The Elusive Equation

One plus one equals three. Billions of dollars and millions of jobs hinge on fulfilling this equation and the hope that a combination of two organizations can produce something more than the sum of the parts. Whether it’s called synergy or leverage, the prospect of creating value through a combination is touted vigorously in boardrooms and executive suites where top managers and their financial, legal, and strategic advisers conjure up and put together deals.

            The concept is alluring: combine the strengths of two organizations to achieve strategic and financial objectives that neither side can accomplish as easily or affordably on its own. The reality, however, is often woeful: up to three-quarters of corporate combinations fail to attain projected business results. In fact, most produce higher-than-expected costs and lower-than-acceptable returns. Meanwhile, executive time and operating capital are diverted from internal growth; morale, productivity, and quality often plummet; talented crew members jump ship; and customers go elsewhere. In the great majority of combinations, one plus one yields less than two.

            Why do they fare so badly?

            Price is a factor. If you pay too much to buy a company or join a partner, the resulting debt load requires massive cost cutting that prevents companies from investing in innovation and growth.  Naturally, a flawed business strategy and poor choice of partner can also destroy value.  Several studies find that an ill-conceived strategy and inadequate due diligence undermine even sensibly priced combinations. My research program with Philip Mirvis spanning thirty plus years documents how mismanaged human, organizational, and cultural dynamics on one or both sides can also spell doom.  As executives compete for top appointments and clout, as functions do battle over procedures and turf, and as employees angle for better opportunities (or simply to keep their jobs), even well-intentioned pledges of camaraderie and fair play give way to self-promotion and flank protection.

            Of course, planning makes a difference. Bankers, lawyers, and industry consultants can variously help executives gauge whom to partner with or buy, how much to spend, how to structure the transaction, and where to position a new mix of products or services in the marketplace. But when it comes to sorting out who gets which jobs, deciding whose methods and systems to use, and actually shaping a combined company culture that will create value, plans don’t make or break the combination. It is fundamentally up to the two managements to make their deal work. 

            From the outset, let us face squarely the reality that most mergers, acquisitions, and alliances have human costs. Stress levels can be acute, and workloads exhausting; former colleagues may be fired and careers derailed; corporate cultures often clash; new structures may not align; and selected systems might fail to mesh. These are the typical, predictable, and troubling trials people face when they join in a combination. Managers have to work their way through myriad traumas and tribulations to achieve a combined organization that is more competitive, efficient, and effective than its prior components. As one senior executive I worked with put it, “Buying is fun; merging is hell.”

            But the upside is enormous. Certainly megamergers grab all of the headlines and for good reason:  These give companies the scale and scope needed to compete on a global playing field.  But the real growth story in the past decade is how top companies like GE, Johnson & Johnson, IBM, Cisco, Tata and others have adopted what Booz & Company call a “merganic” strategy—a combination of organic and M&A based growth. This translates into building businesses through smaller, focused, and rapid-fire deals in current or adjacent markets, or by acquiring complementary technologies and product lines. 

            The excepts in this blog from our book "Joining Forces:  Making One Plus One Equal Three in Mergers, Acquisitions, and Alliances" (Jossey-Bass Publishers, 2010) show how to make one plus one equal three. Our focus here is not on financing deals, the legal ins-and-outs, or corporate strategy per se, but rather on the flesh-and-blood factors that make combinations succeed. Using principles and practices derived from successful cases, I will describe why and how executives have joined forces successfully. I also will  select some unsuccessful cases, as these can be instructive and humbling. The companies I profile achieved their strategic and financial objectives by building productive capacities and by searching for and capitalizing on better ways of growing their business. They were led by executives who took care to understand what it takes to put companies together; united two groups of managers to plan for and build their new organization; and were sensitive to the human, organizational, and cultural issues that had to be addressed along the way. Most important, many of these executives used M&A to grow their businesses and create added value for their shareholders, customers, employees, and themselves.

