Framework 87 Merging, acquiring, partnering, diversification, alliances, etc

When looking at merging, acquiring, partnering, diversification, etc with another organisation, you

"...usually makes careful checks of the financial strength, market position, management strengths and various other concrete aspects pertaining to the health of the other company. Rarely checked, however, are those aspects that might be considered cultural: a philosophy or style of the company, its technological origins, its structure, and its ways of operating - all of which may provide clues to the basic assumptions about its mission and its future. Yet if culture determines and limits strategy, a cultural mismatch in an acquisition or merger is as great a risk as a financial, product, or market mismatch..."

Edgar Schein, 2004

Furthermore,

"...mergers often fail because the excitement over the deal isn't matched by attention to people issues and planning for long-term. Hostile bids make it all the harder to take care of these factors......caught up in the deal fever, it seems all too easy to forget the nitty-gritty, and what will actually transpire once the deal-making caravan and the media move on and investment bankers pocket their fees and start working on the next money-spinner. Number crunchers often dismiss the integration of merging organisational cultures as the soft stuff. But it quickly becomes the hard stuff when it is so easily mishandled ..."

Katrina Nicholas, 2007a

"...Research by Hay Group shows that when mergers and acquisitions fail, it is often because leaders get bogged down by finance and technology issues and don't spend enough time integrating corporate cultures and technology styles..."

Fiona Smith, 2008q

An example of this is Fosters which struggled with its dominant beer culture to merge with the more complicated wine business of Southcorp and US wine house Beringer, ie

"...extremely hard to extract distribution synergies between beer, a product manufactured daily in cities, and wine, an agricultural commodity requiring high capital investment in but producing only one of crop a year......Fosters became overweight in premium wines in essentially what was a beer distribution system......brand loyalty in the one industry is different from what it is with beer. Wine drinkers' tastes change - they don't want to drink the same wine, which is a challenge for Foster's large, mature brands..."

Trevor O'Hoy as quoted by Joanne Gray, 2008

Furthermore, winemakers were price takers while breweries were priced makers.

However, the main justification for Foster's getting involved in the wine industry its need to diversify across products and geographies; gain savings in costs (such as distribution channels), etc, to counter the consolidation of the liquor retailing bargaining power in the hands of the supermarkets, eg Woolworths and Coles. These 2 major retailers control the sale of around half of the wine sold in Australia, and, as a result have the power to make demands in terms of pricing, volume and promotional support.

Also, when you are emerging, etc with another organisation, you are inheriting someone else's baggage, ie their culture. Richard Branson (2008) believes that you cannot reconstruct culture. Thus, it is better to start with a greenfield operations.

At each step of the merger and acquisition process, management can be vulnerable to a variety of cognitive biases (psychological phenomenon). The table below identifies these biases and suggests specific steps to address them.

Process step

Bias

De-biasing prescriptions

Preliminary due diligence

(over-estimate stand-alone enhancement, revenue and cost synergies; decide how much to bid; under-estimate the time, money and other resources needed for integration

Confirmation bias (seek information that validates initial hypothesis)

Seeking out disconfirming evidence; use synergy estimates to guide the price; examine potential pitfalls

 

Overconfidence (especially in identifying revenue & cost synergies)

Use reference forecasting plus comparable prior deals to estimate synergies; use a balanced assessment of entire competitive environment (both top-down & bottom-up)

 

Under-estimation of cultural factors (language, codes, symbols, anecdotes & rules) & conflict differences; use of blame game

Use tools such as network analysis maps

 

Planning fallacy (tend to under-estimate resources required)

Use reference-class forecasting to estimate the time and money needed for integration.

Estimate and update best practices

Need to learn from deal making experience

 

Conflict of interest

Seek objective, independent, external advice from experts

Bidding phase (submit bids until the seller agrees on a price)

Winner's curse, ie in a bidding war, the winner bids above its true value

Set a limit price & avoid bidding wars

Have a dedicated M & A function that looks at alternatives to the deal and sets price limits

Tie compensation of deal-maker to success of the deal

 

Competitive arousal, ie it is an adrenaline fuelled emotional state that is aimed at beating an opponent at all costs.

Need to focus on maximising value

Final phase (obtain greater access to the target's books so better able to determine final pay terms and closing details

Anchoring, ie a tendency to under-act to surprising news by holding onto initial numbers, etc

Seek the fresh eyes of independent, dispassionate analysts who review from the start of the bid

 

Sunken costs fallacy, ie swayed by amount of resources (time, money, credibility, etc) already invested in the bid

Seek the fresh eyes of independent, dispassionate analysts who review from the start of the bid

Have a backup plan and alternative options (including "walking away")

Have multi-options so that not stuck with one bid

(source: Dan Lovallo et al, 2007)

Potential dangers signals to be aware of during mergers and acquisitions include

- top management are the only ones who believe in the deal

- focus on synergies analysis of the revenue enhancement (without an investment plan) rather than cost savings

- inadequate cultural due diligence performed

- lack of independent outside advice

- too many restrictions on price changes during the bidding

- many others bidding for the same organisation

- too much emphasis on the time, money, or reputation already invested in the deal

- the deal must be done no matter what

Two other key biases include loss aversion and comparative ignorance

- loss aversion

"...refers to fearing losses more acutely than desiring equivalent gains......the psychological impact of a loss is about 2 to 1.5 times that of a gain......often, the net effect of loss aversion is inaction..."

