“Sometimes your best investments are the ones you don’t make”

-Donald Trump

 

 My experience on one of the most powerful Strategy tool: M&A

A testimony further away from financial check-mates…The Human Equity.

Why so many mergers fail?

Why there are loads of infamous M&A stories across geographies? At times I wonder, how a proposition announced so lucrative the other day, can turn out to be a financial hemorrhage even before its first anniversary.

In majority of the cases, over a period of time, the acquirer realizes that the company would have been much better off without strategic M&A initiative. This is an unpleasant reality notwithstanding of any evaluative method you select for the success assessment. You may analyse it as Profit-to-Earnings Ratio or IRR or Stock-Price Fluctuations or any other relevant matrices. The unswerving signals on tangible M&A realizations are never encouraging. Finally, it is realized that in most of the deals, the ROI is less than even the cost of the interest on the capital invested. So, a year down the line, the entire focus shifts from multiplying synergy of merged entities to inventing few face-saving measures, like distressed asset disposals, fixed cost optimizations, ‘tax choreography’ to effectively pump-up the numbers, condemning  non-cooperative people and culture of the acquired company, ring fencing deserting critical talents, concessional offers to customers …and many similar recovery manoeuvres.

As  per  a study by consulting firm KPMG , three-fourths of the acquisitions made by local firms in India have failed to generate considerable value and 59% of the acquirers have actually destroyed value within a year of closing a deal.

It is a reviling finding. Probably, also true globally. The M&A success rate is just about 50 percent. I am sure you must have recently noticed leading business newspapers with few uncomfortable headlines on M&A annulments.

Despite repetitive similar inferences time and again, what goes wrong with every next deal?  Is it all about misleading overestimated jugglery of strategic proposals (like: Economy of scale, Revenue, Consolidation of brands & resources, Global footprints, R&D investments) or the equally inflated synergy calculations (Cost & Risks) regarding the potential of the M&A or intrinsic limitations (Managerial Capabilities) in acquirer’s company to leverage the best results?

The question is: whether failure is outside or inside?

My focus is beyond strategic and financial fundamentals. I believe, failed integration of people and culture is at the core of any stumbling M&A. Effective management of people and sensitivity towards underlying organisational equations are most significant challenges for the successful transformation of any deal. Involvement of right functional expertise while doing pre-deal audits, timely institutionalizing project management team of capable managers, comprehensive debate on finalizing M&A architecture incorporating possible complexity of interdependent functional processes, and finally explaining and training the project management team are at the core of any successful deal.

The Indiscernible Rattle of the Cultures

Early in my career, I was part of an M&A deal of a company of almost similar size. Ours was an Indian promoter driven company and the culture was like: 24/7 on call, entrepreneurial, impulsive, and empowered. The company we acquired was an international corporate entity, highly process driven and bit relaxed (in our terminology). On every issue we were having almost contradictory approach. We wriggled to realize the best synergy because post announcement of acquisition, the focus was never on addressing cultural diversities or people issues but on “forced merging” of the entities. As a result, the underlying silent scuffles were more on “who is right” than “what is right”. It took me time to convince our team that Integration does not mean hanging a decorative photo-frame with smiling picture of the promoter behind the reception desk of the each unit of the acquired company. Nor it means deputing and force-fitting your team of managers (infiltrators) in the hierarchy of the acquired company. Human and cultural angle is too complex to be canned like a check-list item. Having just deep pockets is not enough. You also need to have significant capabilities required to lead the complex merged entity.

Often we believe that if the strategic and financial part is addressed successfully, the rest of the deal is just a formality. It has to logically follow the terms of agreement. But, we generally ignore other weighty aspects that are often not accounted for in the agreement broachers. Like: the differential people processes, capabilities required to lead the merged business, and other softer issues. An inclusive due diligence process should exhaustively take into account the cultural and ethnic aspects of the deal. Cultural differences must be fully respected. It is like a building block. Culture is way of our living. There is nothing right or wrong in a culture. Acknowledgement and appreciation for the ways and thoughts of another culture is first step towards successful integration.

