There are no mergers, only acquisitions.

post 406 - Richard Kovacevich, Chairman, President and CEO of Wells Fargo says, “For every ten deals being done today, seven won’t work.” It seems that the road to successful acquisitions is fraught with danger. And mergers today differ from marriages in that there’s seldom a honeymoon period.

Mergers can't solve problems for weak companies. You don’t become more buoyant by strapping two leaky canoes together. For example, the merger of Atari and Federated was intended to improve Atari’s distribution; however, the problem was a poor product, not poor distribution. Even if the business strategy is well thought out, getting managers from different parts of the integrated company to work together effectively often turns out to be more difficult than expected. Companies looking for rapid growth through mergers and acquisitions often end up with different business units, each with a previous history as an independent company and with its own distinct principles and practices. As each unit jealously guards its turf, the combined company is predominantly focused inward on its own issues rather than outward towards its customers, suppliers and investors. As a result, companies that grow by acquisition usually have very political cultures.

Corporate culture means the organization’s values, norms and beliefs that determine how people behave in formal and informal networks and relationships. It’s often described as ‘the way we do things around here.’ If you’re looking to acquire another company, how do you know what its corporate culture is? Ideally you could interview employees or look at opinion surveys. However, most firms today are in too much of a hurry to do this and suspect there are many external factors that might influence the results if they did. So this is often a case of more haste means less speed.

If we really want to correct this, we must include other functional aspects in the due diligence examination prior to the merger besides strictly finance, legal, and accounting issues. Virtually every business today says that at least part of its competitive advantage is due to its people. Firms typically have little physical capital and lots of intellectual capital. So managers of acquisitions need to move their interest from what happens after the merger and more into the actual due diligence process if they're to have a chance of creating greater value.

It’s important to know when to try to change the culture and when not to. Is it worth trying to change people’s core values? Sometimes not. Merging cultures is important when there’s a need for horizontal integration. Where companies or business units operate in a stand-alone fashion, integrating individual cultures is usually less important. The range of culture choices can be thought of as A, B, and best of breed. There can be different choices for different areas of the business. Initially, integrating the IT and financial systems may be more important than integrating the culture. And if the IT systems of neither company is robust enough to handle the whole, it’s best to initially concentrate on reengineering the process and designing a new system.

Here are three dimensions to guide the choice of an integration strategy:

- autonomy: that is, the extent to which you want to leave the acquired company alone. Generally you have a high degree of autonomy when the workforce is heavily creative. Pixar, for example, has a great deal of autonomy from Disney, which owns the company. Autonomy matters when you’re trying to preserve something like craft skill (as in beer brewing), R&D talent (in bio-tech labs), or creative ability (as in developing computer games).

- interdependence: where the value chain must work together to achieve greater industry penetration or to expand the company's reach. As an example, when a steel manufacturer purchases a steel furniture fabricator, it can create value if efficiency is improved by cutting out intermediaries and can also guarantee a source of supply.

- control: Cisco CEO John Chambers notes: “In a merger, you can’t blend resources and cultures – only one can survive.” So he usually favors an absorption strategy, where leadership, control systems and business processes become that of the acquirer. In cases like this, which are the majority in my experience, there are no mergers, there are only acquisitions. The sooner everyone realizes this, the better.

After determining the rationale for a deal, a firm must make choices about each of these factors so that its integration strategy fits with its business rationale. The integration strategy that’s finally adopted must be closely linked to the corporate strategy in terms of what the overall business is trying to do.