There must be a better way

Which frequently used business strategy is guaranteed to create big rewards for accountants, lawyers and bankers yet at best has only a 50% chance of creating value for the businesses deploying the strategy?

Answer - Mergers and Acquisitions.

Susan Cartwright is Professor of Organisational Psychology at the Manchester Business School and her research interests and publications are in the area of occupational stress and organisational change, particularly in the context of mergers, acquisitions and joint ventures. In an article in the Daily Telegraph Business Summer School she writes:
“US sources place merger failure rates as high as 80%. UK evidence indicates that around half of mergers fail to meet financial expectations. A much cited McKinsey study suggests that most organisations would have received a better return on their investment if they had banked their money instead of buying another company".

So with a failure rate of between 50% and 80% why has the trend for this apparently high risk strategy grown significantly in pace and volume in the last decade?

Undoubtedly the persuasive powers (and the powerful incentives) of the M&A financiers and their associated service providers/advisors are a significant factor – however a key driver of mergers and acquisitions is change. Change is happening so fast, so frequently and on such a large scale that businesses find themselves needing to change shape, focus, size and capability, and often believe that they must do this rapidly and on a large scale. M&A offers an immediate and attractive approach that can be a logical means of achieving this. When it is executed effectively, it can deliver the desired outcomes. But, when it is not done well, the results can be a massive disappointment, as Susan Cartwright and others report. So it looks like we need to use it, but at this rate of failure can we afford to keep on doing it the way we always have? Is there a better way to ensure that M&A’s deliver more predictable outcomes?

Susan Cartwright goes on to say:
“To make mergers and acquisitions work senior managements must focus on integrating the cultures of the companies brought together…One lesson to be learned is that deals work best when the cultures of combining companies are similar … A related lesson is that due diligence in advance of deals should extend to evaluating the degree of the cultural fit between companies. Executives involved in mergers and acquisitions need to understand the cultural values and strengths and weaknesses of their prospective partners”.

This makes sense but why might this be effective and how could you do it anyway? Applying a Competitive Strength perspective to M&A provides some answers.

The Competitive Strength Report enables a business to rapidly and objectively assess its Competitive Strength expressed as one of four Competitive Strength Conditions – Constrained – Comfortable – Excellent – Free. Each condition, expressed across 15 dimensions of measure, is a product of how an organisation thinks and behaves and so they are also concise assessments of the organisational culture. It is therefore possible to compare the different cultures and assess the potential consequences of combining these, the potential risks of complete failure, and how to ensure you get the result you want from M&A as opposed to just what turns up!

An example of just what “turns up” are when a Comfortable organization acquires a Constrained one, often a temptation because of the apparently low price for which the Constrained business might be acquired for. A Comfortable business has a relatively low potential for change and a Constrained business an even lower one. The chances are the combined businesses will both become Constrained and value will be lost – a donkey and a mule are unlikely to perform like a thoroughbred – a sickly donkey and a mercy call to the Vet is a much more likely result! Is the BAA situation an illustration of this, we wonder?

When a Comfortable business acquires or merges with an Excellent business they will most probably pay a high price for it (it will have strong financial performance) and yet the Excellence can be so quickly lost. We know first hand of one example where it took just 8 months for the acquirer to turn an excellent business from being highly profitable to loss making and for it to disappear completely in under two years.

Even an Excellent business acquiring or merging with a Comfortable or Constrained business can find its Excellence diluted, especially if it is not fully aware of why it has achieved its Excellent Competitive Strength Condition and how to maintain it. A merger situation where it might not be as dominant a partner as it expected is a particular risk. Have recent results at Virgin Media illustrated this type of “what turns up”?

What about Comfortable with Comfortable or Constrained with Constrained? Well they are likely to get on well but the chances of adding value are slim. The “synergy” is likely to be 1 problem + 1 problem = 3 problems.

Explore the Competitive Strength website, apply the ideas to what you know and have experienced of M&A and decide for yourself if this might produce a better way.