Global mergers and acquisitions advisers, especially, the investment bankers are doing extremely well consummating trillions of dollars in deals as a result of cheap debts, ambitious company executives and desire for expansion (Financial Times [FT], 12/21/2006). Deals announced in 2006 have outpaced those consummated in 2000 by over 16% totaling $3,900 billion. According to statistics from Dealogic and reported by the FT, the top ten investment bankers including Goldman Sachs, Citigroup, JPMorgan, etc. have been working on deals worth $7,341 billion in 2006. The news media provide extensive coverage of these deals. It is common knowledge that once these M&As have been consummated, the bankers and corporate executives realize substantial financial rewards, as well as the investors of acquired companies. However, the media does not provide the same level of coverage on what is needed to make these corporate marriages succeed. It is critical to report on the challenges of Post Merger Integration (PMI). For these M&As to succeed, the corporate executives must avoid eight classic mistakes (i.e. deadly sins).
During the dot com boom and when M&As were growing in 2000, Monnery and Malchione reported the 7 classic mistakes (a.k.a. “7 Deadly Sins of Mergers”) that executives make in M&As based on their analysis of 200 mergers (Financial Times Management Viewpoint, February 29,2000). They concluded that the most common reason for failure is underestimating the difficulty of successful post merger integration (PMI). In an FT article titled “Viewpoint: Why mergers are not for amateurs…” (FT, February 12, 2002) Knowles-Cutler and Bradbury arrived at the same conclusion after reviewing a Deloitte and Touche study of mergers and acquisitions. In my book, “Blueprint for a Crooked House” (www.iloripress.com), I used the 7 classic mistakes to analyze and report the failure of the global joint venture between AT&T and British Telecom; and added the 8th deadly sin–inadequate attention to customer needs.
In response to a question from Bernhard Klingler, Linz, Austria, on how to handle post merger challenges, Jack and Susan Welch recently reported on the Six Sins of M&A (BusinessWeek Online, October 23, 2006). The Welch’s six sins constitute a subset of the eight classic mistakes. It is important to remind corporate executives of these classic mistakes so that they can avoid them and reduce the financial losses by the stakeholders and the economy. The eight deadly sins excerpted from my book, Blueprint for a Crooked House, are revisited below:
1. Assuming that All Partners are Equal. “Mergers of Equals” is a myth. Someone needs to be in charge to resolve deadlocks which can be impossible to do in a 50-50 partnership where it is not clear who is in charge.
2. Using a One-Size-Fits-All Approach for Each Business Unit. Each new business unit has their unique cultures. Marrying the culture of the new organization into the acquirer’s culture should be thoughtfully done.
3. Managing Organizational Change Without Leading. This is what Jack and Susan Welch refer to as “taking bold steps with the integration”. The acquiring company is advised to strike the iron while it is hot–complete the integration process within 3 months of the acquisition while the participants are still excited and motivated about the new opportunity.
4. Paying Too Much Attention to Cost Savings as the Primary Strategic Opportunity. Don’t be too desperate for the acquisition to fall into what Jack Welch calls a “reverse hostage” situation.
5. Expecting to Realize Most Benefits by the End of the First Year. This goal will be harder to achieve if the acquirer pays too much for the merger (i.e., 20% or 30% above the market price–Jack Welch).
6. Believing that the Organization Cannot be Stabilized until all the Facts are Known. This belief may lead to what Jack Welch calls the conqueror syndrome”, a situation in where the acquirer installs their own people in all critical positions. This defeats the primary objective of the merger, which is to fill a strategic void. Management needs to realize that if their people have the expertise to grow the company to fill the strategic void, may be they don’t need the acquisition.
7. Declaring Victory Prematurely and Failing to Track Promised Organizational Changes.
8. Not Considering the Impact of Customer Reactions to the Merger. In a study sponsored by Business Week and conducted by the University of Michigan and Thomson Financial Corporation on American Customer Satisfaction Index, found that 50% of consumers report that they are less satisfied two years after a merger. “It can take years for companies to change customers’ feelings and stop any losses” (Emily Thornton, Business Week, December 6, 2004, pp. 58-63).
Conclusion: Whether hostile or friendly, company executives and shareowners should seriously consider the impact of PMI on M&As. The Sarbanes-Oxley Act that demands more disclosures on the performance of the board of directors and company executives of public companies may help address some corporate governance issues, but until the stakeholders address the eight classic mistakes described above, we will continue to experience significant failures in M&A activities. As stated earlier, those promoting M&As are doing very well financially, but for the sake of the customers, employees, and other stakeholders, the executives need to invest more resources to avoid the eight deadly sins to ensure the success of post merger integration.