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.