clearly be studied, published, and taken to heart. Yet we read the papers daily and find fanfare and much-heralded stories of mergers and acquisitions.
Companies are going crazy with the combinations. Give those managers a year and revisit the story. Ask IBM how much was spent on the Rolm acquisition, the Wilkerson Group acquisition, or the Chem Systems acquisition. Check the status of the three today. In a few years you can probably add Chrysler and Daimler to the list of unsuccessful mergers and acquisitions.
Before you include an acquisition to make up numbers for your plan, consider four problems usually found in conjunction with the deal.
Problem 1: Culture Clash
On the surface there often appears to be good business reasons for a merger or acquisition. Those legitimate business reasons and pro- jected numbers are offset by the potential losses that occur from the hidden costs of the transaction. On October 14, 1998, USA Today carried such an example, headlined “AHP-Monsanto Merger Dies From Culture Clash.” The accompanying article described failure to bring a $35 billion “merger of equals” to closure.5 There is no such dynamic as equals. One company will always dominate the other.
This dominance is not necessarily in physical size. It may be strength of character, quality of management, and force of leader- ship.
Problem 2: The Clash of Management Egos
A second problem is the ego of the two merging management teams, specifically the presidents. The merger of American Home Products (AHP) and Monsanto Company was in trouble, according to the USA Today report, because “[t]he power-sharing agreement between strong-willed bosses John Stafford of AHP and Robert Shapiro of Monsanto quickly turned into a two-headed monster.” A clash of egos is normal. Why is anyone surprised? If the egos don’t get in the way, then the operating styles of the two leaders eventu- ally clash.
A perfect example of the style problem was the Cendant story reported by Peter Elkind in the November 9, 1998, issue of Fortune.6 The article supported the idea that clashing styles destroy the merg- er. “One man ran his company like boot camp, the other like sum- mer camp,” Elkind wrote. Consequently, even before the Cendant scandal broke, it was already “a merger made in hell” and “the decade’s dumbest deal.” One of the key figures was reported to be a control freak and the other a dreamy visionary. How do you think the mergers of these two styles would play out even in the best of conditions? How would you, a vice president, carry out your duties when faced with the style conflict that eventually rolls down to the operational level? What effect does the open warfare have on the organization as support for both sides forms among the employees?
What does all this cost and how much is deducted from the bottom line?
Egos of the individual leaders also must be considered as a strong influence. People who want to do big deals are generally caught up in a personal issue. They want to be the rainmakers or the dealmakers. The issue is to see how big of a deal they can put together so their place in history is confirmed. Very little of this has to do with the actual benefit to the organizations or the ensuing heartache and damage to people’s lives. The Cendant acquisition fits this situation. “One thing [Cendant president and CEO Henry]
Silverman did not spend much time worrying about was the human factor—the ‘small stuff,’ he calls it,” wrote Elkind.
Tragically, this is the very thing one should spend the most time on in the merger process.
Problem 3: The Human Factor
A third problem with mergers and acquisitions is the failure to con- sider the human resistance to change. Integrating the people of both companies is the most dangerous and difficult part of the process. Resistance to change is a major drag factor in getting two organizations aligned. Regardless how similar the two companies may appear, the operational differences will be significant.
Employees will always find their way of doing work the best and resist converting to another process.
I sat at a planning table with two oil companies that had just merged. On paper and on surface examination the two companies appeared to be the same with only a name difference on their respective letterheads. In operational reality they were quite differ- ent. The planning session almost came to a stop because the two internal camps couldn’t even agree on some of the most funda- mental management activities.
Problem 4: The Process Itself
The fourth flaw in mergers and acquisitions is the very process itself. No due diligence is done on the cultures and the hidden costs to create operational alignment. Plenty of work takes place on the
“what you are buying” but none on the “who you are buying.” The syllabus of an unnamed but well-known multibillion-dollar inter- national company reflects this approach. Their three-day program on mergers and acquisitions is all about what they are buying. They train their acquisition project managers on how to do the deals with the idea of improving their closure rates and making better decisions. Of the thousands of pages of instructional materials only two pages referenced the human factors. The three-day training I attended included neither plans for assessing the culture and defin- ing the resistance points nor any plan for post-merger integration of the cultures. This syllabus is normal for mergers and acquisitions training. The parent company acquires an average of twelve com- panies a year, and even with extensive training the results are con- sidered dismal. The company is running about 100 percent in its failure to successfully merge the acquired companies’ cultures into the parent’s.
Talking to mergers and acquisition teams about the dangers of post-culture integration is like talking to a Martian. We are speak- ing two dissimilar languages in two separate contexts. Merger teams are typically number crunchers who have little understanding of people issues. If you plan to buy a company or merge with another
business, the very least you can do to prevent pain is to develop a post-merger cultural integration plan.