Merger Miseries One

This is the first in a series of articles related to building trust and transparency in merger situations of organizations. This particular article focuses on how the complexity of doing a merger is often downplayed in organizations and gives one possible antidote that CEOs should heed before jumping head first into a merger.

Why are the hassles underestimated?

Mergers are usually considered in an attempt to pool strengths and eventually drive costs down to improve competitive positioning. It is normally envisioned as a way to survive, but frequently turns into a way to commit suicide.

Top managers who study the impact of a merger can readily see the tangible rewards, and the benefits look seductively attractive. The costs and hassles seem to be manageable, so not a lot of energy is spent on an organized campaign to mitigate potential negative aspects. The upfront cultural work is often neglected as managers just announce the merger and tell everyone to “work together and get along as new processes are invented.” This typically gets the venture off on the wrong foot, and it gets a lot worse before emotional bankruptcy, if not physical bankruptcy is reached.

Consultants hired to smooth the process focus on the benefits and the quick shot of cash from doing the merger. Their remuneration is tied to an efficient and speedy process, so they spend little energy on the blending of two cultures until the fan becomes very soiled. This pattern is so stubbornly consistent that one wonders why more caution is not exercised. Some groups have found ways to do mergers right, and I hope to add some value with tools and ideas that can contribute to the art.

One bit of advice is to be more conservative during the initial planning phase. First, assume your calculations of the benefits are order-of-magnitude correct, but quadruple the estimated time it will take to accomplish them. Next, take the projected investments required to achieve the benefits, as best you can estimate them in advance, and multiply that number by 10. Finally, take the best intelligence on how this merger is going to negatively impact customers and suppliers, and bump that up by a factor of 5X. That might be a reasonable approximation of a business case for the venture. If the merger still looks viable under those circumstances, then going on to the next steps is probably worthwhile. If the figures based on this more realistic scenario cause you to gulp, better read up on some of the horror stories of merger disasters in other organizations and check your medicine cabinet for antacids and tranquilizers.

Acquisitions gone bad are not hard to find. For example the Daimler-Chrysler merger in 1998 was a classic debacle that cost Daimler nearly $36 Billion over a decade. Just as a reality check, my calculation reveals this to be about $10 Million a day for 10 years. Large scale disasters like this are plastered on the front pages of business periodicals. Unfortunately, the more pervasive problem is the thousands of unsung smaller-scale disasters that go on continually within organizations of all sizes and types.

I am not saying all mergers are failures compared to intentions. I am sure there are some positive surprises as well. My thesis is that the track record does not indicate a positive result is most likely. In the coming weeks, I will be sharing many different aspects of the merger and acquisition business. We will look at the issue in both large scale mergers and in the tiny restructuring efforts that go on daily in most organizations. I would appreciate any comments, suggestions, or ideas you have along the way.

8 Responses to Merger Miseries One

  1. Robert – – –

    I’ve been holding to the side your series on mergers from last fall, waiting to read them during a “quiet time.” I finally have a quiet moment or two, and, as a veteran of the merger wars (having managed the HR side of 30 acquisitions involving 5000 or so employees), I’ve begin reading the series with eagerness.

    I’ve enjoyed — and agreed with — the first post in the series a great deal. Indeed: Why are the hassles underestimated? In my experience, I equate it to the world of dating. That is to say, sometimes people “fall in love” very quickly — and any words of caution from their family and friends often fall on deaf ears.

    So, too, does it happen with acquisitions. The CEO “falls in love” with the target company (or, at least falls in love with the idea of the money that can be saved or generated because of the deal), and all words of caution go unheeded. Just as someone who thinks they are in love tends to disregard sound advice if it runs contrary to their desires, so too are cautions disregarded by a CEO hell-bent on acquiring a particular company to fulfill their vision. Somehow, the fact that the target company has a very different culture from the acquiring company isn’t perceived by the CEO as a red flag.

    Ain’t love grand?

    Thanks for sharing this series of insights.

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