What Drives M&A Performance?

What Drives M&A Performance?


We became interested in the measurement of post-merger success about 10 years ago. At the time, it seemed, everybody was convinced that most mergers were failures. Many articles on M&A, especially those authored by practitioners, point out their poor success rates. Academic researchers have been studying this question since at least the 1950’s, with more scrutiny and discussion each decade since. Numerous assessments prove that more than half of deals are failures. Even more, however, argue that the average deal is successful. These analyses are confusing to people who just want to know what to do to in order to succeed with their acquisition strategy or their next M&A deal.

While the debate goes on, more and more mergers and acquisitions are taking place. 2015 may top all previous years for global deal volume. Do CEO’s and company executives know something that the pundits do not? Why are the assessments we read about so conflicting in their conclusions?

Good News on Two Fronts

We assume you are, as are we, interested in better understanding the factors that determine success in mergers and acquisitions. If so, we need to generalize from what all the papers and articles are telling us. Most of the studies over the past 40 years have sought to shed light on the question, “Does M&A Pay?” Predictably, they vary a lot in design, and this has led to the lack of consistency in results. No single study purports to perfectly characterize all acquisitions. Some are aimed quite narrowly (e.g., benefits to being a frequent acquirer) and others broadly (overall economic benefit of M&A activity.) There are different measures of what constitutes success, different time periods studied, different sample sizes drawn. Taken as a whole, however, we know that the average deal pays off very well for the owners of the target company and pays off, if only a little, for the buyer. [1]

The two conclusions we draw from all of the studies are these: First, the average deal is not a failure. This contrasts with a lot of repetition about 70 percent failure rates that we see in the business press. More important, and this is where the opportunity lies, is that there is a very big difference between the top performers and those at the bottom.


Returns to Shareholders of Acquiring Companies

(Indexed to peer group)

Median and spread

Perhaps it should not be surprising, given that the individual assessments vary so much in their conclusions, that there would be a very wide dispersion of results, both positive and negative, around this small positive mean. What is of critical interest to us now, and what we can use to improve our current success rate, is to understand the drivers of this dispersion.

We believe there are four drivers of the performance differences:

  1. Acquisition strategy
  2. Operational integration
  3. Cultural assimilation
  4. Leadership competencies


Acquisition Strategy

Acquisition Strategy has two parts. The short-term component is centered around the logic behind any particular deal, including its relationship to the corporate strategy. A number of objective researchers have focused on specific individual determinants of deal success. Among the drivers of deal value for the acquirer, backed up with statistical support, are these:

  • Buyers who ensure strategic and operational fit perform better.[2]
  • Acquirers of companies in the same or closely related businesses perform better.[3]
  • Buyers avoiding “hot” markets and structured auctions perform better.[4]
  • Those who finance the acquisition with cash perform better than those who finance with equity.[5]
  • Buying private companies or subsidiaries leads to success more often than buying public companies.[6]
  • Acquisitions by small buyers perform better than those by large ones.[7] (This is hardly actionable by any one company, but the finding suggests that small buyers may take greater care, perhaps due to fewer resources with which to overpay.)


The long-term strategy behind growing through acquisition defines the broader purpose for making acquisitions given the company’s current market and competitive position and is grounded in a company strategy leading to success. Portraits of highly successful frequent acquirers such as Cisco or GE identify the approaches that have worked for them in the context of their respective competitive environments, over long periods of time. As far as we know, there are no objective studies across multiple organizations relating to best practices in long-term acquisition strategy.


Operational Integration

Numerous studies have identified integration planning or post-merger integration skills and experience as factors leading to M&A success. Some suggest this dimension is even more important than having a rational strategy.[8]

It is therefore satisfying to note that several studies, including those by Kenneth W. Smith noted above, have observed that acquirers have been getting better at post-merger integration efforts by managing them more like other significant change initiatives with standard processes, tools and disciplines, training of a cadre of people with integration experience, and careful choice of integration managers.

Taken individually, even collectively, these strategic and operational factors for success are significant. Statistically speaking, they do have an impact, but they are not particularly helpful in explaining the wide range of observed M&A outcomes. Why not? It’s because the ability to explain the wide dispersion in M&A outcomes is so small. For example, by one account, firm and deal characteristics only account for about 5% of the variability of results, and firm experience in making repeated acquisitions only accounts for another 6% of the difference in results.[9] It appears that quite a few strategic and operational elements need to be aligned well to ensure even a modicum of success.


Company Culture – The Third Rail of Successful M&A

While the requirements for M&A success are many, when corporate leaders are asked about the reasons for falling short of expectations, they are likely to point to one overarching reason: the conflicting leadership cultures of the companies involved. Organizational culture and leaders’ capabilities do not appear in the analyses of merger success because they are impossible to measure objectively and consistently from outside the organization. They are, however, recognized by insiders as the key cause of failures.

