But such daunting prospects have failed to deter big corporations like American Airlines and Office Depot from attempting to defy the odds. Companies merge for a variety of reasons: expansion of market share, acquisition of new lines of distribution or technology, or reduction of operating costs. But corporate mergers fail for some of the same reasons that marriages do – a clash of personalities and priorities. The fact that mergers so often fail is not, of itself, a reason for companies to avoid them altogether. It does, however mean that merging is never going to be a simple solution to a company’s problems. Here are some of the main reasons for the M&A failures:
SYNERGIES – So often the synergies are propounded around technical knowhow, such as complementary products or market access. This may be sound in theory, but the execution so often fails because it requires extra efforts from all employees in both companies. An example is the epic failure of the when eBay decided to buy Skype for $2.6 billion in 2005, only to sell the company four years later for $1.9 billion. Apparently, it didn’t work out because eBay and Skype were unable to integrate their technological systems successfully.
Above all, to gain synergies, as with most gains for M&As there needs to be change. Change is difficult, especially in large companies. British Airways only really shook off the BEA vs. BOAC divide for the 1970s when it moved to Terminal 5 in 2007. Change integration for full synergistic gain can only happen by creating the framework that is practical and that allows people to work in happily. Even in these modern times, business leaders think that change and synergies can be forced through. Indeed, even publicly they will say “we will push this through”. Therein lays the admission that there is a barrier.
BACK OFFICE SAVINGS -There only needs to be one HR, finance, IT, manufacturing, and marketing function. When Orange merged with T-Mobile in 2010 there was talk of £545m back office savings. This number is not trivial and behind this will be vast amounts of disruption. Look what happened when NTL bought Virgin or when Barclays bought Woolwich. There was chaos and huge customer frustrations as the service levels fell during the merging of functions. That said, the back office savings are usually the most reliable source of upside in an M&A.
STRATEGY AND GROWTH MODELS – Two businesses often have very different strategies and growth models. These are the fundamentals of a business usually unseen from the outside though usually detectable once on the inside. M&As often demand some alignment of strategies. This assumes that one or maybe both were flawed in the first place. The result is either a new one or the imposition of one party strategy on the other. This usually leads to some level of failure. One only has to look at GE and its ‘blueprint’ for acquisitions to see how the ‘one size fits all’ approach to business strategy leads to failures. Each business, market and customer franchise is unique in some way – no matter how small that may be. This often gets overlooked though ignorance or arrogance.
BRAND MANAGEMENT – The brands are often ignored by the M&A planners because they fail to fully understand what makes up brands and their equity. The same should not be true of the boards but none the less, how often have we seen M&A’s where very strong brands are swept aside by the name of the new owner. This can be disastrous and destroy value and indeed simply throw away existing and loyal customers. All brands should be respected and invested in where they have current and future value.
CUSTOMER FOCUS – This is so often forgotten in the M&A frenzy. Boards do not stop and say – what will the customer think of we shift distribution, adopt common pricing etc etc? The customer is the life blood of the business along with its cash. How can this be forgotten? Still M&A s take place with the arrogance to ignore the customer.
MANAGEMENT COMPETANCE – Is the competence in both organisations to equal measure and if not then how will balance be achieved? Does the acquiring company really understand its new acquisition? Too often the acquirer parachutes in its own team and fails to grasp the idiosyncrasies of the acquired company. If a new, single board is to run the combination then so often this board cannot manage to complexities of the new, larger organisation. Simple management weakness is a common trap.
COMPANY CULTURE – Clashing cultures can be the undoing of the deal unless a proper culture adoption, harmonisation or change programme is in place. This needs managing well with strong champions. Culture is a great enabler but it can be the hidden destroyer. One option is to start afresh. This involves setting aside the cultures of the two organisations involved and creating a new culture for the new organisation. This approach proved highly successful in the merger of Glaxo Wellcome and SmithKline Beecham in 2000 forming GlaxoSmithKline (GSK). Both organisations decided to engage their combined workforce in a process of defining and instilling a new vision and new set of values for GSK that everyone could sign up to. Nearly fourteen years later, the company is not only a huge commercial success but is also recognised around the world as one of the best companies to work for
LEADERSHIP – Orange has outstanding, proven leadership. All too often leadership is tested beyond its abilities when it comes to handling a bigger commercial enterprise with integration challenges. This is one area that is more vital than most. For shareholders the true motivation of leadership is critical. This must be fully understood.
THE ANALYSIS
It’s no secret that plenty of mergers and acquisitions don’t work. Those who advocate mergers will argue that the merger will cut costs, boost revenues by more than enough to justify the price premium. It can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. In theory, it all sounds great, but in practice, things can go awry.
But remember, not all mergers fail. Size and global reach can be advantageous, and strong managers can often squeeze greater efficiency out of badly run rivals. Nevertheless, the promises made by deal makers demand the careful scrutiny of investors. The success of mergers depends on how realistic the deal makers are and how well they can integrate two companies while maintaining day-to-day operations.
