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. 
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)
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:
- Acquisition strategy
- Operational integration
- Cultural assimilation
- Leadership competencies
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.
- Acquirers of companies in the same or closely related businesses perform better.
- Buyers avoiding “hot” markets and structured auctions perform better.
- Those who finance the acquisition with cash perform better than those who finance with equity.
- Buying private companies or subsidiaries leads to success more often than buying public companies.
- Acquisitions by small buyers perform better than those by large ones. (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.
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.
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. 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 reported that incompatible cultures ranked first on a list of M&A integration 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. 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.
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. 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
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.
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.
 Bruner, Robert F., Deals From Hell, 2005: John Wiley.
 Haspeslagh, Phillippe C. and David B. Jemisen, Managing Acquisitions: Creating Value Through Corporate Renewal, The Free Press, 1991.
 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.)
 Sirower, Mark L. 1997. The Synergy Trap, Free Press.
 Loughran, T. and A. Vijh. 1997. Do long-term shareholders benefit from corporate acquisitions? Journal of Finance 52 (No. 5, December.)
 Moeller, Sara B., Frederik P. Schlingemann and René M. Stultz, Firm size and the gains from acquisitions, Journal of Financial Economics 73 (2004).
 Moeller, et. al., 2004
 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.
 Golubov, Andrey, Alfred Yawson and Huizhong Zhang, Extraordinary Acquirers, Journal of Financial Economics 116 (2015)
 Bureau of Business Research at Springfield College, Springfield, MA. Survey reported in CFO Magazine, April, 1996.
 http://humansynergistics.com/docs/case-studies-and-white-papers/financial_returns_from_culture_astd_v-2-0.pdf?sfvrsn=0 (Retrieved December 2015.)
 http://humansynergistics.com/docs/case-studies-and-white-papers/business-objects-crystal-decisions-merger-v-4.pdf?sfvrsn=0 (Retrieved December 2015.)
 (Kotter, J. P. and J. L. Heskett, Culture and Performance, The Free Press, 1992.
 Dunbar, Keith, The Leaders Who Make M&A Work, Harvard Business Review, September, 2014.