A CFO Magazine article[10] reported that incompatible cultures ranked first on a list of M&A integration pitfalls:

Top 10 Pitfalls

Source: CFO Magazine, April, 1996.

Subjective surveys of merger participants point to the people issues that drive poor performance – lack of information, resentment about losing a familiar culture, departure of trusted leaders, distractions associated with the integration.

Although large sample studies are not available, some business leaders are now beginning to describe how their own focus on cultural integration helped to ensure M&A success. Recently, Andrew Taylor, CEO of Enterprise Rent-A-Car, described in HBR how taking the time to learn from Vanguard, which Enterprise acquired in 2003, helped to bring two distinct and successful cultures together, build a new combined organization, and reduce resistance to the merger.

Robert Cooke has demonstrated that constructive cultures perform better than other types – specifically better than two defensive styles.[11] Constructive cultures are those where people are expected be achievement oriented, where they enjoy and produce high quality work, are supportive of each other and open to influence in dealing with colleagues, and are friendly and sensitive to the satisfaction needs of their work group. Cooke’s firm worked with integration leaders during the 2004 integration of Crystal Decisions with Business Objects. His article on the cultural integration focuses on the journey both companies took to create a new, common constructive culture despite differences in operating and communication styles and national cultures.[12]

The common themes in these examples are respect for the target company’s existing culture, openness to learning from them, and a commitment to creating a new culture out of the two that existed before the merger.


The Role of Leaders

It has been well established that leadership drives culture and that both leadership and culture drive organizational performance generally.[13] Why should this not also be the case in managing an acquisition?

Leaders also determine deal strategy, manage operational integration and determine the culture of an organization. Leadership, therefore, is at the center of M&A performance.

A Balanced Acquisition Framework

Balanced Framework

What kind of leadership makes a difference? Until recently, little objective academic research had looked at the impact of leadership capabilities on M&A performance. Our friend Keith Dunbar recently conducted what may be the most comprehensive evaluation to date. In his thesis, reviewed in the Harvard Business Review, he identified seven key managerial skill sets that are associated with first quartile M&A results for acquiring companies. Leadership teams exhibiting these capabilities, as revealed in the companies’ own 360 review processes, are highly likely to be successful in their M&A activity.[14]

1Q leadership skills

This set of required leadership competencies is almost entirely people oriented. In addition, the alignment of these skill sets with the attributes of a constructive culture (see above) is impossible to miss.

Not making the list required for first quartile M&A outcomes are the typical “executive functions” such as using sound judgment, thinking strategically, planning, driving for results, and managing execution. This may seem counter-intuitive to some. The analysis doesn’t say that these are unimportant; it simply says that they are not driving factors of first quartile M&A performance.



An acquisition or merger is one of the most challenging and potentially transformative actions an organization can take. It is easy to say that leaders account for the difference between successful and unsuccessful M&A results. Our challenge is to know what to do with this knowledge.

We do not believe a checklist of actions will be helpful for leadership teams wishing to improve their prospects for M&A success. Instead, we suggest that they discuss as a team how well they are positioned with respect to each of the drivers of a positive outcome – acquisition strategy, operational integration, culture, and leadership. A balanced conversation across these four dimensions will reveal strengths to be emphasized and weaknesses to be addressed. These questions might be helpful to get the conversation started. As with any change effort, leaders should focus on just a few areas for improvement at a time – two or three where making a lot of progress will be felt by the organization. The results will begin to be evident the next time you hold an integration steering committee meeting.



[1] Bruner, Robert F., Deals From Hell, 2005: John Wiley.

[2] Haspeslagh, Phillippe C. and David B. Jemisen,  Managing Acquisitions: Creating Value Through Corporate Renewal, The Free Press, 1991.

[3] Healy, Paul M.,Krishna G. Palepu and Richard S. Ruback. 1997. Which takeovers are profitable: Strategic or financial?  Sloane Management Review 38 (No. 4, Summer.)

[4] Sirower, Mark L. 1997. The Synergy Trap, Free Press.

[5] Loughran, T. and A. Vijh. 1997. Do long-term shareholders benefit from corporate acquisitions? Journal of Finance 52 (No. 5, December.)

[6] Moeller, Sara B., Frederik P. Schlingemann and René M. Stultz, Firm size and the gains from acquisitions, Journal of Financial Economics 73 (2004).

[7] Moeller, et. al., 2004

[8] Chakrabarti, Alok K. Organizational Factors in Post-Acquisition Performance, IEEE Transactions on Engineering Management Vol 37, No. 4, November 1990; also Smith, Kenneth W., as referenced by Alexandra Reed Lajoux and J. Fred Weston in Mergers & Acquisitions, October 1, 1998.

[9] Golubov, Andrey, Alfred Yawson and Huizhong Zhang, Extraordinary Acquirers, Journal of Financial Economics 116 (2015)

[10] Bureau of Business Research at Springfield College, Springfield, MA. Survey reported in CFO Magazine, April, 1996.

