Why Do Mergers Fail?

merger and acquisition image

During the 1980’s and 1990’s the numbers of mergers and acquisitions dramatically increased.  As organizations were forced to restructure and develop new strategies to maintain competitiveness, mergers, strategic alliances, and other integrative organizational strategies became more prevalent.  But a study by Rohrer, Hibler, and Replogle (a management consulting firm) found that 65% of a sample of merged companies called the outcome disappointing or a total failure.  The question to be answered in order to increase the success of mergers or other partnerships is “How do we successfully integrate with another company whose values, culture, management approaches, and operating practices are different from ours?”  

The primary reason many mergers and acquisitions do not deliver longer-term value is because they lack a strong cultural-integration plan. Like people, acquired organizations go through a change curve immediately after a deal is made, and the systems, processes, and programs that underpin the acquired company’s culture are heavily scrutinized. All too often, these are quickly replaced. That’s because the acquiring company spends little time planning and leading through this critical change curve. Leaders fail to realize integrating cultures is not a short-term task and does not happen immediately. Rather, it takes time to understand what the newly formed entity will look like and then put a management team in place that is both persistent and aligned as it guides the organizations, practices, and people toward the established vision.

The problem seems clear enough: not enough time is spent investigating the differences between the merging companies. Management styles, company cultures and employee expectations almost always differ between companies. Surveys of chief executives and other senior executives in the late 1990’s whose corporations ranked among the nation’s largest and who merged with or were acquired by another company points to this oversight. Over 90% of the CEO’s think that a thorough investigation of management is a necessary part of the merger evaluation process. Additionally, 81% agree that “people problems” are more likely to affect long-term merger success than financial ones and 85% of the CEOs indicate, “If they had to do it over again they would spend much more time evaluating the people issues”.

I suspect that these opinions have not changed much some ten years later. As one CEO recently said, “You have to remember, you’re not acquiring a business as much as you’re acquiring a culture of people.” What then are the people problems? When companies merge, their identities clash. Disbelief, uncertainty, and a feeling of pending disaster pervade executives whom have built careers within one organization only to see them upset by a merger. The same feeling pervades the whole company for the acquiring and acquired company. Employees in the acquiring company may have a concern that the company is changing its focus and their job will be eliminated. Office workers in the acquired company learn that their jobs may depend on how they fit into the new company rather than on past performance. Rumors of pay freezes and benefit losses weigh heavily upon hourly workers. In general, employees may become frozen in the path that they are pursuing. This happens in both hostile and friendly mergers. With individuals preoccupied by the merger and personal fate, performance levels drop, productivity may be reduced, employees are less engaged with their work and profits can suffer. Right after a merger is the time to watch for symptoms of impending difficulty. 

Key Integration Levers and Components:

There are seven key levers that can influence the success or failure of a cultural integration initiative. They are:

1. Integration teams, which can build the necessary relationships between the two companies;

2. Speed, which refers to the sense of urgency (not haste) that must accompany the integration;

3. Leadership, or buy-in to the process from key members of the management team;

4. Communication, which must be consistent both internally (associates, board) and externally (shareholders, customers);

5. Retention of valuable employees who can help smooth the transition;

6. Culture, second in importance only to results;

7. Results, which are the ultimate goals of the merger, and which should guide the process.

Key Problem Components:

• Preoccupation Has the merger obsessed employees? Is this reducing job performance?

• “We vs. They” Are employees focusing on the difference rather than similarities of the merging companies?

• Illusion of Control: Does top management produce a master plan promising that merger changes will be as painless as possible and does such a plan fail to reassure employees?

• Constricted Communication Are most employees ignorant of what is happening? Has top management retreated to the Board Room to form strategies but lost touch with the rest of the company?

Impact of Mergers on Shareholders:

All evidence from ex-ante studies indicates that the impact of merger announcements on the share price of the acquiring company is negative in the medium and long-term, while the impact on the share price of the target company is positive. Ex-post studies are consistent with these pessimistic assessments of the impact of M&As on company profitability. From as far back as the 1950s, data show declines in profitability of around 15% of merged companies. A large US study showed that acquired companies, which did well prior to the merger, deteriorated after the event. Acquired companies which did badly in advance of merger went from bad to worse. Furthermore, it is found that between 19-47% of all acquisitions were disinvested within 10 years of acquisition.

Over the years, academic studies have consistently shown that only 15% of mergers are successful and over 60% have negative results.

In trying to assess why, despite this evidence, mergers do indeed happen, it is therefore concluded that much can be attributed to “bandwagon mergers” based on a so-called “minimax” strategy. In the minds of company executives this strategy is aimed to minimise regret as far as is possible. Therefore, when they observe other companies around them being involved in merger activities, it is considered whether the level of regret would be greater if they sat tight and did nothing and saw other ventures succeed or become an acquisition target themselves, or whether regret would be greater if a merger was initiated which eventually failed. As the latter would be the experience of a majority of their peers, regret would be minimized.

What does it take to reverse this trend and make the merger work?

First, top management needs to become more sensitive to human relations issues. They should prepare mid-level managers, supervisors, clerical and hourly personnel for the transition and give a chance to air fears and hopes. It is very important for management to quickly send the message to employees that they have not been forgotten and that their concerns are the concerns of top management. It is also important that an assessment using a custom designed survey tool take place pre-merger or as soon after the merger as possible to determine the cultural attributes of the acquired company as well as a documentation of their management style. The cultural attributes that drive performance like employee engagement and productivity as well outcomes like profit should be identified to evaluate whether or not they are different from the acquiring company. Very often the cultural attributes that drive success in one company differ from those that drive success in other companies. If you do not document these drivers then you take the chance that they may be lost in the merger and the result will be lower of engagement and productivity among workers and eventually a drop in profit. Some months after a merger it is helpful to survey employees about their views and feelings. This conveys the message that what they think continues to matter as the new company begins to grow. It also gives strategic planners additional data to guide further integration and to identify areas for particular attention. It is very important during the integration process to regulate and frequently assess the progress against the proposed plan.

It is inevitable that new problems will arise and a quick resolution of these issues will benefit the final outcome significantly. Another helpful idea is to inform employees about the progress of the merger. What is the progress against the time line for integration? What new employee programs have been initiated and what changes have been made to already existing ones? Informed employees are better able to understand why decisions are made and exactly what impact they will have on them personally. It’s easier for them to take a more favorable view than those kept uninformed. They are also much more likely to help make the merger work. The absolute key to the success of these communications from management is sincerity. Employees must believe that management is telling them the truth and is not trying to pull the wool over their eyes. What appears to be a successful merger can turn sour very quickly if employees believe that they have been lied to, manipulated and used. Employees can very quickly determine if a communication from management is “all form and no substance.” Adversarial relationships between management and employees develop quickly after a merger and while a certain amount of stress and crisis is inevitable, it can be managed. Reaching out to employees in both companies, sharing and understanding corporate cultures that drive outcomes, developing common or complimentary goals and devising a transition structure can reduce the ill effects of expected anxiety. The product of these efforts will be a new company with a new hybrid culture supported by all employees. This approach is the surest way for both companies in a merger to achieve the operating and financial performance they hope to attain from the merger.