New findings from an online survey of 2,500 reorganizations show that only 11% of reorganizations driven by Mergers and Acquisitions achieve total success. Worse, 28% have a negative impact on the business as compared with 17% of other types of reorganizations. That is a horrible track record. But there are ways to increase the success of M&A reorganizations.
Previous research has shown that, despite market and financial analysis, investment, and herculean efforts, 40% to 75% of all mergers and acquisitions fail to achieve their goals. There are a host of reasons for this outcome, including faulty due diligence, bad strategy, paying too much, business model ambiguity and whole segments of the workforce feeling abandoned by the new company.
The success last week of AT&T in court over the US Department of Justice allowing its acquisition of Time Warner to move forward is expected to accelerate more M&A activity. M&A activity in 2017 hit $3.7 trillion. That is a lot of money chasing failure if executive leaders don’t better learn what drives M&A success.
The new findings from the authors of the book, Reorg – How to Get it Right (HBR Press, 2016), Stephen Heidari-Robinson and Suzanne Heywood shows that merger-and-acquisition driven reorganizations share many of the characteristics of other types of reorganizations. They learned that the three following steps are critical for success with M&A reorganizations and other reorganizations:
- Have clear objectives — your success or failure will depend on them.
- Ensure the design for your reorganization is comprehensive and that it includes the structure, people, and processes.
- Determine that your implementation is robust.
But, M&A reorganization activity, according to the authors, is also different in a number of troubling ways. M&A reorganizations:
- Involve more of the organization than other types of reorganizations — about 40% versus 30% respectively.
- Take more time — about 14 months on average compared to 12 months for other types of reorganizations. More importantly, of the M&A and other reorganizations that achieved total success, more than half took less than six months. After 18 months, the chance of success vanishes to zero.
- Consume more of the leader’s time. On average, M&A reorganizations require about 41% to 60% of leaders’ time, compared to 20% to 40% for other types of reorganizations.
- Lead to greater resistance from both leaders and employees. Some 66% of M&A-driven reorganizations face significant employee resistance, as compared with 50% of other types of reorganizations. In more than 50% of the cases, leaders are resistant, as compared to 40% of leaders with other types of reorganizations.
- See business results suffer more during the organizational changes. More than half of M&A-driven reorganizations see significant and very significant drops of more than 5% and more than 10% respectively in the operating metrics of the units affected, as compared with 33% of other reorganizations.
Finally, M&A-driven mergers tend to communicate the changes to staff more than other types of reorganizations, but they tend to depend too much on email. Face-to-face communication between leaders and staff, as well as webcasts, will usually be more effective.
The authors’ findings are published in the current issue of the Harvard Business Review. Their survey is still open in June 2018 if you would like to participate.
I have participated in several horizontal and technical mergers and acquisitions, both from the perspective of being acquired and being the acquirer. From this experience, I have learned that the disappointing M&A track record can be improved upon.
Based on my experience with more than two decades of mergers, acquisitions and business consolidations, I’ve developed nine critical strategies for making mergers and acquisitions (and all reorganizations) successful:
- Articulate a clear vision, business model, and strategies and move quickly. You want to jump start the implementation after the lengthy due diligence and blackout period. You can’t do that unless you explicitly and repeatedly articulate your vision, business model, and strategies to the affected employees. During periods of tumultuous change, employees need to understand the company’s vision and direction. Provide it and work quickly to implement it.
- Proactively reach out to the target company’s key employees and provide mentors and career development. Don’t merely offer retention agreements. Contact key employees in person and inform them of your intent to retain them and provide them with challenging work and career development. After the deal has closed, invite them to join communities of interest and assign strong mentors.
- Approach M&A and all reorganizations as a significant change effort. A merger or acquisition is a major change, not only for the acquired company’s employees, but also for the employees who will manage and participate in the integration. I recommend that you use John Kotter’s eight-step change model to manage this process.
- Over-communicate to a fault. Employees want to know if they will still have a job after the M&A or reorganization. They will also be concerned about changes to their job titles, managers, pay, benefits, and previous mentors. During periods of uncertainty, worried individuals fill the gap between understanding and ignorance with rumors. Rumors feed upon each other and create negative attitudes. Get in front of this! Communicate your vision, business model and strategy, and its impact as if you were running an advertising campaign. The secret to successful advertising is that you need to repeat a message at least seven times for it to sink in. Hold town hall meetings. Don’t over-rely on email. Meet with employees in small groups. Start an internal blog.
- Turn over the big rocks. Find and solve secret problems fast. Even the best due diligence will not detect every significant problem within your acquired company. Immediately encourage your new work force to tell you, with Impunity, about any problems they see. Then, address those issues quickly. You don’t want to have technical, supply chain, customer, accounting, or ethical/legal issues fester undetected.
- Be transparent with bad news. If you have bad news, get it out in the open and then move on. If you are not transparent, you will lose the trust of the new work force. For example, if you plan to close a facility or lay off employees, announce it, treat those impacted with respect and dignity, and provide severance benefits and outplacement. How well you treat the employees to be laid-off significantly affects the morale of the remaining employees. Be sure to engage the remaining employees in your new business model.
- Understand that middle management is key to your success. Leaders of the acquiring company usually spend most of their time after the M&A building relationships with the top leaders of the target company. But those top leaders are often gone within a year, or whenever their retention agreements end, enjoying the spoils of the acquisition. It is critically important to develop excellent relationships with middle management and key technical talent of the target company as well. They still need jobs. Published research by J. Keith Dunbar in the Harvard Business Review found that middle management within your company will be one of the keys to your success, particularly if they have excellent leadership competencies for building relationships, providing direction, and motivating and influencing others.
- Carefully select integration leaders. According to J. Keith Dunbar’s research, leaders who successfully integrate new acquisitions have the following competencies: motivating and influencing others, building relationships, high integrity, developing others, adaptability, and focus on customer needs. Carefully select integration leaders and team members who have these competencies.
- Ensure there’s a good culture fit. The “C” word frightens many leaders – it’s too soft and squishy. But, culture can be translated into strategy, operating norms, goals, information flows, decision rights, and measures. This translation is critical for the success of mergers, and it begins with leadership. Explain your corporate culture to the acquired company, not just your policies but also the unwritten rules of what is important for building relationships, gaining influence, planning, budgeting, getting work completed and career development. Always translate your culture back to its impact on strategy, operating norms, goal achievement and measures.
If your company is considering a merger or acquisition, these nine key strategies can help you achieve your goals.
Victor Assad is the CEO of Victor Assad Strategic Human Resources Consulting and is a Managing Partner of InnovationOne. He consults and provides “hands-on” support for global talent strategies, developing innovative cultures, agile leaders and teams, and other strategic initiatives. Contact Victor Assad at VA@VictorHRConsultant.com. Visit http://www.victorhrconsultant.com for his valuable free reports.