The Five Facets of Merger and Acquisition (M&A) Management

Throughout our work, organizational psychologist Philip Mirvis and I address combination management from five distinct but overlapping perspectives:

            Strategy.  M&A is not a strategy.  It is a means for a company to achieve its strategy.  The second edition of our book “Joining Forces:  Making One Plus One Equal Three in Mergers, Acquisitions and Alliances” is not a primer on strategy; rather it examines how companies can best translate their growth strategies into the search for and selection of a combination target or partner.  We also show, based on some hard earned experience, how different strategies dictate different degrees and types of integration. 

            Organization.  Are you buying a product brand or a business?  Our book presents a hands-on case study showing how Unilever had problems trying to preserve the power of the Ben & Jerry’s brand following its heavy-handed integration of the acquired ice cream maker’s factories—a situation since improved as the two sides learned to work together.  By comparison, P&G expanded its male customer base with its well-designed integration of Gillette.  In the new volume, we build on our prior writings to show how to integrate businesses functions by function to capitalize on synergies without destroying the vital “organizational ability” of a partner. 

            People.  To paraphrase Gerry Levin, former CEO of Time Warner, there are a lot of psychological things going on in M&A.  As organizational psychologists, we’ve written about them crystallizing in the Merger Syndrome.  We’re updating that material in our new edition with the latest research on which emotional reactions are more prominent at different stages of a combination and what interventions are best suited to address them.  On the practice end, some interesting methods are being used to help people to surface and talk about the psychological aspects of M&A. 

One of us worked with a client that made innovative use of “toys” to surface feelings about culture in the merger of two large Midwestern firms.  In one exercise, employees from each of two merging companies were asked to choose from a variety of toys and objects the ones that represented their feelings about the combination.  One employee chose the “etch-a-sketch” to represent the future because “everything is a blank screen.”  Other items selected—a menacing pirate, a prowling lion, and a scrambled egg—evoked more harrowing images.     

            Culture.  In prior writings, we have identified the sources and symptoms of culture clash in M&A.  In our latest book, we pay special attention to the clash of multiple cultures in a combination—across companies and nations.  The scale of cross-border M&A continues to grow and the contours are changing:  Chinese companies, for instance, now spend far more on cross-border acquisitions than foreign investors spend acquiring companies in China.  How about doing a deal in Eastern Europe? “Slovenes do not appreciate the ‘American’ style,” reports our colleague Lidija Drobež, an M&A consultant based in Ljubljana.  When asked whether it was Americanism that bothered her countrymen, she said not at all, “We love Americans.  It is your aggressiveness in running our businesses that is the problem.”  Her studies indicate that the real aggravation for Slovenian acquirees is that the parent company executives rush in, change things, then move on and their replacements repeat the process. 

            Transition Management.  In this updated and revised volume, we focus on best practices to accelerate and improve transition management.  Studies find that the interval between the announcement and closing of deals has fallen dramatically, from roughly 130 days a decade ago to 60 days in the past year.  Why?  The internet and new software technology has led to the formation of “clean teams” that can consolidate information from two companies and prepare combined balance sheets and unit by unit comparisons for use in precombination planning.  FedEx’s acquisition of Kinkos highlights how you can speed up the combination period in a friendly deal with the right structure and processes. All 1,200 Kinkos stores were rebranded within four months of the close.  Employees involved in the combination, over 18,000, went through roughly forty hours of training on combined products, processes, systems, and corporate culture—some 700,000 hours in toto.

            At the same time, some innovative methods to “slow down” the acculturation process were pioneered by Tex Gunning, who led the combination of Unilever and BestFoods in Asia.  Executives from thirteen Asian countries were molded into a leadership community and embarked on journeys across the region to get “first hand” knowledge of their markets and their own cultural diversity.  The result was a transformation of their business that helped to reshape the parent company’s operating philosophy and product lines.

