The Seven Worst M&A Mistakes and How to Avoid Them
The world has not lost its taste for M&As despite evidence that the gross majority are “abysmal failures.” LHH looks at the seven biggest mistakes organizations make during M&As and offers some practical suggestions on how to overcome them.
Apr 24, 2019
Charles de Sabran and Joanne Layne
Nearly three years ago, Prof. Roger Martin of the University of Toronto’s Rotman School of Management uttered one of the most infamous quotes ever about the state of global mergers and acquisitions.
“M&A is a mug’s game,” Martin wrote in the June 2016 issue of The Harvard Business Review, “in which typically 70%-90% of acquisitions are abysmal failures.”
Martin may have been guilty of hyperbole, but he certainly had the case studies to back up his claim: Microsoft and Nokia, Google and Motorola, Hewlett Packard and Autonomy, News Corporation and MySpace. These were all multibillion-dollar deals that ended with the acquiring company forced to sell off the acquired asset and write off nearly all of the money invested to bring the companies together.
Despite Martin’s assessment, the world does not seem to be losing its appetite for M&As.
In 2018, nearly $3.9 trillion in M&As were announced. It was not a record, but had the proposed marriage between U.S. cellular carriers Sprint and T-Mobile been allowed to proceed—it is currently in a state of limbo at the direction of regulators—it would have been one of the busiest years ever in M&A activity.
Given that every year sees a new wave of M&A activity, why do we continue to see such a poor record of success? Theories abound.
Currency fluctuations and trade wars can derail some deals. Sometimes, proposed M&As collide with shifting markets or unforeseen technological complications. And in many cases, acquiring companies simply overpay for an asset and underestimate the costs of integration.
There is, however, a common thread running through most botched M&As: failed cultural integration.
Deloitte has estimated that failed cultural integration is a primary cause in about 30 percent of failed M&As. Bain & Company has identified cultural integration as the number one cause of M&A failure.
After reviewing the details of M&As that Lee Hecht Harrison (LHH) has seen up close, we’ve identified seven common mistakes related to cultural integration that bring down many promising M&As.
The New Company Obsession: Trying to deliberately erase one of the legacy cultures. Every company has a unique DNA that, like humans, is deeply ingrained in all that they are and do. Many leaders make the mistake of thinking that the DNA of an acquired company will just disappear. However, experience tells us that there will always be trace elements of the DNA of both organizations in an integrated company. Failure to acknowledge this reality can lead to fear, resentment and—ultimately—a failure to fully integrate.
The Ivory Tower Syndrome: When fear invades the senior leadership team. For many leaders, an M&A can trigger fears about their own careers. They may worry about losing influence, status, power or, ultimately, their job. This anxiety is exacerbated by the fact that integrations can take many months, if not years, to complete. This can make many leaders feel estranged from their day-to-day duties and disinterested in the outcomes of the M&A.
The Mirror Effect: Projecting the fears of leaders onto the entire organization. When leaders are fearful, they can project those fears onto an entire organization. For example, a recent client undertaking an M&A guaranteed to all employees that there would be zero job cuts for the first three years. But when we met the executive team, they were convinced that these assurances did not apply to people at the senior leader level. Their concerns about “unofficial” job cuts eventually invaded employee discussions at all levels of the organization. Once employees saw that their leaders had lost faith in the organization’s pledge, they also began to lose faith.
The Road Runner and Wile E. Coyote Scenario: Making rash decisions and falling off the proverbial cliff. Those of us who grew up watching this iconic cartoon may remember that no matter how hard he worked or what gimmick he employed, Wile E. Coyote could never catch the Road Runner. The problem was that the Coyote, in his desperation, was willing to try anything without pausing to consider the wisdom of his schemes. This is certainly a scenario we see in M&As.
When attempting M&As, leaders sometimes believe they must always be making, announcing and implementing integration decisions. If too few managers or employees are involved in formulating those decisions, however, there is a high risk of disengagement. Before announcing any decision, it’s important to reach out to as many people as possible to discuss the ramifications. Just as Wile E. Coyote discovered, making bad decisions quickly and in isolation can lead you over the proverbial cliff.
The Broken Record Syndrome: Keep selling the rationale of the deal instead of tackling practical issues. We often see that, in order to meet communication expectations, leaders fall into the habit of just repeating core messages over and over again and never acknowledging that new problems have arisen. When the message is out of date and deliberately ignores new developments, it can completely undermine leadership’s reputation. Sometimes, it’s better to be silent rather than redundant.
Abandonment Issues: Not supporting middle managers. Middle managers form the backbone of most organizations. They are the frontline for all the questions, fears, anger and confusion an employee may experience in the midst of an integration. Despite that reality, middle managers are often forgotten when it comes to managing an integration. If the leaders of an M&A starve middle managers of information and leave them unable to answer the most basic of questions, those managers and their teams will quickly lose faith in the integration.
