Mergers and Acquisitions: Growth Strategy or Minefield?

Elliot S. Schreiber and Chris Bart

Shop owners face various challenges, including the task of growing their business. Sometimes the best way to grow is by acquiring another business and merging the two.

The merger and acquisition (M&A) strategy has been around for decades. However, not to be too blunt, most business mergers simply do not merge very well.

Research from Harvard Business School found that, even after waiting five years, as many as 86 percent of M&As failed to achieve their defined upfront expectations of success.

Even for huge companies that should have the executive and legal oversight to avoid pitfalls, the number of acquisitions that have led to huge write-downs has increased in recent years. For example, Microsoft had to write down nearly the entire cost of its aQuantive acquisition, and Caterpillar lost almost $600 million related to one of its acquisitions a few years ago.

With the track record noted by the Harvard studies in organizations of all sizes, it’s clear that companies must improve their due diligence before taking the leap. Clearly, due diligence is about much more than simply auditing the books and reviewing the outstanding sales orders. That’s the easy stuff.

The primary reason mergers fail is a cultural clash that undermines the acquirer’s ability to execute the desired strategy for the new organization. In essence, the cultural fit of the two partners is usually paramount in determining the successful outcome of the merger. Conflicting and unaligned organizational and administrative arrangements represent the death knell for most merger plans.

We are not suggesting that M&As are never a good thing; they can be. However, doing so to get away from one’s own problems rarely works.

Therefore, before deciding to go down this route, companies should look beyond the numbers and into the heart of a potential partner organization. Looking beyond the numbers and implementing the required administrative and cultural changes with the mission statement as the foundation of all decisions and communications greatly improves the likelihood of success for M&As.

A few steps can be taken to make the transition easier.

1. Compare the mission statements of the two companies. This is a critical step in ensuring alignment between the two organizations.

Assuming the mission statement of the company being acquired has been implemented well, it should provide a strong indication as to the philosophical similarities—and differences—of the two organizations.

2. Review key administrative arrangements for cultural fit. Mission statement similarities are important, but it is just as important to assess the degree to which the organizational systems and processes of the prospective company are aligned with its mission.

Acquiring companies should perform a strategy execution audit to determine the extent of direct connection between the phrases used in the target’s mission statement and its management systems, then compare the results with an assessment of its own mission and systems alignment.

If the audit reveals inherent gaps between the mission and values statements of the two companies and the way they are reflected throughout each organization’s administrative systems, trouble is brewing.

While it doesn’t mean that a merger or acquisition should be avoided, it clearly should set off alarm bells. The greater the differences, the more work and time will be involved in harmonizing them.

Meaningful cultural change does not happen quickly. If the attraction still exists for the business move, companies must adjust the execution plan to reflect the extra effort and expenses that will be required to create one cohesive business entity.

3. Create corporate synergy. Once the merger or acquisition is legally completed, the next step is to capture and build the synergies required to create the competitive advantage and economies of scale that everyone hoped would arrive by virtue of the two companies joining forces.

Many teams will want to jump directly to execution, and execution is truly important, but it is useless in the face of a bad or absent strategy. The best place to start this journey is once again with the mission statement.

4. Build a new mission statement. The new mission statement must articulate why the organization exists and if it’s a true merger/partnership. Too many acquisitions have been said to be “mergers of equals” to placate employees or investors when it was simply not the case.

Be honest upfront. A “purpose statement” explaining the reason for being of the new entity should be extensively communicated. Otherwise, there will be mixed signals as each partner misunderstands what the new endpoint is all about.

The new mission is especially pivotal for explaining the new organization to the employees of both companies so that they can all rally around the new mission and get aligned in terms of their behaviors and actions.

5. Align the organizational structure, objectives, and administrative arrangements. Ninety percent of all organization failures are attributed to bad execution. Accordingly, after clearly articulating the new mission statement, the company’s next step is to begin adjusting all organizational arrangements to ensure that there is a direct connection between the phrases used in the M&A’s new mission statement and the key metrics and behavioral elements of the management systems.

This includes such items as the compensation systems (including bonuses), hiring/training systems, and performance measurement systems. Without this alignment and consistency among the M&A’s administrative arrangements and its strategy, execution gaps will eventually emerge that will undermine the M&A’s viability.

6. Build engagement. Being extremely clear about organizational goals and showing all employees how their work contributes to the new organization’s success—especially its mission—are critical to employee engagement.

Everyone wants to feel important and to feel that what they do matters. Those feelings are not always easy to achieve, especially for employees performing boring, routine, and repetitive front-line jobs.

But it is the responsibility of the nearest leader (immediate supervisor) to help those individuals see the higher purpose in their work and recognize that the organization is measured through the eyes of the customer on every single activity regardless how big or small.

Everyone, therefore, is depending upon them to do their job with excellence or else the whole organization could fail. This needs to be explicitly stated and reinforced.