 The Oblivious Face of Acquisition Team

I would anytime advocate for instating a highly empowered and capable integration team right form the pre-deal planning or due-diligence phase. This will help a company to ascertain some of the fundamental integration risks, issues, accountability matrices, and scrutinizing desired capabilities for an impeccable integration. It will also lay the foundation for rigorous review processes and timely feedback on perceived red flags.

Most often the deputed integration team members from the acquirer company tend to blow-out an artificial seriousness and stiffness during entire integration process. They seriously believe that any expression of sensitivity towards people or indulging in natural agreeable interchange would be perceived as the projection of feebleness and unfledged capabilities. The notion that ‘Acquirer’ is superior and the team has to be in total command, unsettles early impressions. The entire interaction pattern remains very heavy and loaded. In one such integration visit to Eastern Europe, a Quality Assurance Manger, earnestly shared with me an unfathomable laundry list of all “wrong-doings” in the acquired plant. He also openly remarked his observations while taking the heroic visit of the plant. I got concerned and privately asked him to compare the observed quality-compliance level with our own plants. To my surprise, he said, “we too have numerous similar concessions practiced in our plants”. Try as you might, you can’t avoid such behavioral realities. Admitting that acquired company is almost similar to us seems like giving up; you just want to prove that you are the most dispassionate professional and you are doing your duties very objectively. Such reports are largely academic. As a result, you create a very intimidating environment which is really off-beam for a smooth integration?

I have also observed another case where a company which was struggling for managerial capabilities to even run their existing business, acquired a large enterprise in Central Europe.Unfortunately, the capability limitations turned out to be the major humiliation for the company.

Likewise, In one of the acquisition, where parent company decided to run the acquired company as an independent business unit, reluctantly selected an accidental CEO who was more a figure-head than a leader. Providentially, even the Board members were more interested in per visit sitting-fee, luxurious accommodation, and earliest possible return flight back home. The entire business was so sloppily managed through remote that even major recurring bloopers of the operating apex team were absorbed with blind ease. As a result, acquirers further palmed-off the entity at a much compromised terms to a third investor. Managing the irregularities of an acquired business is not only time consuming, but requires total involvement. We cannot afford to have circus of misdirected energies at the very apex level. In my recommendation, the best preventive measure is to enforce an early emphasis on identification of ‘right managerial team’ for the ultimate realization of the deal.

Constipated Trickling of Communication

Any complex organizational change impacting people demands effective and objective communication. In any M&A, expeditiously multiplying synergy to create value is one of the most difficult task. Integration involves many direct and ancillary compounded adaptations which have enduring impression on people’s emotions. It can throw many unprecedented people issues, confusions, and interruptions. In fact, there should be a wide-ranging plan prepared for series of communication.Like: message content, method, target audience, timings, participation, periodicity, legalities, feedback, and other critical elements of such communication. This is true for all the other stakeholders too. The most influencing element is the consistency of message and visibility of the leadership team. I remember an open house, where chairman and CEO both elucidated two different conclusions on the same issue.  Their indifference on such a platform was a sort of communication to the people at large. Open house is not a ritual, it is a serious occasion where many people look up to the management to address their fears. During such transition time, it is commanding to have a premeditated approach towards “what to communicate” throughout the transaction and integration progression. Avoid leeway of constipated and sporadic seeping of scuttlebutts. Sincere and precise communication rhythm matters a lot.

I am not against inorganic growth plans. I am against the compromises.The truth is, you got to be lucky to efficaciously go through such a complex process. To be gainful in M&A, we have to think beyond strategic and financial dimension. Entire M&A life-cycle ( from pre-deal strategy to post-deal integration ), is precarious to the overall success. But one of the most decisive aspect is the ‘managerial capabilities’ in the entire integration.

Recently Tom Peters tweeted @tom-peters “Giant mergers: the ultimate expression of failure of imagination”.

 May be, may not be….Thoughts please….!