[11] http://humansynergistics.com/docs/case-studies-and-white-papers/financial_returns_from_culture_astd_v-2-0.pdf?sfvrsn=0 (Retrieved December 2015.)

[12] http://humansynergistics.com/docs/case-studies-and-white-papers/business-objects-crystal-decisions-merger-v-4.pdf?sfvrsn=0 (Retrieved December 2015.)

[13] (Kotter, J. P. and J. L. Heskett, Culture and Performance, The Free Press, 1992.

[14] Dunbar, Keith, The Leaders Who Make M&A Work, Harvard Business Review, September, 2014.

Is Your Company Merger Friendly?

(Warning to MBA’s and spreadsheet pros: this article is about the “soft stuff” of merger success. NSFW if your organization is only focused on near-term financial goals.)

Is your company merger friendly? Do your people embrace the acquired company’s employees, respect their accomplishments, their skills and capabilities? Do they actively seek to build business together by quickly merging product lines or leveraging customer relationships? Are they willing to give up some things they usually count on for the greater good of the new organization?

Or do your people exhibit the pride of the victor? Does the transaction give them proof of their inherent superiority? Are they jealous that it was “those guys’ who got rich in the deal? Do they look for problems with the acquired company’s business model, sales team, R&D results, or even the leaders themselves?

We have seen these behaviors all too often. One CEO proclaimed in our first joint meeting with the acquired company execs, “We are going to fix (your company.)” And frequently, we have heard it said, “We bought them; our way must be better.”

Leadership and Culture

Most acquisitions begin with strategic objectives and financial projections. Revenue forecasts are pushed little by little, and costs are nudged downward in the same way, as proponents seek to make the deal economically feasible, its financial model meeting ROI expectations. All the while, it is assumed that leaders are up to the job of making the tougher numbers, and rarely are cultural factors assumed either to be a benefit or a hindrance.

Leaders ignore leadership and culture issues in M&A at their peril. Recent research by one of us identifies seven specific leadership capabilities that drive first quartile financial outcomes for acquiring companies. And a deep body of knowledge demonstrates clearly the organizational culture required to succeed in times of great change.(1)

We believe that any integration will benefit from fewer generic assumptions and more thoughtful focus on the “soft” themes of leadership and culture.

Merger Friendly Companies

What does it mean to be a leader in a merger-friendly organization? We’re talking about leaders who understand that a deal isn’t done until it is successfully integrated, where people understand that integration makes extra demands and often pushes them outside their comfort zones, and that success often requires them to adopt new skills. We’re talking about leaders seeking to understand deeply how the target company actually achieves its objectives, and incorporates that understanding into its plans for the combination. Above all, merger-friendliness is openness to learning during the planning and integration of an acquisition, building on respect for the capabilities of the target company management and founded on the assumption that their people and their knowledge are crucial to the success of the combined enterprise. Broad-minded executives, open to exercising new leadership capabilities while being thoughtful and deliberate in their decisions impacting culture, create merger friendly companies.

Introducing Leadership and Culture to Your Merger Integration

Planning and managing the integration of a significant acquisition demands a balance of attention to hard and soft variables. For most organizations, the hard ones get 80-100% of the attention. You can begin to move the dial a little at your next opportunity:

1) Beginning any time, preferably before the next deal surfaces, build a better understanding of your own starting point. By this we mean to document how your leadership team stacks up against the seven key leadership skills that the most successful acquirers exhibit. Make development of the required leadership skills a focus of leadership development for top executives. During the next integration, coach these executives to truly show up as the leaders they need to be.
2) Begin to speak openly about culture. Engage colleagues now in a reflective assessment of your own company culture – both the visible and invisible elements. The visible elements fall into the category of “how we do things around here.” The invisible ones are the assumptions, beliefs and values that underlie your organization’s norms. Thoughtful interviews of long time employees can determine what it is about these that drive success and, if relevant, identify those that impede success. When you have gone through this exercise for your own organization, and socialized the result with your leaders, you will be much better prepared to explore and properly integrate a company with a different culture.

John W. Pancoast
J. Keith Dunbar
C. Evan Smith

1. Seminal documents include John Kotter and Jim Heskitt, Corporate Culture and Performance, 1992 and Edgar Schein, Organizational Culture and Leadership, 4th Edition, 2010.

Can’t We All Talk About Culture?

Ah, culture! It takes the blame for many an M&A stumble. For deal makers, culture differences may seem like an inconvenient distraction in the heat of negotiation, so their potential impact is often minimized in due diligence, the potential issues wished away or simply ignored. For integration managers, however, culture is the elephant in the room. These people know that understanding the impact of culture is critical to their success, but they often don’t have the skills to address it or the language to talk about it.

