Why Most M&A’s Fail and How You Can Fix That

MALast week, while listening to Mixergy’s interview of Gary Swart , best known for being the CEO of oDesk, the world’s largest online workplace, I became inspired to write about the biggest issue holding most M&A’s from declaring sustainable success. Gary is currently transitioning from his CEO role at oDesk, into an advisory role after the company finishes its merger with Elance.

Having witnessed first hand a series of M&A’s over the past 30 years, before, during & cleaning-up afterward, if there’s anyone that can nail the most complicated reason for failure, it’s Gary. I haven’t known Gary for long, but having recently interviewed him for my upcoming book entitled Practical Leadership, I’m confident he can nail the #1 culprit for lack of long term success because of his passion for Culture & Modeling Leadership.

Reasons Why So Many M&A’s Fail

In 2011 HBR stated that companies spend more than $2 trillion on acquisitions every year. Yet study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%. A lot of researchers have tried to explain those abysmal statistics, usually by analyzing the attributes of deals that worked and those that didn’t. What’s lacking, they believe, is a robust theory that identifies the causes of those successes and failures. In a nutshell, HBR concludes that many acquisitions fall short of expectations because executives incorrectly match candidates to the strategic purpose of the deal, failing to distinguish between deals that might improve current operations and those that could dramatically transform the company’s growth prospects. As a result, companies too often pay the wrong price and integrate the acquisition in the wrong way.

Depending on who you listen to, the following are the main reasons for failure of many M&A’s.

  • Misgauging Strategic Fit
  • Getting the Deal Structure Or Price Wrong
  • Misreading The New Company’s Culture
  • Not Communicating Clearly — Or Enough
  • Blindly Focusing On Integration For Its Own Sake
  • Not Focusing Enough On Customers And Sales (vs. Cost Synergies)
  • Allocating sufficient management capacity to take on the integration process

*Sources; Forbes, Financial Times, HBR & Business Insider

With due respect, while HBR’s perspective is part of it, there is a greater challenge that very few companies get right during an M&A.

Culture Is King

394ma-viet-namCulture is the cornerstone, that when gotten wrong will collapse like a house of cards. The simple and effective leadership approach, and care for culture, that Gary modeled in our now 3 interactions to-date (including the Mixergy interview) has me confident he’ll nail the culture mystery of the newly merged entity.

The HP Case

Let’s get down to specifics. The date is 2004 & I’m walking into HP Portugal to Interim Executive Manage it’s Education & Partner Division toward +40% profitability in the next 12 months. At my first meeting with the management team I was to work with, I was puzzled at the suggestions coming from the table stating “at Compaq we used to.. at Digital we used to.. at Tandem we used to.. when we were only HP we used to..”. Considering HP acquired Compaq in 2002, I was puzzled as to why there were 4 companies seated around the table, instead of one, +2 years post-merger. In short, ultimately, the success I had with that assignment was tied to being able to quickly foster a one company attitude where everyone felt heard & valued. It was a localized solution, but at least it got all of the relevant parties on the same page.

Opinions on the success of this merger are naturally divided, and even if you are in the camp that argues that this was a successful merger, I will still challenge that in order for it to be considered successful, the cultural issues should have been more seriously addressed & prioritized. As a consequence, the expected benefits would have come much sooner & would have been far less painful.

The Banco Santander Case

In late 2011 I was brought into Banco Santander Brasil to facilitate Workforce Agility through a series of leadership touchpoints that would give them better tools to align, motivate, engage & get accountability for execution excellence from their teams. Starting in 1997, by 2007 with the acquisition of Banco Real, Banco Santander Brasil was now a compilation of more than 8-10 entities (cultures). Walk into their cafeteria in 2012 and you will have witnessed the ironic site every single table’s apparent harmony. As I looked around, I saw people from a mix of departments sitting at the same table. Sounds like the culture integration when right? At closer inspection each table was a composition of the former banks that now comprise the group.

The goal has always been to become the #1 bank in Brazil, yet in 2014 it sits at #5. For the shareholders, I’m sure there will be a split between success & failure depending on the expected outcome. From a culture integration perspective, I can tell you that sitting around most conference tables were unintegrated entities still defending their previous company cultures & way of doing business. In order to succeed, I had to work Culture, and specifically Purpose, before I could get the rest flowing.

The eDreams (Odigeo) Case

In early 2011, eDreams engaged me as Director of their newly formed Portfolio Office to support the technology ecommerce platform merger of 4 companies. It was a fast paced 14 months of an assignment, cutting it short due to my eventual relocation to the Bay Area (San Francisco, CA) in mid to late 2012. The Odigeo Group, as they are known post-merger, was a more entrepreneurially minded organization simply required more execution focus. In parallel to the operational & strategic merger, there was indeed great care given to the “we are one company & culture” approach. Everyone was heard, not everyone was satisfied and some left the organization in the process, but at the end of the day, this we were better as a culture of the newly formed organization. It’s still a work-in-progress, but from what I’ve witnessed with their IPO today at a market valuation of $1.51 billion, I’d say they’re still on-track to succeed.

In Summary

Whether it’s Reuters, which I left 8 years before it’s acquisition by The Thompson Corporation, or any of the others I’ve encountered, across 5 continents what I’ve most often seen hold-back the expected success of M&A’s has more to do with company culture as a root cause. I’m convinced that when you set ego’s aside, Strategic Fit, Deal Structure & Price, Customer / Sales vs. Cost Synergies & allocation of integration resources are easier elements to get right. Culture, including Communication Clarity & Frequency, are what most often get compromised, and always comes back to bite you hard.

 

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