Often we read and experience M&A leads to value destruction and complex organisations, because companies are not integrated fast enough, cultures clash and management is not sufficiently involved in the acquisition process.
In a recent study by McKinsey, they identify common critical success factors for value creation in M&A processes. Their findings were earlier acknowledged by Schweiger and Lippert (2005) and Sitkin and Pablo (2005). Although not original I found them quite insightful and wanted to share them with you.
Three factors of key importance:
- After the acquisition performance targets should be set higher than due diligence synergy estimates;
- Reject adopting two cultures approach, also called best of both worlds approach;
- Focused involvement of the CEO in a few critical areas.
1. After the acquisition performance targets should be set higher than due diligence synergy estimates
Expected synergies based on due diligence shouldn’t be targets of the post-acquisition integration process, they should be the baseline because:
- In due diligence processes time and data is highly limited so the identified synergies can be merely considered hypotheses;
- Often synergies focus on the cost side (e.g. staff redundancies) not revenues;
- There’s hardly any focus on the opportunities for growth and sales synergies;
- Due to performance risk, management involved will be inclined to articulate on easy achievable synergies.
Considering this, a careful reassessment of synergies for the forward integration and business plan makes a lot of sense.
Some examples of best practices
Acquirers reset aspirations and build them bottom-up by identifying opportunities to transform the business.
Acquirers build a well documented fact-base to support the development of those opportunities
The common areas of opportunity that need discussion and fact-gathering are:
- Fundamental changes to operations;
- Offering of new products and services to customers;
- Overlap in customer space and suppliers;
- Importing best practices – this realizes synergies 75% higher than expected from due diligence estimates.
Uncomfortable leaders needed!
The target setting process requires leaders to leave their comfort zones and share aspirations. This is highly difficult in the general corporate environment, where managing expectations and avoiding surprises is the modus operandi of successful managers.
A successful technique are off-site workshops, where executives jointly pursue idea generation. End products should be:
- A list of growth opportunities:
- assessment of each opportunity
- ranking them by size and priority.
- A high level implementation plan;
- Additional synergy discovery;
- Cooperative formulation of targets (increasing motivation)
Surely as always there’s a catch. In an ideal world this would work like a dream, however aspirational performance targets require:
- a special breed of managers;
- higher than average sense of accountability (Think 90/10*);
- inspirational and authoritative leadership.
Now attracting these kind of managers and stimulating their behavior takes time and leadership. According to McKinsey, you should first develop this environment before you conduct acquisitions. This is the dreamworld part.
So what should 99% of the company’s do, which don’t have this culture, but see an opportunity to acquire a long time competitor? I’d say buy-in against a large margin of safety, so they’re not overpaying for the hope of synergies they’ll never get. Of course this also sounds more easy than it is.
Special managers require a special culture
If an organization would have the meanwhile the organization should start building a behavioral set of competences:
- Encouraging managers tot take calculated risks
- Giving management confidence to aim beyond original scope and size of synergy targets:
- encourage to develop ambitious business plans
- provide resources to pursue these plans
- Clearly defined managerial roles
- Strong links between individual performance and consequences (+ and -)
- Incentives for high performance – reaching the business plan goals
- Consequences for low performance – 3 strikes and you’re out
2. Asserting control of future company culture is key
McKinsey finds, mergers of equals – or the best of both worlds posture – creates confusion and reduces accountability, hindering integration, lengthening the time of integration, leading to lack of focus on doing business.
To prevent this situation, companies should recognize that one culture tends to dominate.
They should start building a fact-base to identify cultural differences and supporting the integration process. The fact-base should lead to extremely targeted improvements to the company culture, explaining cultural differences clearly and should better help acquired employees understand what to do and how to migrate to the culture of the new organization.
The integration should be managed aggressively, otherwise an unfair playing field will emerge for acquired employees.
A practical example
- Start with survey of: cultural performance, management practices & outcomes
- Identifying different cultural dimensions
- This provides a benchmark on each company’s position and performance
- Discuss this data with integration leaders so everyone understands differences in cultures
- Identify very targeted improvements
- Shape the language of messaging to the merged company
- Develop a Boarding-program to help employees understand how to succeed, performance reviews, financial planning and accountability
3. Focused involvement of the CEO in a few critical areas
During an M&A process the demand on the CEO’s time can be quite overwhelming or too hand-off. The CEO’s involvement should be carefully balanced to have a great process outcome.
The involvement of the CEO is critical for the deal team to remain focused and continue their high energy process. However the CEO should be merely involved in the two areas that matter most, for a couple of hours every two weeks. The remaining decisions should be taken by senior management.
Again thanks to McKinsey for the knowledge sharing, the most difficult part of their advice is overcoming the cultural hurdles to make managers take responsibility for ambitious targets. Career risk is a significant driver for bad decisions and most managers are not risk takers, at least when it comes to their own wallets.
*the 90/10 rule is an approach (which I try to apply) to get things really done. In any circumstance, project, work assignment or else, we should assume 90% of the responsibility and just expect 10% from others.
Some well meant advice, also use Pareto’s 80/20 principle in selecting the 20% activities that add 80% of the value otherwise you’ll drown in work!
Schweiger and Lippert (2005) and Sitkin and Pablo (2005)were both published in the book: Mergers and Acquisitions: Managing Culture and Human Resources edited by Gunter Stahl, Mark Mendenhall.
McKinsey’s findings can be found at http://www.mckinseyquarterly.com/Corporate_Finance/M_A