Dan Lovallo et al, 2007

One of the best ways to overcome loss aversion is to aggregate a particular decision within the larger portfolio of strategic choices thereby mitigating the loss associated with a single poor outcome. For example, over time firms can undertake numerous investments; so long as one investment doesn't threaten, they should be considered a minor part of the continuing gamble

- comparative ignorance

"...given a pair of betting options, people prefer the gamble that is comparatively less certain..."

Dan Lovallo et al, 2007

Overcome ignorance by identifying actual returns your organisations has achieved on internal projects as against returns from acquisitions.

"...this baseline, objective measurement of the 2 types of returns can be formulated by using a reference class of at least eight similar deals......revealing ventures in this way will help reduce uncertainty about an acquisition's potential range of outcome, minimizing the ambiguity inherent in an unfamiliar gamble..."

Dan Lovallo et al, 2007

It has been found that in the short-term (1 to 2 years) most acquisitions fail but over a 10 year period those that do survive perform well. This could be explained by

- all benefits may not be apparent in the short-term

- good acquirers keep on making good acquisitions

However

"...Research shows that mergers and acquisitions have a high probability of destroying shareholders' value: three years after completion, 48 percent of merged organisations had a total shareholder return that was lower than the industry average......61 percent failed to earn cost of capital, or better, on funds invested.....managing human capital risk is both the most important factor for success of the deal, and the most difficult to manage.....people and cultural issues was cited as the underlying cause of disappointing results of M&A transactions......respondents were asked to name what area of human capital management they could have done better, communications, culture and leadership were the top three items on the wish list......the cultural thing is hard to get your arms around. Organisations really struggled to make it tangible. This is about getting the people and cultural issues right: the loss of the people; lower productivity before and after the deal; disruption to sales and customer service; industrial disputes; delays to the process of implementation. The organisations that get it right are the ones who do it (M&As) time and time again. But they have learned the hard lessons and make the time to review how the last deal went......30 percent of the people in a company that has been taken or merged say they do not intend to stay......damage done by a disengaged or disheartened person can be greater than the impact of their loss to another company..."

Fiona Smith 2008e

At the same time, every M&A is different

However there are 3 major components of successful mergers and acquisitions (culture, execution and strategy)

Mergers and acquisitions are difficult
"...It is difficult to separate what the source of failure is. Culture is a big part, but so is execution and strategy..."
Jonathan Knee as quoted by Anna Nicolaou et al 2019

An example of a mis-match in culture can be an organisation, like AT&T, that has a command and control culture merging with another organisation that thrives on collaborating and dissent, HBO.

The 3 elements of the merged organisation - culture, execution and strategy - must be quickly aligned in order to achieve success. If just one is misaligned, problems will ensue

Even though research has shown that integrating processes from different firms is one of the main problems in forming successful mergers, partnerships, acquisitions, strategic alliances, joint ventures etc, management needs to be aware of cultural incompatibilities. More often than not these are not taken into account in the initial decision-making process. When one firm buys another, the buyer assumes that its culture will dominate. At the same time the buyer needs to respect the other firm's culture. There needs to be objectivity in decision-making around the composition of the new management team, and the culture and values that will emerge.

Importance of Autonomy in Mergers and Acquisitions, etc

Conventional wisdom prefers to merge under one umbrella to gain economies of scale in the business and gain synergy benefits to deliver higher short-term profits.

Yet one of the keys to successful mergers and acquisitions is allowing autonomy

"...let the people working for the acquired company get on with the job..."

Tony Boyd 2019c

Some examples,

Allowing autonomy and thriving

- $1.9 b. takeover of the Financial Times by Japanese publishing company Nikkei (2015). Nikkei agreed to editorial independence and allowed the current management to get on with the job. It did not impose its hierarchical structure. The takeover has been very successful, ie increased revenue and profitability; the latter by 400% in 4 years.

- $4 b. takeover of Colonial First State Global Asset Management by Mitsubishi OFJ Financial Group (MOFG); the former manages, $US 222 b. and the latter, $US 528 b.. They allowed Colonial to retain its autonomy in determining the investment process and investment philosophy.

Not allowing autonomy and having problems

- Henderson group merging with US fund manager Janus (they followed the conventional wisdom, ie consolidating under one identity. There have been significant falls in the shares of Janus Henderson since the merger; key fund managers have left and the performance has slipped, eg cumulative outflows of $38 b in 2 years)

- Japanese Post Takeover of Toll Holdings (Japanese replaced almost the entire executive team and since then has had stagnating revenue and lower profits)

NB In general the Japanese corporations have a much longer term approach to their investments when compared with their Western counterparts

Handling cultural incompatibilities

There are 4 critical tasks that leaders need to address in these situations of potential cultural incompatibilities

...1. Leaders must understand their own culture well enough to be able to detect potential incompatibilities with the culture of the other organisation

2. Leaders must be able to decipher the other culture; to engage in kinds of activities that will reveal to them and to the other organisation what some of its assumptions are

3. Leaders must be able to articulate potential synergies or incompatibilities in such a way that others involved in the decision process can understand and deal with cultural realities

4. If the leader is not the CEO, he or she must be able to convince the CEO or the executive team to take cultural issues seriously..."