Visible and Invisible Culture

Culture is a way of describing what’s unique about one group (insiders) compared to other groups (outsiders.) Insiders might say, “we don’t make a big investment until we all agree” or “we interview people an average of 16 times before we give them an offer.” In most companies, these behaviors become second nature after a while, and become the observable elements of culture.

To outsiders, these visible examples of culture beg some questions. The first of these is: “Why do we they these things?” Underlying the observable dimensions of culture are assumptions that people have about their industry, how their company provides differentiated value to customers, and what’s required to succeed strategically, operationally and financially. The other question is: “Which of these cultural elements actually have a positive impact on performance?” In other words, for example, how does a particular recruiting process translate into results for the enterprise?

Difficult Discussions

In most organizations, the assumptions, beliefs and values underlying their cultural behaviors, and the links to performance, are not discussed. Why is it so hard for us to talk about corporate culture, especially when culture seems so integrated with competitive success? The most basic reason, we believe, is that we don’t have a commonly understood framework or language that would make it easier to talk about culture the way we do about, say, accounting statements or six sigma programs. Researchers and consultants offer a myriad of frameworks, definitions, analytical tools and intervention methodologies, leaving skeptical leaders to sort it all out on an ad hoc basis. As a result, we rarely hear executives draw explicit linkages between dimensions of their culture and performance of their business, and it is not easy to appreciate the power of culture to support or derail achievement of objectives.

Another reason that many people are loath to discuss culture is that talking about values, assumptions and beliefs makes many of us uneasy. Many people rarely communicate about these things in non-business conversation, so they don’t have the skills to do so in a business context. Some wonder whether communicating on this level is even appropriate in a business context. It sounds to them vaguely psychological, something that may cause them to reveal more than they wish about themselves. That pretty much shuts down discussion in most circles.

Thoughts for M&A Leaders

So, what can Business Development Managers and Integration Managers do about this during their next acquisition? We don’t expect people to embrace culture discussions easily, but they can start by developing a basic understanding of their own organizational culture – working with HR – to establish a common framework for discussion and give leaders the language to explore culture in the workplace. Focusing the conversations on how the culture produces tangible results gives everybody the incentive, and the permission, to continue. When the M&A team is clear about how their own organizational culture drives performance, they will be better prepared to understand, honor and leverage the culture in companies that they acquire.

Leading when your company is being acquired

What should the senior managers of a company do while their organization is being acquired? A friend of the firm asked this fairly simple question the other day, and we thought our answer could be helpful to some readers.

We think of the leadership in an acquisition coming necessarily from the executive ranks of the buyer. We expect them to lead with a clear acquisition strategy, a compelling deal vision, open and honest communications, and thorough engagement of the combined organization. But, as Keith Dunbar noted recently, executives of the selling organization have a very critical and distinct leadership role, especially at a level or two below the executive committee – those solidly within the firm’s senior management.

Senior management is often the most “at risk” (of downsizing or being “packaged out”) in a merger or acquisition. The executives above them are often made fairly wealthy as a result of the transaction. Managers below the senior level are frequently retained due to their valuable business and operational knowledge. Senior management is expensive to carry and vulnerable to elimination as acquisition teams work out redundancies. Leading from this position of vulnerability can be challenging.

My colleagues and I believe that senior managers in the target company should think of their role as balancing three important constituencies – 1) the new combined company, 2) former colleagues and subordinates, and 3) their personal well being. They have strong obligations to all three; pursuit of less than all three neglects some important dimension. Here’s a framework and some guidelines for thinking this balance through.

1. My company. By this, we mean the new, combined, company. Some leaders might see the merger as a welcome situation, but frankly, most leaders will hesitate fully to commit to the new enterprise for some period of time. Once the deal is done, do not hesitate to step forward as an advocate for the combination. Seek to understand the benefits of the combination from a strategic perspective. Communicate the deal vision and stay on script. If you believe there are serious flaws, communicate these personally and confidentially. Commit to the integration plan. Get involved in co-sponsoring or jointly leading integration teams in your functional area or area of interest.

2. My colleagues. Everybody in your old organization is going through some kind of transition, one that usually challenges the status quo and demands changes in the way they see and do their work. Eschew the low-value discussions about the annoyances and difficulties of adapting to the new regime. Even if you, yourself, have doubts and concerns, you will be of more value to your colleagues and subordinates by helping them to do their best in the situation that presents itself. In addition, your empathy for colleagues’ challenges or trauma may surface important data that can help you and others to address collective obligations to “My Company.”

An acquisition is one of those unexpected times when new leaders are discovered and recognized for their contribution. Help your people to align with the new company leadership. Make executive-level introductions for them where you can, in the interest of their success. Help them to excel in any role they may have in the integration, to be their personal best.

3. My personal well-being. Yes, it’s ok and proper, in fact necessary, to be concerned about your own future. The key here is to focus on things that will serve you well, in combination with the first two components of your leadership.

