Strategy & Operations

Surviving Merger Mania

I ask retailers lot of questions and one of my favorites is, “What keeps you up at night?”

One of the most telling answers came from a senior supermarket executive several years ago who replied: “Waking up in the morning and finding out my company was acquired by A&P.”

His attitude was understandable, and one that was shared by many in the industry after decades of hubris-driven mismanagement that snaked its way into every acquisition the now defunct chain made for over 30 years, finally leading to its epic and long overdue demise.

Corporate Sinkholes

However, this isn’t about one company’s mistakes, although it is a textbook case of how not to do business. Let’s look at a broader issue that needs to be explored; namely, no matter how good the fit a merger or acquisition might seem, corporate marriages can easily become financial and operational sinkholes.

More to the point, the failure to fully integrate businesses culturally, operationally or technologically results from the corporate version of the seven deadly sins: lust, gluttony, greed, sloth, wrath, envy and pride. However, let’s add one more to the list. The most pervasive sin of all—ego! Leave it at the door or run the risk of getting tangled up in your own self image.

To begin, let’s clear up one misconception. The so-called merger of equals is a myth. Eventually, one company, or group of executives that fancy themselves empire builders, winds up dominating the other. And these Alphas are not always the most savvy business planners. Often it’s the group whose blinding egos prevent acquired companies from maintaining their own hard-won reputations and whose operations end up folded into the warm and sometimes smothering embrace of the mother ship.

Life After Merger

There are, of course many successful marriages. The one that comes to mind for most consultants and Wall Street types is Disney and Pixar, which observers have called a match made in heaven that breathed new life into the Mouse House.

However, think about some other, less benign possibilities.

  • Will Amazon continue to let Zappo’s be its own quirky self? And will the online behemoth’s acquisition of Whole Foods forever change the dynamics of the grocery business or will it be Amazon’s Waterloo in grocery?
  • Will Albertsons—the king of plain vanilla, middle of the road retailing—continue on the acquisition trail in the brick-and-mortar and digital business?
  • Would the beleaguered Lululemon Athletica be better off under Nike’s tutelage or not?
  • Will whomever acquires Jimmy Choo have the same love affair with the brand as Carrie Bradshaw and leave the iconic brand to stand on its own stilettos?
  • Might PetSmart, which has not been able to get much e-commerce traction, end up putting too tight a leash on Chewy.com, whose brand has become synonymous with customer service?

The Harvard Business Review has estimated that the failure rate of mergers and acquisitions is somewhere between 70 and 80 percent. Some never get out of the gate while others are stymied by a complex regulatory process. Then there are the few that manage to leverage each other’s strengths and retain their unique identities.

But it’s the post-merger failures that can really kill one’s appetite for growth by acquisition and create a toxic environment for innovation. In fact, other studies indicate that 30 percent of mergers fail within the first three years.

Fatal Attractions

With worldwide M&A activity at record levels and approaching nearly $1 trillion per quarter it’s easy to see the attraction for dealmakers. But the negative impact of these deals has often been underestimated while the potential synergies, or at least the timeline at which they are instituted, are overestimated. Basically, not all firms have good acquisition strategies and even those that do have a hard time sticking to them once the rubber meets the road.

The first step in smoothing out any post-merger scenario between two companies is the basic reorganization and integration of both companies in order to take advantage of each other’s strengths and identify or eliminate weaknesses. This is the point at which the basic standardization and streamlining of operations and people takes place, according to Harvard researchers. It can also be a potential minefield if middle and upper management feels threatened enough to put the kibosh on change.

This is also the time to recognize a merger for what it is—a marriage where both parties are going to spend a lot of time together—for better or worse, in sickness and in health.

This seems to be underscored by research from McKinsey & Co. showing that only 16 percent of merger-related reorganizations deliver their objectives on time, while 41 percent take longer than expected. And in 10 percent of cases, the needle on the misery index starts moving in the wrong direction and the reorganization plan just ends up harming both companies.

Avoiding Culture Clash

Much of this angst is the result of too little attention being paid to cultural issues during the integration process.

As such, McKinsey has developed a much-needed five-step process for a smoother reorganization process:

  1. Develop profit-and-loss statements as an integral part of any M&A plan to calculate the cost of change and the level of disruption it will cause, not only to operations but the human element as well in order to keep employees from looking for a new job.
  2. Uncover and understand the strengths and weaknesses of each organization, preferably before the deal is closed. Some of that can come from former employees who may now be with your company or from sites like LinkedIn that can assist you in profiling managers.
  3. Consider not only what the organization looks like but also how it works in terms of management, business processes and systems, as well as the capabilities and behaviors of its employees.
  4. This may be the hardest step, according to McKinsey, noting that executives tend to trust their teams to handle new acquisition transition plans. But this is the time for them to get more deeply involved with synergies, understanding the new company’s strengths and weaknesses and make refinements.
  5. “Launch, Learn and Correct Course.” Few reorganizations work perfectly from the beginning especially when you have two organizations with completely different cultures. Encourage everyone to point out the new organization’s “teething problems,” openly debate solutions, and implement the appropriate fixes as soon as possible.
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But if you could pinpoint one thing that could cripple a good merger or acquisition more than anything else it would be this: culture clash!

Much of that has to do with people, not numbers. These transactions are not a matter of simple mechanics. During and following an acquisition there is a tendency for a small circle of decision makers to keep things close to the vest. But limiting communication can exclude the people in areas like marketing and sales who are closest to your customers and whose input would be invaluable.

Building Bridges

And as important as synergies are, don’t push too hard too soon. This can cause disruption among people who are already nervous about the outcome of the acquisition. As such, M&A gurus will tell you it’s not only about what you do, but when you do it and to take a good, hard look at the long-term effects of what you’re doing.

This means taking the time to build bridges between management and employee teams from both companies, not erecting barriers to keep them separate. Creating a culture that empowers people and enables them to thrive is fundamental to the integration process according to experts in the field. If you leave people in the dark surrounded by shadows of fear without showing them a clear career path in the newly joined organization, you’ll find them hunkering down to update their résumés.

Think of mergers and acquisitions in terms of a redesign. Would you treat one part of the store differently than another? Some categories will play a larger role than others. But the ultimate goal is to sell everything in the store.

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