Edgar Schein, 2004

Furthermore

"...So many business acquisitions end up being disasters because the people involved fail to understand the real challenges involved in getting different types of people to work together and share the same goals. They look only at the numbers..."

Richard Branson, 2008

Basis for Successful Alliances

Despite increasing number of alliances, most fail (over 60 %). According to Jonathan Hughes et al (2007), successful alliances require focus on 5 principles:

i) placing less emphasis on defining the right business arrangement and more on developing the right working relationship (it is important to develop and maintain trust and communications so that the inevitable disagreements have a solid basis for solving; develop collaboration so that alliance members understand how each other operates including decision-making, resource allocation, information sharing, organisational structure, policies, procedures, cultural norms, etc; this needs to get beyond abstract terms, guiding principles and phrases - it needs to explore the potential challenges of working together, examine differences, develop shared protocols for clarifying and managing those differences and establish mechanisms of daily work operations.)

ii) placing less emphasis on creating end metrics and more on creating means metrics (generally as alliances take time, considerable investment and efforts occurs; need to initially use leading indicators that look at relational aspects of the alliance, such as amount of information sharing, development of ideas, speed of decision-making, etc rather than just the financial indicators, such as reduced costs, revenue generated, marketshare gains, etc)

iii) placing less emphasis on eliminating differences and more on embracing difference, ie leverage them to create value and stop driving difference underground where it becomes potential 'time bombs' (sometimes the differences touch on sensitive issues, such as competencies and culture - initially people can be reluctant to address these differences and preferred to focus on perceived commonality. Once you start to view the differences in a positive and productive fashion and demonstrate a willingness to acknowledge your own weaknesses and limitations, the relationships in the alliance improve.)

iv) placing less emphasis on establishing formal alliance management systems and structures and more on enabling collaborative behaviour (need to nurture and actively foster the collaborative behaviour; need to get away from the "blame culture" or "finger-pointing" or "CYA" when something goes wrong by having an emphasis on inquiry rather than judgment; an inquiry focus acknowledges that in a complex and interdependent relationship difficulties usually result from actions of both sides - not just one)

v) placing less emphasis on managing the external relationship with partners and more on managing internal stakeholders (sometimes focus is on alliance partners and customers at the expense of your own staff; need to get "buy-in" and internal alignment to the alliance from all your staff; need to beware on the biggest barriers to trust, ie

"...mixed messages, broken commitments, and unpredictable, inconsistent behaviour..."

Jonathan Hughes et al, 2007

NB Working in alliances requires a different approach from that required in traditional business relationships

These 5 principles are in addition to the conventional advice to

"...create a solid business plan backed up by a detailed contract. Define metrics for assessing the value your alliance delivers. Seek common ground with partners and pay close attention to managing your interface with them. Establish formal systems and structures..."

Jonathan Hughes et al, 2007

Furthermore, in mergers and acquisitions, etc, there is a need to understand if the acquisition is going to sustain and improve performance of its current business model, ie help the organisations move up-market better and faster. Or is it going to disrupt the current business model and thus be treated as an autonomous business unit?

With mergers and acquisitions, etc, there is a need to develop an exit strategy, ie will it be a sale, or a float on a stock market?

Generally invest emergers, acquisitions, etc

"...synergies are overestimated, immigration costs are underestimated and time frames are unrealistic..."

Tommie Bergman as quoted by Narelle Hooper, 2008b

In mergers, acquisitions, etc need to overcome

"... usual barriers to successful mergers: employees shock, protests and anxiety, all of which can fuel supplier unrest, government disapproval and customer affections..."

Rosabeth Moss Kantor, 2010

Furthermore, it is important to understand the cultures of the different organisations involved. This requires understanding the informal networks and how decisions are made. The different organisational cultures can be further complicated if the firms are in different countries.

One approach for successful merger integration involves 3 sets of activities - "dual organisations, one organisation, new organisation"

- dual organisation (operates both organisations side-by-side - especially in complex situations, operating parallel operations can be a practical necessity. Furthermore, it helps people retain their identities, avoids too much change initially and staff can learn new ways with open minds)

- one organisation (find a common human bond and encourage developing relationships - need to encourage people to meet frequently, including social events. This can help forge an emotionally unified culture despite operations still being separate; motivate staff to connect and work across divides.)

- new organisation (quickly starts envisioning and building the future - create a new business model that is separate so that sends attention away from territoriality and conflict, and towards collaboration and facilitates future success.)

NB You need to focus beyond the short-term financial benefits of the deal and aim to integrate the talents. Also, staff need to see and hear the human side of the senior management!!!

 

 

 

 

 

 

 

 

 

 

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