A former senior manager, a client who was himself involved in a merger last year, referred to this as refining one’s “Personal Brand”: what it is that you know, what you are good at, where and how you add value to particular situations, and how you accomplish important objectives. Live this brand as you engage with people during due diligence, integration planning, and integration leadership. Clarifying your brand in this way will serve you whether you stay or leave. At the same time, talk to your network outside the organization. Keep former colleagues, customers and the like up to speed on what you are doing, and be honest about your prospects for and desire for staying.

Finally, develop a Plan B – and perhaps a Plan C. Flesh out your plans in enough detail that you have a viable alternative to continued employment in the new organization. If you don’t do this for yourself, you’ll find it harder to help your colleagues when they need to do this for themselves.

These three dimensions of leadership are in dynamic conflict with each other. At the very least, they compete for your limited time. Deeper than this, however, is the inherent conflict between commitment to the new organization, to your long-time colleagues, and to your own future.

You don’t need to choose between the new company and your longtime colleagues, or between the company and yourself. Viewing these three dimensions as elements to balance in your own way gives you permission to devote appropriate time to each of them. And knowing that you have committed to addressing the full portfolio will allow you to commit fully to each step, whatever that may be, from a well-prepared and considered foundation.

John Pancoast and Evan Smith

Throw Away Your PMI plan

Let’s start by saying that we have always been strong advocates for building a post- merger integration (PMI) plan. We advise clients to build this plan as early as possible, and certainly before deal closing under most circumstances. A well-thought-out plan is the shortest path between communicating and accomplishing the vision behind an important merger or acquisition. But what happens when the assumptions underlying an integration plan are incorrect? What if we learn things after closing the deal that change our thoughts about how best to integrate the new business?

Most deal plans are built on the principle of “under-promise and over-deliver” on the financial objectives. So, if the new information is to the good, there’s little financial incentive to raise the issue, and management’s ability to control its destiny is increased. On the other hand, when the information is negative, often leaders prefer to manage their way through the issue, knowing they enjoy some leeway in their projections, or have the ability to make rebalancing changes within their overall business.

We’d like to propose, however, that focused pursuit of a plan in spite of its apparent limitations is not particularly virtuous or wise*, whether for family budgets or corporate strategies. It has often been apparent, within weeks or months of the deal closing celebration, that the assumptions developed during due diligence were not built on a solid foundation. We should keep this in mind in planning and executing post-merger integrations. (This is, unfortunately, an occupational hazard. HP’s acquisition of accounting-challenged Autonomy is one of a legion of examples.)

The headline-capturing misrepresentations in big deals gone bad are only the tip of a more innocent iceberg. We try to assess so many aspects of a business during due diligence that we occasionally miss a tree for the forest. Most integration leaders have at one time or other encountered information early in the post-close period that significantly challenged the deal assumptions. At the risk of stating the obvious, here are the main reasons that imperfect information becomes embedded in PMI plan.

• The time and resources available for due diligence gathering is invariably less than ideal.
• Topics requiring in-depth discussion to understand well – undocumented knowledge or cultural norms of behavior, for example – may be poorly understood because access to the seller’s leaders and managers often is severely restricted.
• Topics that are more easily analyzed using the buyer’s resources – financial pro formas and modeling of cost reduction efforts – get more attention than subjects requiring more of an investment, such as product/ market assessments or competitor analysis.

We expect that there will be gaps in the information. Yet, many companies are unwilling to alter the planned course to reflect the new knowledge.

Ignoring new information while staying the course leads to a misallocation of resources and missed opportunities to improve the business. We suggest that leaders reassess their integration plans at some point soon after closing – usually within about 30 to 45 days – and make sure that their plan represents the best overall outcome for the business. That may mean investing more in the first year in customer service or sales and less in cost cutting than was proposed in their original PMI plan. Or, it may mean holding back on some personnel changes until their knowledge becomes your knowledge.

So, go ahead and build that plan. And take the time to review it in the light of critical new information a month or two after closing.


* Publilius Syrus, who made his way in Rome with the art of the aphorism, lets us know that the sentiment has been around for a long time: “It is a bad plan that admits of no modification.” More recently, Prussian General Helmuth von Moltke is famous for observing that “no plan survives contact with the enemy.”

3 Rules to Capture Deal Value

A great piece of analytical insight from last year’s Harvard Business Review, which has had an impact in many areas, needs a more thoughtful reading by both buyers and sellers interested in capturing greater deal value in M&A transactions. The argument, by Michael Raynor and Mumtaz Ahmed of Deloitte, is that the long-term success of companies is determined by adherence to two rules: 1) create value for customers by differentiating instead of competing on price and 2) create value for your company by prioritizing growth ahead of cost reduction. A small number of “Exceptional Companies” emerged from the analysis, followed by a whole lot of “Average Joes.”

