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It's a fact: most business acquisitions and mergers fail.   Management desires the gains that consolidation and economies of scale should bring, but in fact the great majority of M&As-across all industries-do not live up to their promises.  On paper, two plus two should equal five.  In fact, two plus two usually equals three.  This has been conclusively shown by dozens of studies covering hundreds of companies across all industries.  Some excerpts:

"70 percent of mergers fail to achieve their anticipated value."
 -Weekly Corporate Growth Report

"Most [mergers] fail to add shareholder value-indeed, post-merger, two-thirds of the newly formed companies perform well below the industry average."
 -Harvard Management Update

Why do the majority of M&As fail?

Mergers and acquisitions fail for a variety of reasons. First of all, a deal can fail because it was not a good idea to begin with. Some executives get caught up in the ego-boosting idea of growth for its own sake. The business culture and profit motive may discourage internal managers and external agents from pointing out potential pitfalls, and the deal can carry through without any serious challenge.

Second is the failure to manage the "human" or "cultural" integration. Businesses are more than financial reports-they all include of people-people with uncertainties, self-interests, personal desires, needs, etc. A great number of acquisitions proceed with minimal effort to integrate the people aspects of the businesses. When this happens, its no wonder they fail.

"By some estimates, 85 percent of failed acquisitions are attributable to mismanagement of cultural issues."
- Industrial Management

The people aspects necessary for a successful integration include communications, goal-setting, management styles and expectations, trust issues, work environments, implicit values and norms, and issues such as the equity in benefits and work rules. Neglecting any one of these can make life difficult for many of those involved. Neglecting all of them is a sure precursor to failure.

How We Can Help You

InterLINK's core competencies cover the "people" issues necessary to integrate businesses successfully. Our experience with companies involved in M&As has led to the development of unique Merger Integration Services, in order to help companies avoid the 70% chance of failure.

The odds are against you. Most mergers and acquisitions fail, at a high cost to the businesses and the people involved. Our Merger Integration Services specifically designed to ensure the success of your investment. Put the odds in your favor when you work towards success with InterLINK.

 

What Are the Costs of a Failed Acquisition?

The initial costs show up in decreased performance and productivity. Uncertainty, lack of communication, and mistrust frustrates employees. The lowered morale and trust causes people to operate at only a basic level of performance and not to do anything that might cause them to get noticed, and possibly laid off. In other words, they take a wait-and-see approach, rather than being excited about the potential synergies between the two organizations. This starts a vicious cycle downward.

Front-line supervisors and managers responsible for the integration start to suffer "emotional burnout". Dealing with layoffs and uncertainties takes its toll on everyone. The best performers start to consider other jobs. They get hired more easily by other companies, and so siphoning off of this talent hurts the labor pool badly. This causes even more decline in performance.

Corporate performance continues to slip faster than the expected efficiency gains are realized, and shareholders become discontented. Customers wonder what is happening as the oversold efficiencies fail to occur, and quality and customer service suffer. The "buzz" sours, and the company's reputation suffers.

Eventually the company reaches a "tipping point", where the losses outweigh the gains, with a corresponding decline of shareholder value.

"One-third of the transactions provided marginal returns, while only 17% provided substantial returns to shareholders."  About these figures, one expert said: "That's a staggering number.  That means those organizations were better off before they merged than after they merged." - Best's Review/Property-Casualty Insurance Edition

Overall, the costs of an unsuccessful acquisition are extraordinary: lower morale, increased employee turnover, lower productivity, customer complaints, loss of reputation, and loss of shareholder value. This creates a real-life business tragedy, especially considering the great amount of work necessary to put the deal together and the heady sense of optimism formerly experienced among the dealmakers.

 

What it Takes to Do It Right

As noted below, business acquisitions do require a great deal of work in the Legal and Financial areas. This is widely understood and acted on in the business community.

  • Financial Factors: Due diligence, financial review, valuation, financing, taxation, synergies, etc.
  • Legal Factors: Due diligence, contract issues, negotiation, closing mechanics, post-closing issues, etc.
  • Business Factors: Strategic planning, operation and technical due diligence, integration of product lines, sales, etc.

They also take work in Business Systems Integration, a fact widely understood but somewhat less-swiftly acted upon.

A key factor, however, is not often recognized. That is the People factor discussed above.

 

"In acquisitions that do fulfill their promise -- that really make two and two equal five -- leaders paid a great deal of attention to the integration process and, not surprisingly, involved people at all levels of the process."
- Academy of Management Executive

The People factor is the missing "puzzle piece" that causes most of the 70% of failures in business acquisition.

People Factors include organizational culture, trust, communication, leadership, skills, employee retention, etc.

Because the People factors are typically not included in the typical M&A process, nor considered by the dealmakers, they constitute an important but unseen risk.

Click here for a more detailed discussion of successful integration practices.

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QuickFACTS

"By some estimates, 85 percent of failed acquisitions are attributable to mismanagement of cultural issues." - Industrial Management

Three factors that most influence the outcome of a merger are its strategic rationale, the price paid, and what Mercer consultants call ''the hard part" -- post-merger integration. ''It's what happens when the ink dries that determines whether an acquisition is a success or not," - Business Intelligence, Boston Globe

There are seven examples of 'people' expertise in most-M&A that are the keys to success:

  • Culture
  • Change Management
  • Trust
  • Leadership Skills & Team Continuity
  • Transition Planning
  • Retention of Key Personnel
  • Human Resource Policies/Benefits

Understanding the impacts of these factors sets the tone for long-term growth and successful integration.

 
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