* * * * * * *

While no one knows when the impact of the global economic crisis will subside, one thing is clear:  once business and credit markets rebound, there will be a huge wave of M&A.  Some executives will make smart moves to fill product or service gaps, enter new markets or participate in industry transformations.  Others will be less strategic and more opportunistic as they go on a shopping spree for targets at bargain basement prices.  “Joining Forces:  Making One Plus One Equal Three in Mergers, Acquisitions and Alliances” aims to help those who want to create lasting value with M&A.

Why a New Edition of our Book on the Human and Cultural Aspects of Mergers & Acquisitions?

With our first book, Managing the Merger, Philip H. Mirvis and I were dubbed ‘merger mavens’ by Fortune magazine.  The second, Joining Forces:  Making One Plus One Equal Three in Mergers, Acquisitions and Alliances, was called the M&A “bible.”  So why a second edition of Joining Forces"?  Several reasons:

·         Early on we identified the “Merger Syndrome,” the human reactions to the uncertainty and threat posed by combining businesses.  We showed how this Syndrome afflicted not just everyday workers and managers, but also the deal makers and leaders on both sides of combining firms.  Nowadays, the majority of the corporate workforce has been through a combination or some other organization-wide restructuring or traumatic change.  Many more senior executives are M&A battle tested and integration managers have better training and more tools available to put companies together.  This new book helps these seasoned managers to accelerate the process of putting companies together and shows how to build longer term resilience in a merged workforce.

·         Much of the case material in our two earlier books dealt with big deals in industry consolidations, large companies absorbing small firms, and either U.S., European, or cross-Atlantic combinations.  Today the M&A landscape has changed.  Firms like Cisco and Google use alliances as an R&D strategy and take a phased approach to M&A.  Companies are buying into growth markets with acquisitions that require a delicate balance between integration and preservation of an acquiree.  Global companies are acquiring businesses in China and India.  And Chinese and Indian firms, like Chinalco and Tata, are globalizing by acquiring U.S. and European assets.  These deals pose new kinds of strategic challenges and present new forms of the culture clash that destroys so many mergers.  This book identifies the organizational and cultural issues posed by these new forms of M&A and how to best manage them.

·         Finally, our guidance in earlier volumes concerned managing a single combination—how to select a partner, set integration goals, put the companies together, bring people along, and so on.  Here we also talk about developing an M&A competence within companies—drawing lessons not only from GE and Cisco, but also Asian companies that have benefitted from the M&A lessons learned by Western counterparts .  Here we describe how to create a merger mindset in firms, merger competencies among senior managers, and merger readiness and execution skills among professionals and workers at every level.  We believe that the capacity to conceive, organize, and implement combinations can become a core competence of companies and a source of competitive advantage. 

This new volume shows what it takes—for firms and for their managers—to do M&A well.  As with our previous books on M&A, our aim is to blend theory, research, and especially practice in a useful and insightful volume.  To accomplish this:

• We not only report the who, what, how, and why’s involved in implementing proven practices in each of the phases of a combination, we also highlight their relevance in different kinds of deals and which ones matter most in eventual M&A success.
• We share our personal experiences (good and bad) as researchers and advisors in many deals and the best of the academic and practitioner literatures on making mergers and acquisitions work.

Getting One Plus One to Equal Three

My primary interest is with a specific breed of merger, acquisition, or alliance: the type that attempts to build some strength or capacity greater than that present in the partners as independent organizations. Getting one plus one to equal three calls for sound strategy and a careful management process to guide identification and attainment of true and productive synergy. Opportunistic deals, combinations made purely for cost-cutting reasons, or acquisitions meant more to satisfy a CEO’s ego than to enact a cogent business strategy are not likely to enhance the partners’ abilities to achieve their desired business and financial results. Slamming two organizations together and eliminating redundancies may achieve one-time-only cost savings, but does the organization reap sustainable gains in ability to compete over the long haul?”

           

Let's Get this Blogging Started

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?