Why Mergers Often Fail

In an acquisition, people may be overwhelmed by a tsunami of change. If you’re managing the acquisition, you’re probably expecting talent run off (47% of senior executives of the acquired company leave in the first year), productivity losses and sales drop offs.  But here’s what you’re not expecting.

1. The Predictable Dynamics of Change

It’s where the buyer misses the point. You’ve studied the target, opportunistically going after them because the target looks cheap, or low value or in trouble. Maybe this competitor looks good because they’re in a diminished state because of the economy. So buyers say, “hey they’re in the same space as me, the same industry, we’ve competed for decades, we use the same suppliers and understand the same customers, why not consolidate now, reduce our costs and take advantage of volume discounts and share suppliers?” It sure sounds good on paper.

What buyers miss is that the organization must still go through all the predictable change dynamics – the change curve. Any change that you make, anywhere, in any organization – family, church, business – will always cause a bit of bruising. The same thing  occurs when you switch exercise machines during your workout. Your muscles go through what’s called a change-up: they’re not as effective initially as they begin to adapt from one change to another. Blood flow is not as efficient. It takes time to integrate what you’re doing.

The same thing happens to organizations  going through an acquisition. The business isn’t going well, that’s why you were interested in the first place. But buyers think that their acquisition can somehow do the same business, service the same customers, do everything the same during the transition, when they are actually going through this change-up. The predictable dynamic is that organizational chaos begins.

Here’s what it looks like. The acquisition just can’t seem to get traction; can’t understand their new role, even though you tell them time and again, even though they’re selling to the same customers and servicing the same way. Why? Each person in the acquisition still doesn’t understand what the transition means to them personally and their “me-issues” surface. Often their allegiance is to the previous organization and now they are part of the competition, which they were selling against before.

Picture this change curve in a U shape. At top left is betrayal, lower down is denial, and at the bottom of the curve is an outright identity crisis. As the U shape rises on the right, there begins a search for solutions, and eventually, acceptance. We all go through these change dynamics whenever we go through any changes in life.  The concept of emotional stages was first developed by Dr. Elisabeth Kubler-Ross (death and dying stages) and in business, the curves are the same. If individuals go through it, why wouldn’t organizations go through it too?

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2. Organizational Gearing

You can’t put the organizations together based on the organizational structures that existed previously in the selling company. You can’t match VP to VP, manager to manager, supervisor to supervisor. Your integration is a chance to “gear” them together.  Your goal is to fit the teeth so they mesh together smoothly, otherwise once you put them together they will tear each other up. Even though it’s a gear, it isn’t necessarily compatible with the other gear. How do you know how to integrate and “gear” people together?

One way to do it is by understanding an individual’s Timespan outlook/Thinking Strata.  Timespan is a key Merger Coach concept, and has to do with how an individual processes chunks of time and relates to the world. There are fiveTimespan/Strata levels, and they don’t have to with native intelligence, just time.

Timespan and Strata are the way to think of creating compatible gears. The real alignment breakthrough should be primarily driven by Timespan and its associated Strata. Then align around competencies. When you do, the organization looks different but will be much safer and function better going forward.

Timespan and Strata Levels

1. Ones are in-the-moment types, focused on the day at hand and what must be done right now. They cannot really conceive of thinking even a month ahead. You would want an airline pilot to be a One thinker.

2. Twos have an outlook of about a week.

Most people are Ones and Twos, about 80% of the population.

3. Threes think in terms of months, quarters, and can set and achieve long term goals. About 10% of the population are threes and they are very good implementers.

4-5.  Fours and Fives are those who change the planet. They are able to engage in long range, visionary thinking and typically look years into the future. An organization may have several fours and fives who must be identified and mentored because they are invaluable to an organization and its future.

See Key Executive Coaching which aligns around Timespan and Strata for Buyer CEOs and Integration Managers.

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3. Culture clashes

It’s usually why most people think they fail. “The cultures were terrible! One was totally uptight and conservative, the other valued weirdness and creative innovation. Why didn’t we realize this before?! It didn’t stand a chance!”  Most people who think that they fail say, “our cultures just don’t fit together – we thought it was going to work, but now we see it hasn’t because they keep clashing.” Or maybe they secretly (or not so secretly) knew it wasn’t going to work but went ahead anyway, optimistically thinking things would somehow work themselves out, or the application of blunt force and edicts would take care of it.

The bottom line of what drives culture is how decisions are made. A decision making process in one organization is often totally different in another, and the process is typically driven by the leader. For example, in Company One, to do any expenditure over $75, you have to get approval by the owner or CEO.  In Company Two, it’s a collaborative process where the owner doesn’t make the final call; it’s a decision by committee. The concept of decision-making will drive every single thing in the organization including policies – all policies will be designed around that style of making decisions.

Another type of culture is benevolent – the benevolent leader who takes care of everyone, not matter what, and everyone is equal and treated identically. This ignores different capacity levels. A lot of baby boomers and small businesses use this approach, which treats people like family. We all know that everyone should be treated equally. But different Timespans and Stratas will need different things so they have to be treated differently.   Understanding how decisions are made in an organization is the quickest way to determine due diligence in an organization. And you simply ask, rather than assuming.

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Making Excuses for Failure

If the above three dangers are unchecked, and due diligence is not done, here’s what you’re left with: A need for excuses.  Here are a few favorites:

1. We Overpaid

Everything is going to seem expensive, and you probably didn’t anticipate a lot of the costs. Probably costly skeletons in the closet start falling out. When the acquisition fails to achieve its goals, you’ll say, “we paid too much even in a depressed economy” with plenty of other blame to go around for attorneys, accountants and anyone else in the deal.

2. We Chose Poorly

“Well, it looked like they were in distress, but they really didn’t fit the strategy of what we were doing.”  Along the lines of Black Friday deals, the thinking was,  just buy it cause it’s cheap! But then you get home and there really isn’t a place for this item, or you really didn’t want it. Now you have costs of things sitting around or disposal costs. You didn’t know what you wanted and you were buying on price because it was available. And it didn’t fit your strategy.

The Blueprint for Exit program can help with organizing strategy and fix this.

3. Unable to Unlock the Synergies

Another approach is “we don’t know how to integrate it, so let’s not put it together, but just save as much as we can with our buying power!” The thinking is, if we’re in the same space, we’ll just buy at higher levels from particular suppliers and negotiate bigger discounts. We don’t need two accounting departments, or two computer systems so we’ll put those together too, so we’ll save on the cost of duplicate back office talent and systems. That’s how we’ll unlock the value.

These tend to be the most difficult areas to put together and return the least amount of value.  Systems are the biggest problem area. If you try to share a system, you’re really changing the organization – by imposing an enormous amount of change on them along with the transaction. The bottom line is system integrations are more expensive than ever because underneath it all is more organizational change, which you’re willingly ratcheting up.  Inevitably the synergies come up shallow.  Even though the synergies looked good and Wall Street likes them, they tend to be an easy excuse as potential problems are relatively simple to identify prior to doing the deal.