The First Spring Flower Syndrome: Claiming success prematurely. Anyone who has lived through an M&A knows it can be a long, unpredictable and sometimes uncomfortable journey. Despite this, senior leaders are sometimes quick to claim victory once the process has been launched. This is particularly true of cultural integration. It will take months, maybe even years, for two different cultures to mesh and find a happy, productive common ground. Claiming victory prematurely can frustrate workforces and actually lengthen the gestation period for a full integration.
The challenge of avoiding these pitfalls of cultural integration often falls to HR leaders. Based on our experience working side-by-side with HR leaders in the throes of integration, LHH has identified several best practices that can help bridge the cultural gap experienced during many M&As.
These best practices include but are not limited to:
Create a “cultural” workstream led by the senor leadership team. A workstream focused on cultural integration can determine the distinct qualities in the DNA of both organizations and identify what is shared and how to create common ground. A cultural workstream ensures both entities respect each other’s values and histories.
Measure the truth. Regularly survey the field to get an honest assessment of how the integration is progressing. When events are unfolding rapidly in an M&A, we tend to demonstrate greater biases and make more assumptions. To figure out exactly how well the organization is handling an integration, it’s important to survey different levels of the organization and encourage an open dialogue so that everyone knows what’s really going on.
Clarify expectations around new leadership behaviors. Successful organizations take early steps to articulate the leadership values and behaviors necessary to facilitate the integration. Clearly communicating these expectations lets leaders know that they must be prepared to change their own behaviors to successfully drive an integration.
Invest heavily in the middle managers to build foundational leadership skills, fill intercultural gaps and mitigate unconscious bias. The capacity and willingness of middle managers to adopt the new integrated culture can make or break an M&A. During the early stages of an integration, where important first impressions are made, middle managers must know why and when things are happening so that they can keep the workforce up to speed and solidly invested in the integration.
As an HR leader, don’t get caught up in the technical aspects of the integration. To avoid getting caught in the tall grass of technical details, organize collaborative workshops with key leaders from both entities. These forums can help leaders quickly flag issues and deliver solutions that demonstrate that the new integrated organization is just as concerned about people as financial projections.
Secure your key talent. Senior talent not only drive results, they retain the knowledge and experience necessary for future success. Incentives and tailored working conditions will be essential to retaining these people. Retaining key talent will prove to be much more cost effective than having to go out and replace them.
The one positive aspect of the “abysmal” record of M&A success is that it has provided us with an abundance of data about what companies are doing wrong, which can actually help us draft a blueprint for a successful integration.
In M&As, as in life, we can always learn from the mistakes of others and commit to doing things a different way.
“M&A is a mug’s game,” Martin wrote in the June 2016 issue of The Harvard Business Review, “in which typically 70%-90% of acquisitions are abysmal failures.”
Martin may have been guilty of hyperbole, but he certainly had the case studies to back up his claim: Microsoft and Nokia, Google and Motorola, Hewlett Packard and Autonomy, News Corporation and MySpace. These were all multibillion-dollar deals that ended with the acquiring company forced to sell off the acquired asset and write off nearly all of the money invested to bring the companies together.
Despite Martin’s assessment, the world does not seem to be losing its appetite for M&As.
In 2018, nearly $3.9 trillion in M&As were announced. It was not a record, but had the proposed marriage between U.S. cellular carriers Sprint and T-Mobile been allowed to proceed—it is currently in a state of limbo at the direction of regulators—it would have been one of the busiest years ever in M&A activity.
Given that every year sees a new wave of M&A activity, why do we continue to see such a poor record of success? Theories abound.
Currency fluctuations and trade wars can derail some deals. Sometimes, proposed M&As collide with shifting markets or unforeseen technological complications. And in many cases, acquiring companies simply overpay for an asset and underestimate the costs of integration.
There is, however, a common thread running through most botched M&As: failed cultural integration.
Deloitte has estimated that failed cultural integration is a primary cause in about 30 percent of failed M&As. Bain & Company has identified cultural integration as the number one cause of M&A failure.
After reviewing the details of M&As that Lee Hecht Harrison (LHH) has seen up close, we’ve identified seven common mistakes related to cultural integration that bring down many promising M&As.
The New Company Obsession: Trying to deliberately erase one of the legacy cultures. Every company has a unique DNA that, like humans, is deeply ingrained in all that they are and do. Many leaders make the mistake of thinking that the DNA of an acquired company will just disappear. However, experience tells us that there will always be trace elements of the DNA of both organizations in an integrated company. Failure to acknowledge this reality can lead to fear, resentment and—ultimately—a failure to fully integrate.
