When Philip Mirvis and I began studying the human, organizational, and cultural aspects of mergers and acquisitions (M&A) over 30 years ago, roughly 70 to 75 percent of corporate combinations failed to achieve their desired financial or strategic objectives. Since then, scholars have generated many insights and practitioners have honed many tactics to improve M&A success. To this day, however, the failure rate still hovers in the same range. While some organizations, like Cisco and General Electric, have developed competencies in finding a good partner and managing the integration effectively, most executives remain ill-prepared for the rigors of steering a combination through its three phases—too often they rush through the precombination work of strategy setting and due diligence, mishandle the melding of two organizations and their cultures, and neglect to reenlist employees in the postcombination phase and create lasting value from promised synergies.
“I am really sorry about the pain and suffering and loss caused,” lamented Jerry Levin on a CNBC program entitled “Marriage from Hell: The Breakup of AOL Time Warner.” In this ten-year retrospective about the failed deal, he added, “The destruction of value was so painful to many people….I invite business schools to continue to study it. Not because it was the worst deal of the century, but (for) the lessons to be drawn from it.”
What did the former CEO from the Time Warner side learn? He told viewers, “There were a lot of psychological things going on,” and confided that he “didn’t have enough compassion for people,” and hadn’t paid enough attention to the “human side” of the merger.
Steve Case, then AOL head who became chairman of the combined company, added another perspective: that managers were focused too much on “internal politics and on Wall Street, rather than innovating.”
Levin reflected on the strategy, “I believed strongly in the power of the idea…that AOL Time Warner would in fact change the landscape not only of our own company, but across an industry….You get beguiled by the majesty of that language, and the aspiration that’s underneath it.” Case rejoined, “The vision is one thing but execution is another.” Where did the execution fall down? “Execution is about people,” Case said, “Strategy is inside people.” Levin concurred, “I had the missionary zeal,” he said but lamented “not everyone did.”
A clash of cultures? One of us worked on the Time Inc. plus Warner Brothers plus Turner Broadcasting combination (recounted in our 1998 volume of this book). Those firms, with very different cultures, found a way to work together. Hence Levin discounted cultural differences as a factor in the failure with AOL. Case had a more nuanced view of the differences between “old” versus “new” media companies.
He compared the two to venture capitalists that had very different views of a “safe” versus “risky” investment. To illustrate, he used the music business where there are thousands of rock bands, a few that create a hit, and even fewer that turn out to be a franchise like U2 or the Rolling Stones. Warner Brothers he said was comfortable investing a billion dollars in movie deals, because from their side that seemed like a safe bet. By contrast, the Time Warner Board was “out of its comfort zone” spending one hundred million dollars to buy internet technology. That, of course, is how Case built the AOL franchise.
There were, to be sure, “exogenous” factors that sent this January 10, 2000 $350 billion dollar deal to ruin. The dot.com bubble led investors to overvalue AOL and made recouping the purchase price implausible. That’s why many M&A analysts and many executives within Time Warner argued against the deal at the time. Competitors like Yahoo, Google, and the rapid development of the internet also overtook the combined company with innovations and market appeal. In a January 10, 2010 post-mortem, one of the former executives involved summed up the failure in this way: “The enduring debate is whether the deal collapsed because the concept was flawed at the start or because the cultures were too different and the execution of the merger was a failure.”
These are the kinds of questions I'll address in this blog. The aim here is not only to highlight what goes wrong in combinations and the reasons why, but also—and especially—to show how they can be managed toward more successful ends. In so doing, I'll draw on Philip and my studies of and hands-on experience in over 100 mergers, acquisitions and alliances, as well as the insights of academic colleagues and the best-practice examples of managers from whom we have learned.
Any one want to speculate what we'll be writing about AOL's acquisition of the Huffington Post several years from now?