Wednesday, December 13, 2006

"A Disappointing Merger"

I just wrapped up an interesting project with colleagues from an investment bank. We were asked by a CEO of an able and healthy company to analyze why an acquisition which looked so good on paper five years ago bombed so badly in practice. Apart from protecting confidentiality, I want to assure you that the name of the company in question, and the financial specifics of the deal, are irrelevant to the learning points that my colleagues and I unearthed. As it turns out, the economics of the deal were sound. The price was good, the legal and structural issues were handled well, and the strategic rationale was solid. No problems before the documents were signed. The problems began afterwards. It turned out the gross cultural mismatches between the two firms pretty much overwhelmed and negated the financial and strategic advantages underlying the acquisition. Basically, what happened was that the key players in both companies had vastly different perspectives on how they ran their businesses, how they managed for growth, how they dealt with customers, and what they defined as appropriate corporate values. Even though the acquisition was not ever called a “merger of equals” (no acquisition ever is, regardless of the spin), the acquiring firm simply could not dislodge the cultural legacies and resistances within the acquired firm. How could Company X, which acquired Company Y, not have seen this train wreck coming? The reason is that the capable people on both sides who originally put together the deal were primarily “numbers” people. They focused their due diligence and preliminary analysis almost entirely on the financials and “big picture” strategy. Though they wouldn’t admit it, some of them ignored the cultural integration issue altogether, and the others naively assumed that things would somehow work out or that "staff" would figure out how to make the execution happen. Company X is certainly not unique. All too often in the M & A arena, these “soft” cultural issues are given short drift by dealmakers, and then they come back to haunt the marriage partners—in a “hard” way. Don't make the same mistake. That's the first, and most important, lesson. Next week I’ll tell you what we suggested to the CEO and the executive team.


Post a Comment

<< Home