The Ivory Tower Syndrome: When fear invades the senior leadership team. For many leaders, an M&A can trigger fears about their own careers. They may worry about losing influence, status, power or, ultimately, their job. This anxiety is exacerbated by the fact that integrations can take many months, if not years, to complete. This can make many leaders feel estranged from their day-to-day duties and disinterested in the outcomes of the M&A.
The Mirror Effect: Projecting the fears of leaders onto the entire organization. When leaders are fearful, they can project those fears onto an entire organization. For example, a recent client undertaking an M&A guaranteed to all employees that there would be zero job cuts for the first three years. But when we met the executive team, they were convinced that these assurances did not apply to people at the senior leader level. Their concerns about “unofficial” job cuts eventually invaded employee discussions at all levels of the organization. Once employees saw that their leaders had lost faith in the organization’s pledge, they also began to lose faith.
The Road Runner and Wile E. Coyote Scenario: Making rash decisions and falling off the proverbial cliff. Those of us who grew up watching this iconic cartoon may remember that no matter how hard he worked or what gimmick he employed, Wile E. Coyote could never catch the Road Runner. The problem was that the Coyote, in his desperation, was willing to try anything without pausing to consider the wisdom of his schemes. This is certainly a scenario we see in M&As.
When attempting M&As, leaders sometimes believe they must always be making, announcing and implementing integration decisions. If too few managers or employees are involved in formulating those decisions, however, there is a high risk of disengagement. Before announcing any decision, it’s important to reach out to as many people as possible to discuss the ramifications. Just as Wile E. Coyote discovered, making bad decisions quickly and in isolation can lead you over the proverbial cliff.
The Broken Record Syndrome: Keep selling the rationale of the deal instead of tackling practical issues. We often see that, in order to meet communication expectations, leaders fall into the habit of just repeating core messages over and over again and never acknowledging that new problems have arisen. When the message is out of date and deliberately ignores new developments, it can completely undermine leadership’s reputation. Sometimes, it’s better to be silent rather than redundant.
Abandonment Issues: Not supporting middle managers. Middle managers form the backbone of most organizations. They are the frontline for all the questions, fears, anger and confusion an employee may experience in the midst of an integration. Despite that reality, middle managers are often forgotten when it comes to managing an integration. If the leaders of an M&A starve middle managers of information and leave them unable to answer the most basic of questions, those managers and their teams will quickly lose faith in the integration.
The First Spring Flower Syndrome: Claiming success prematurely. Anyone who has lived through an M&A knows it can be a long, unpredictable and sometimes uncomfortable journey. Despite this, senior leaders are sometimes quick to claim victory once the process has been launched. This is particularly true of cultural integration. It will take months, maybe even years, for two different cultures to mesh and find a happy, productive common ground. Claiming victory prematurely can frustrate workforces and actually lengthen the gestation period for a full integration.
The challenge of avoiding these pitfalls of cultural integration often falls to HR leaders. Based on our experience working side-by-side with HR leaders in the throes of integration, LHH has identified several best practices that can help bridge the cultural gap experienced during many M&As.
These best practices include but are not limited to:
Create a “cultural” workstream led by the senor leadership team. A workstream focused on cultural integration can determine the distinct qualities in the DNA of both organizations and identify what is shared and how to create common ground. A cultural workstream ensures both entities respect each other’s values and histories.
Measure the truth. Regularly survey the field to get an honest assessment of how the integration is progressing. When events are unfolding rapidly in an M&A, we tend to demonstrate greater biases and make more assumptions. To figure out exactly how well the organization is handling an integration, it’s important to survey different levels of the organization and encourage an open dialogue so that everyone knows what’s really going on.
Clarify expectations around new leadership behaviors. Successful organizations take early steps to articulate the leadership values and behaviors necessary to facilitate the integration. Clearly communicating these expectations lets leaders know that they must be prepared to change their own behaviors to successfully drive an integration.
Invest heavily in the middle managers to build foundational leadership skills, fill intercultural gaps and mitigate unconscious bias. The capacity and willingness of middle managers to adopt the new integrated culture can make or break an M&A. During the early stages of an integration, where important first impressions are made, middle managers must know why and when things are happening so that they can keep the workforce up to speed and solidly invested in the integration.
As an HR leader, don’t get caught up in the technical aspects of the integration. To avoid getting caught in the tall grass of technical details, organize collaborative workshops with key leaders from both entities. These forums can help leaders quickly flag issues and deliver solutions that demonstrate that the new integrated organization is just as concerned about people as financial projections.
Secure your key talent. Senior talent not only drive results, they retain the knowledge and experience necessary for future success. Incentives and tailored working conditions will be essential to retaining these people. Retaining key talent will prove to be much more cost effective than having to go out and replace them.
The one positive aspect of the “abysmal” record of M&A success is that it has provided us with an abundance of data about what companies are doing wrong, which can actually help us draft a blueprint for a successful integration.
In M&As, as in life, we can always learn from the mistakes of others and commit to doing things a different way.