These simple rules recall familiar aphorisms such as the two-part strategy formula, “decide where to play and how to win,” as well as the admonition “you can’t cut your way to greatness.” The fact that the rules, however, were based on the performance of 25,000 public companies over 4+ decades makes the authors’ conclusions hard to ignore. Subsequent commentary has reinforced these conclusions, and the rules were released as a highly regarded book called The Three Rules, the third rule being the cutely referential[1], “there are no other rules.” (Hey, do we really need everything memorable to be in threes?)

An essential point to keep in mind is that the rules focused on identifying drivers of long-term success – a superior return on assets over several decades relative to competitors in a given industry. The problems with most mergers and acquisitions today stem largely from the proclivity of deal-makers on all sides to view their work as a short term transaction instead of a way to grow an exceptional company.

So, how do you capture greater value in mergers and acquisitions? Many people have identified two drivers of M&A success that somewhat parallel the Rules: establishing a reasonable valuation, or how much is paid for a business, and leading a thoughtful integration, including the range of decisions and actions post-merger about whether and how to bring the two companies together. Both dimensions of M&A success would be improved by application of The Three Rules.

Let’s start with valuation. Rule Number One says that exceptional companies, those consistently in the top 10 percent in ROA, focus on competitive differentiation, while the “Average Joes” usually compete on price. Business valuations tend to focus on near term historical and future performance through the lens of discounted cash flows. DCF understates the value of differentiation because it cannot look out far enough in time to capture the greater strategic value of the differentiated positioning. DCF analysis will consequently overvalue businesses that compete on price because price competition, according to the analysis, is not a reliable path to sustained high levels of performance.

Perhaps more significant are the insights the Rules offer around integration. Rule Number Two says that exceptional companies prioritize growth ahead of cost reduction. A revolution in merger integration success would grow by planting this seed of advice wherever an acquisition were contemplated. Why? Because the first thing acquiring companies usually focus on in planning for integration is how and where and how fast they can cut out costs. But investing near term in cost cutting reduces the financial and leadership resources available to grow the acquired business. This priority is often baked into financial models and forecasts developed during due diligence, and is hard to reverse later, after the deal has closed. Integration plans should focus on growth opportunities first, with the knowledge that cost reduction can always be brought to bear once the major growth opportunities have been addressed.

It’s pretty clear that buyers would benefit by more closely adhering to these two rules. They would more accurately value prospective targets, and they would tend to capture more of that value in focusing post merger integration decisions on growth. But how would sellers benefit from these insights?

Most sellers are well compensated for their work in growing a business or improving it to the point of a sale. But those who have built companies based on differentiated products or services should be wary of all-inclusive industry valuation benchmarks. In reflecting on valuation assessments, these sellers should consider what has happened over many years to the price competitors in the same industry, and insist on being paid for the extra value of their superior strategy.

Most entrepreneurs and leaders of public companies also have their legacies tied to what happens to their companies after the deal is done. There are ways to help ensure that strategic decisions about resources and costs are as consistent as possible with the historic strategy and vision for the company. It pays for these leaders to find a way to stay relevant and engaged during the integration period, usually by insisting on a key integration role for at least a year and ensuring that integration plans are developed that prioritize long term success over short term profitability.



[1] This reminds me of the two rules that Stew Leonard’s prints on each of its plastic grocery bags: 1. The customer is always right, and 2. If the customer is ever wrong, re-read rule 1.

Culture Block

How often have we read that cultural differences are the cause of a failed merger?

For many years, I have been intrigued, puzzled and occasionally confused by organization culture. Complex, defying easy definition or manipulation, company culture has been noted as an essential ingredient of greatness in many situations while being fingered as a key determinant of failure in others.

In casual business discussion, we have found useful shorthand for visible cultural attributes and often hear statements such as, “This organization has a collaborative culture,” or “The CEO makes all the decisions in that company.” We make connections between cultural attributes such as these and the organization’s relative effectiveness only to find out that similar attributes have led to the opposite outcome in another situation. Furthermore, a culture that once supported growth and profit might not prove as successful in the future for the same company. Culture and success are moving targets, and often we invoke culture to explain successes and failures that can’t be attributed to other causes.

So, how do we deal with the widely-held belief that cultural differences are behind most merger failures? I was brought to this question by a client recently, a senior executive who had been in a similar role in a company that was sold to a strategic buyer around a decade ago. He related that the leaders of both companies had been certain at the time that the integration would go smoothly since people in both organizations shared the same values. Both organizations valued highly ethical behavior, a commitment to “doing the right thing.” Both companies had long histories of encouraging innovation and a commitment to cost savings. With these values in common, surely the organizations would fit together well.

