M&A Research

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I Now Pronounce You Partners for Life!

When you stop to think about it, business marriages have a lot in common with romantic unions.  There are two parties involved who are highly attracted to each other and who have shared interests.  Both are involved in a period of courtship followed by an engagement announcement.  In romantic unions, the engagement is symbolized by a ring.  In business mergers, it’s a signed letter of intent.  As the relationship grows more and more intimate, certain disclosures are made about debts and assets.  Decisions are made about the sale of property and what will be considered common assets.  When the big day arrives, the marriage certificate is signed, the bride is “given away“ and the assets and obligations of the parties are merged.  Both parties publicly commit to love and cherish each other forever – regardless of future circumstances that neither can envision at the time.  The presiding deal maker declares the couple “partners for life,” and the parties are “co-branded.”  Photos are taken, rice is thrown by a throng of well wishers, and the newly-weds drive off into the sunset to live happily ever after.

But, in real life, despite all the passion, excitement, and high expectations that accompanied the wedding vows, half of those marriages, seemingly made in heaven, end in divorce.  The track record for business marriages is not much better. In romantic and business marriages, finance plays a major role in the disruption of marital harmony. Within one year following the merger, 75-80% of merged companies have not delivered on their financial projections and, even worse, more than half have diminished in value.  This has been an on-going trend for more than ten years. The question that I set out to answer is, “Why?”

The interviews that are archived on this site were conducted with professionals who have considerable experience with mergers and acquisitions.  Their experience involves mergers and acquisitions in different industries, they have differing roles in the M&A transaction, and are involved with different sizes of deals.  Interviewees included CEO’s, CPA’s, CFO’s, attorneys, consultants representing buyers and sellers, brokers, valuation consultants, turnaround specialists, venture capitalists, and investment bankers.  Aside from their experience, all of the interviewees have two things in common.  They have all operated at a high level of involvement with M&A transactions and they have all been involved with strategic mergers and acquisitions. In other words, the objective of the merger or acquisition was to produce a strategic competitive advantage and involved more than the purchase of hard assets.

Given their varied credentials and roles in the transaction, a surprising consensus is emerging among the professionals interviewed.

1. The due diligence process does not routinely address the risks involved with post-deal integration.  Those risks are associated with the employees whose performance is critical to the productivity of the merged company. See Contented Cows Give Better Milk.

2. There are three critical predictors of successful mergers:

   	a.)	Communication - the degree to which the information systems of the merged companies can be integrated effectively and the time and cost involved in the integration.
   	b.)	Power -  who has it and the degree of candor involved in     communicating to the leadership team about their roles, authority,  and the strategic objectives of the merged company, and
   	c.)	Sex -  how the companies operate “behind closed doors” and the    degree of alignment between the core values  of the two companies and the effectiveness of a cultural integration strategy to align the values, incorporate them in day-to-day business operations, and hold leaders and employees accountable for “infidelity.” See Integrity: How does your workplace measure up.

   
   
3. The “people risks” inherent with mergers and acquisitions are created by the high-change environment that accompanies most M&A’s.  Because the changes (and resistance to change) are occurring both vertically and horizontally across the organization, i.e. are occurring within the leadership hierarchy and simultaneously across business units and work teams, the change is difficult to manage from within.  This high-change environment creates conflict conditions that give rise to defensiveness and adversarial relationships that slow productivity.

4. The expertise of mid-level managers in the organization usually does not include conflict management skills.  These managers may be confronted with working with new teams or reconfiguring existing teams at the same time they may be dealing with uncertainty about their own employment status or adjusting to challenging change initiatives.

5. All of these issues underscore the importance of developing a post-deal integration strategy while the due diligence process is occurring.

Risks Inherent in Mergers and Acquisitions*

*Note:  This list should not be construed to be an all-inclusive list