Avoiding The Pitfalls of Mergers and Acquisitions

”Restructuring” is one of the outcomes of the current economic downturn.  One method of restructuring is the consolidation of companies via mergers or acquisitions.  With the backdrop of struggling enterprises, and the poor record of accomplishment of mergers (about 60-70% of mergers/acquisitions FAIL in their initial goals and objectives.  I do not know about you but that average should send up flares to anyone considering this venture); it is even more critical to execute a “restructuring” correctly.

 

The following are some key reasons why mergers/acquisitions go poorly.

 

1-     Poorly understood or articulated objective.  Many M/As are done or better stated – everyone believes – for technology reasons.  This is the classic management conclusion that it is not good business to develop something in house, therefore let’s go buy it.  So off everyone goes and analyzes the potential technologies to the nth degree.  Everyone is so wrapped up in the technology story that other key factors are either ignored or poorly examined.  The result is a failed M/A.  So, understand why you want to do the merger or acquisition.  Is it for strategic, distribution, technology or resource reasons or a combination, and look at the balanced picture; i.e. all the aspects of what would make a successful business. 

 

2-     Poorly executed integration.  I personally believe this is the second biggest issue when it comes to the failures of mergers; especially when one considers a merger that involves a company from another country.  I have seen acquiring companies totally ignore the acquired personnel in the sense of orientation, assimilation, building relationships/teaming, and the merging of systems and processes.  This sends a clear message to the acquired company, namely we are not really interested in your ideas, talent or future!  Just ask yourself, how would you react and work in this type of environment? In many cases, it is the people fit not the technology that will make a good acquisition.

 

3-     Changing goals.  I not sure if this is caused by political reasons or just poor management, but in either case, it is amazing how quickly people forget why they started the effort and are now are working on different assumptions or goals; and then they wonder why the acquisition does not work out.  Stay focused on the original intent and measure success on the original metrics.  Do not switch horses in the middle of the stream!

 

4-     Unrealistic expectation on meeting merged goals.  Most mergers seem to be done on a spreadsheet, NOT in the real world.  Management tends to either panic or go with #3 after only a few months, changing the “game plan.”  Management then wonders why things are not going well and why goals and milestones are being missed.  One must understand that mergers/acquisitions are complex, and real results will probably take 3 to 4 times the original plans (years not months).  If one thinks about it, internal product or service development programs always run into issues, now add a company, people, new systems and new cultures and thus by definition, timelines will be longer. Thus have realistic goals and milestones.

 

5-     Underestimating revenue and costs.  A classic expectation is; combine the two revenues and expect a 20% cost savings.  This may be because most teams look at the technology and assume a total net add.  In reality, the acquisition does not completely augment some existing product or service, resulting in confusion by sales on what to sell and sell to; thus delaying additional revenues.  Reductions in cost is not seen initially because redundant efforts are being done that are not closed quickly enough combined with multiple supports efforts that are needed.

 

In summary, while there are many good reasons for mergers/acquisitions, the key is to have and maintain a well-understood goal, to look at the complete picture and perform adequate due diligence across all areas…and then do it again, and finally to have realistic expectations.

 

 

RHL 6/11/09

 

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