As it played out over the next year or two, many unexpected fundamental differences emerged, and most of the leaders of his function left the new organization voluntarily. My friend’s insight was that while the values were similar, the cultures of the two companies were very different. In his view, the larger organization operated like the federal government. One was expected to “come in, do your job accurately and well, but avoid causing consternation or conflict.” His own organization, by contrast, had rewarded people for what they referred to as “constructive dissatisfaction.” In this organization, people were expected to come in to the office prepared to think about how to save money in a product, or push an idea with one’s boss. People were expected to challenge the status quo in one company and avoid disruptions in the other. So, while common values represented agreement in principle on basic commitments, culture differences determined that there would be big differences in the way the organizations behaved in achieving those ends.

So, what do you do if you are contemplating an acquisition, either as buyer or seller? Can you reduce the unintended consequences of cultural differences in merger integration?

In a surprising number of mergers and acquisitions, there is literally no thoughtful discussion of cultural differences and of either the impact that these might have on the success of the integration or the ways in which cultural differences could be addressed to reduce the disruption of culture clashes. In our experience, there are some general approaches that make sense in certain circumstances:

  1. The two cultures are significantly different, and can stay that way. If the acquirer is building a portfolio of unrelated businesses, or if the intent of the deal is diversification rather than operational leverage or market penetration, then cultures can be left alone. An extreme example is Berkshire Hathaway, which regularly buys “a wonderful company at a fair price” and lets it operate with a lot of independence within its holding company structure. There are fewer examples today than in decades past of this kind of acquisition: strategic buyers make relatively few diversifying acquisitions today.
  1. Create a new culture from the best that each company has to offer. This approach is considered most seriously when two large, successful companies merge in what is sometimes dubbed a “merger of equals.” Often proposed but rarely achieved, creating a new culture requires deep trust and collaboration between the companies and relentless reinforcement on the part of the CEOs of both companies. HP and Compaq successfully followed this approach in their very public 2002 combination. In addition to using the 8-month announcement-to-close period to carefully plan the integration, the integration team adopted Compaq cultural dimensions where they believed that these would be better than some less effective dimensions of the HP culture. By contrast, in the example discussed with my friend above, the leaders professed intent to pursue this approach, but faced overwhelming resistance from their own bureaucracy, and failed in the attempt. Many merger negotiations, such as those recently between ad giants Publicis and Omnicom as well as those between many of today’s large law firms, break off over cultural differences.
  1. Insist that the acquired company adopt the buyer’s culture. This approach is often employed when there is a significant size difference between the parties and when the acquirer is consolidating an industry by rolling up numerous similar but smaller entities in the same market. NationsBank (now Bank of America) and Rinker Materials (now Cemex) pursued this approach during their periods of frequent acquisition in the 1990’s, creating strategic advantage with their highly predictable and unwavering integration approaches. Financial buyers seeking to build companies off of initial platform investments would do well to consider which culture would be most helpful in achieving their goals.

Many deals today fall outside these convenient categories. Most challenging from a cultural perspective is that of the corporation seeking to fill a void in its product line, sales channel or geographic footprint by acquiring a very successful smaller firm. In these situations, one must balance two truths. The culture of the acquired firm contributed, perhaps significantly, to its success. The acquiring firm has its own cultural profile linked to its long-term performance. There is no simple solution to striking the correct balance, but ignoring cultural differences, and culture’s contribution to success, is a poor approach indeed.

Culture differences will always be a topic of discussion after the integration has been underway for some time. What will it take for leaders to think about culture before cultural differences throw a wrench unexpectedly into their integration plans?


John Pancoast

Buyer Hubris and Value Destruction

by John Pancoast

Recently I sat down with the former head of a family owned manufacturing business to hear about his sale of the company to a PE-owned platform company pursuing a consolidation strategy. Being a thoughtful person, he was scratching his head about what he had experienced in the year since the sale. To be fair, he still holds a minor stake in the larger enterprise, but his advice has been roundly ignored by the CEO even as a new manager was brought in, sales are off 40%, pricing mistakes abound and nearly all the key managers have left for competitors.

This entrepreneur’s experience is extreme, but his general situation is not unusual. I am amazed how callous and arrogant buyers can be. Years ago, the head of a high-end home furnishings manufacturer related to me his regret at presiding over the acquisition of a mass market competitor, deciding that his company knew how to run the new subsidiary better than the existing managers. The struggling business was later sold. More recently, I worked with a technology company that was being sold. I will never forget the openly expressed determination of the buyer’s leadership team to “fix” the target, and the subsequent departure of most of their talented leaders and managers within the year. These are all specific, though less visible, cases of the Daimler approach to integrating Chrysler, where the “merger of equals” fell apart once Daimler’s true beliefs about Chrysler management became public.

As these situations demonstrate, value is destroyed when buyers believe that their success in dealmaking confers permission to do things their way in spite of differing value propositions, business models, customer needs, distribution channels or production processes. It occurs as well when acquisition models are based more on financial engineering benefits than on building comparative advantage.

