Can you make mergers work? Only if you have great leadership skill
The most successful deals…are those where the strategy is clear and integration is quick, allowing the acquirer to realise synergies and recover the premium it paid to buy the business.
Retaining key employees is also critical, otherwise bidders can see much of the value of their purchase walk out of the door.”
Lina Saigol and Richard Milne, Financial Times (3 May 2010)
As the East African economy taxis for takeoff, many a company is going to eye an interesting merger here and an enticing takeover there. It is a quick way to acquire scale, market share, new customer segments, locations and facilities, technology, talented employees. Or is it? The evidence suggests that boards and CEOs should exercise great caution when considering acquisition targets.
Hundreds of studies conducted across the world suggest that as few as 30% of mergers achieve their planned benefits. Most spend interminable months and years trying to integrate businesses, align cultures and realise mythical synergies. Most lose market share and market value as combined businesses compared to stand-alone ones.
What goes wrong? Pretty much everything. IT systems prove impossible to integrate. Leaders egos clash over positions, politician-style. The best employees find it all a drag, and leave. What looked like complementary corporate cultures during the acquisition talks turn out to be a clash of civilisations. The fear of redundancies to come hangs over the merged organisation like a shroud. Customers find a bloated organisation in disarray, unable to engage or offer meaningful service. Competitors make hay.
Those of you who have lived through mergers will have nodded your heads several times there. I know I’ve seen it many times, both from within and as an advisor to the process. The truth is, mergers don’t often follow logic: no matter how much you warn of the pitfalls, they become vanity projects for empire-building leaders who concoct fictitious financial rationales for pressing ahead.
Kraft’s recent purchase of Britain’s venerable Cadbury is the most recent merger to run into turbulence, with the public, employees and key shareholders up in arms. Our own track record is very patchy too: there are not many local examples of successful integration of merged entities.
So what to do? Lina Saigol and Richard Milne recently asserted in the FT: whatever you do, do it quickly. Many experts suggest you aim for a 6-month integration of systems, processes and people. Don’t leave it any longer than that. A prolonged and painful integration exercise will drain the energy of your new enterprise. Set a deadline, and focus everyone’s attention on it. You won’t achieve it, but you will create urgency and get a lot done and some difficult decisions made.
The authors point out that Spanish bank Santander took over Britain’s Abbey National in 2004, and projected a £300 million annual saving to be realised by combining proprietary IT systems. They achieved it six months ahead of schedule, and lowered their cost-income ratio dramatically as a result.
Mergers, acquisitions, amalgamations, collaborations: all require a combination of two critical attributes. First, a hard-nosed focus on the key numbers and synergy targets. But second, a more subtle understanding of human psychology and the fears and hopes that drive it. They require business leaders who initiate a merger out of hard business sense, yet have the emotional insight to know how to allay fears and enrol people in new visions, while simultaneously cutting costs and removing duplication.
Those skills do not often exist in the same management team, let alone the same person. And that is why so many mergers run aground. The problem is not in the employees or systems, it is usually in the quality of leadership. If you want to have a big merger on your CV, you had better be an inspirer of people and an executor par excellence.
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