The very first mistake many companies make takes place at the onset of the voyage they have decided to embark upon together, by failing to paint a clear and coherent picture of their shared vision and aims. As a result, the mental energy of most of the individuals in both organisations will be wasted on hypothesising whether theirs is a merger of equals, or a take-over, a convergence towards "best of both", the overthrow of one company's culture by the other's, or a common journey towards totally new ways of working.
Regardless of whether or not the transaction was technically a merger or an acquisition, the issue of if the integrated company will be based on company A, or company B, on a mix of both or be something totally new, needs to be addressed in each of a number of areas: people, culture and values, outward image, processes and technology to name just a few. All too often, semantics take precedence over common sense; companies talk of a "marriage of equals", and whilst this politically correct concept initially avoids hurting people's pride and sensitivities, it is unlikely to generate the integration's potential economic value because merely "blending" cultures or combining processes usually produces an incoherent outcome.
At the other end of the spectrum, particularly when the two companies are of very different size, there is a tendency for the smaller one to simply be "ingested" into the larger organisation; this has the advantage of making the rules of the game clear to everyone from the onset, but this very one-sided approach fails to capture and retain some of the knowledge and good practice of the smaller company and thereby erodes economic value.
If we are seriously seeking to maximise valuecreation from a merger or acquisition, the decision as to what needs to be retained from either of the two companies or needs to be reinvented from scratch in terms of culture, values, image, processes and technology, should result from thorough analysis and strategic consideration rather than face-saving politics or a David and Goliath negotiation. Sadly, this rational approach only succeeds in a minority of cases, either because egos get in the way and result in biased decision-making, or because the companies simply are not aware of some of the fundamental pre-requisites that need to be in place to allow rational fact-based decision-making that will lead to a successful integration. In the rest of this article, I shall deliberately skip "communication" and "change management" on the subject of which entire libraries have been written, and concentrate on some of the less obvious pre-requisites that are too often ignored and result in failed integrations.
Most companies ignore how much preparation can and should take place before the merger or acquisition deal is even signed. Regulations prohibit the exchange of any commercially sensitive information until the two companies are under common ownership, but this does not prevent the two companies from preparing and reformatting all the information and data that will be needed, deciding on how that information will be used and defining the criteria upon which major decisions will be taken.
Anyone with a finance background will know how time consuming and painstaking the restatement of accounts can be, so it is easy to imagine the effort and resources that are needed to reclassify not only financial data and definitions, but also customer data (including customer hierarchies and categories), suppliers, employee information, products, components, consumer data etc. according to common agreed definitions that will allow a like-with-like comparison and analysis of the data as soon as the merger or acquisition deal is completed.
Failure to carry out this preparation means that a great many fundamental decisions will be delayed by several months due to the lack of accurate and comparable cost data from both parties to the integration.
For example, in the absence of comparable product cost data and an agreed model of consumer behaviour, it will not be possible to decide on what the combined product portfolio should be, which products clash or need to be repositioned, what relative priority the various products or product categories should be given, how resources will be allocated etc. This in turn means that the routes to market for those products cannot be defined with clarity, as a result of which the sales organisation cannot be re-designed in an optimal manner.
Other examples of decisions delayed by lack of preparation before the deal is finalised would include office locations, manufacturing footprint, systems integration, supply chain optimisation and procurement synergies. These delays lead to failure for two reasons:
the business case underlying the M&A decision is not realised, as savings are not rapidly captured and business growth falls short of targets due to lack of clear priorities and appropriate resource allocation
the organisation design cannot be finalised or requires a number of corrective "tweaks", which cause uncertainty, undermine morale and incite the best players to leave the business.
One could argue that project team mobilisation is part of "preparation", but I believe it is a topic in its own right because most companies fail to select the best people for their integration teams. The integration of two businesses is unlikely to succeed unless the key individuals on the integration teams are dedicated 100% to the project; if not, day-to-day business will take precedence, causing the integration to stall and ultimately fail.
Most companies underestimate the time required to release high-calibre people from their daily business responsibilities (this may take one to three months), and they often forget to define from the onset the process by which those project team members will be redeployed into the business when the integration is over. This turns a potentially fantastic learning experience into a high-risk situation which none of the company's best resources will be keen to join.
Beyond best governance, efficient issue resolution processes and all the best practice that should be incorporated in any project of significant complexity, the way the project team is structured and organised is crucially important; and yet most companies get it wrong because they organise their integration project teams by function (finance, marketing, sales, manufacturing and so on), whereas they should be organised by "deliverable" status because the vast majority of the key decisions and the processes to be redesigned during an integration require a cross-functional approach.
In a recent integration that had set up function-based project teams, the marketing workstream struggle for eight months to define the integrated product portfolio, because although their consultants had designed a project blueprint in which "marketing owns the product range", it was clear that the relative positioning and resource prioritisation of the products within the range could not be decided without the input from manufacturing, logistics / supply chain and sales, and that changes in product groupings or hierarchies also had a far-reaching impact on trading terms and IT.
A deliverable-oriented approach would have called upon a team that includes representation from all of the above-mentioned functions, which would be given the accountability for defining the optimum product range.
Oddly, this cross-functional approach is not rocket-science, but most companies (and their advisors) still try to do it the difficult and ineffective way – by function team – and fail.
Pre-deal thorough preparation, timely team mobilisation and effective project team organisation are the pre-condition for sound decision-making to correctly define what needs to be retained from the two businesses, adapted or re-invented in the new integrated company. Anything less than that opens the door wide to arbitrary decisions or solutions resulting from a negotiation between parties of unequal strength rather than the pursuit of the optimal outcome.
This explains why up to 80% of all mergers and acquisitions fail to deliver the business case they had promised their shareholders, and some estimates situate at close to 50% the proportion of business integrations that actually result in destroying shareholder value. A dismal score, which could be drastically improved if merging companies just took the trouble of starting off on the right foot.