There is an alternative to these value-destroying approaches. Consider treating the acquired organization the way you would treat a new hire of whom you expect much in her first year on the job. As with any successful new partnership, begin by establishing rapport. Listen to and trust the leaders of the organization you are buying to have knowledge that you cannot have discovered in due diligence. Seek genuinely to learn what they know about their business and why it has been successful. Find the common ground in your visions of the future while seeking to understand more deeply the factors that drive the differences in that vision. Find a way to discuss the issues and challenges the leaders have faced in the past, and their struggles to address them. Finally, work together to build a roadmap for the combined business.

What’s the deal with merger failure rates?

By John Pancoast

Here’s some fodder for this topic from around the web:

  • One consulting firm reports that research “has shown that acquirers destroy shareholder value in nearly 60% of acquisitions undertaken.”
  • A second firm quotes another study study revealing that “83% of mergers and acquisitions failed to produce any of the anticipated benefits, and over half actually ended up reducing the value of the companies involved.”
  • And finally, from a third, in its own 2014 M&A Trends Report: “Almost nine in 10 corporate survey respondents believe that at least some portion of their transactions did not generate the return on investment that they had anticipated.”

These – and numerous other examples – vary from intriguing (I would really like to know more about the ones that succeeded) to useless (9 in 10 people also say that they didn’t like some portion of their lunch yesterday. If you’re the chef, what are you supposed to do with that information?)

The fact is that consultants have been throwing these scary numbers around for years, quoting new or old studies, many times without listing the specific source. We find this alarmist approach to be offensive.

McKinsey and BCG, in their published research, usually take a higher road. They offer insights that are more analytical, if not always applicable to a given deal.  Being more intellectually rigorous, they point to characteristics that more often are associated with success. (e.g., acquisitions of relatively big companies are generally less successful than acquisitions of relatively small companies.) These insights can be challenging to apply to your next deal.

Only one examination of M&A results ever registered with me as being truly unbiased. Conducted by an academic with no dog in the fight, it concluded that:

  • “On average, buyers earn a reasonable return relative to their risks,” and
  • There is a truly wide variation in returns around the average, and understanding the reasons behind these variations is the key to managing the deal for success.

So our challenge is to understand the drivers of good and poor results across a lot of variables. If this interests you, take a look at Robert Bruner’s book.


For our more recent discussion of what drives the variation, and leads to top-quartile M&A results, see our recent post, What Drives M&A Performance?


Integration Best Practices for Top Executives

By John Pancoast

We all bring our collective experience to bear on the dilemmas and decisions of today. For some of us that experience is more extensive than others. Every now and then we find it our duty to sit back and reflect on how we have come to have the convictions we do about good and bad practices, right and wrong decisions, fact and fiction. Herewith we offer not the top ten, but a quite digestible six best practices that will ensure success in closing and integrating your next acquisition.

1. Plan for aggressive synergies. Make sure to stretch them far enough to make the deal ROI appealing to the Board. In the current fully priced environment, it is harder and harder to get Board approval, but don’t let that get in the way of a good acquisition. As one division head said, “Look, the key for the management team is to get the deal done. We can always figure out how to make the economics work once we have the scale that the deal brings us.”

2. Limit the scope and scale of pre-closing visits. Employees will get wind of the situation and start worrying about their jobs instead of getting work done. One due diligence project leader told us, “We have learned the hard way that employee distraction accounts for declines in sales and profit in the first year of a deal. We didn’t want to spook anybody with the fact that we were buying the company, so we did our best to conduct our discussions only at the highest level, and only off site.”

3. Focus due diligence activities where they will pay off the most – the financial and legal downside risks. New products and customer segments are what the seller likes to use to distract you from seeing the business clearly. Said one Business Development VP, “We have found that it’s far better to forecast cost savings and efficiency synergies than to figure out how to grow the top line. Besides, you can’t take upside potential to the bank.”

4. Avoid devoting scarce resources on people issues, or the link between the target company’s culture and their results. As one Integration Manager told us, “That culture difference stuff is bogus. There’s really nothing we can do about culture; either they buy in to our culture or it’s time for someone to hit the road. Anyway, people will want to keep their jobs, so I’m sure they’ll jump on board once they know the drill.”

5. Do not involve too many target company managers in merger planning. And after closing, try to keep them from generating too many new ideas that will prevent you meeting your commitment to the Board. As one CFO said to us recently, “We knew what we wanted to do with the business. Hey, if they were so good, why were they selling it, anyway?.”

6. Be sure to leave the acquired business alone for at least a year or two. It’s not a good idea to tie the management down with integration activities that will just distract them from their business. The CEO made it clear, “We need them to meet the plan in our board paper. We can always integrate them into our systems and processes as part of next year’s plan. That stuff’s not strategic.”

So, forearmed with these absolutely serious nuggets of outstanding integration practices, go out and make that deal!