Post 407 - I believe a company's culture determines how it responds to everything and anything. Some years ago, Aetna bought a "vanilla" group benefit company. It only had 3,000 employees and Aetna at that time employed about 50,000 people. Aetna's CEO didn't think it important to assimilate the new company into the Aetna culture. After all, he reasoned, there were only 3,000 of them so what impact could they have?
The Aetna culture was pretty loose in those days. But the "vanilla" company's culture was incredibly strict and disciplined. Everyone was on the same page. They wound up taking over the Aetna culture and destroying what had been in place for more than 100-years. Very soon, Aetna had one line of business, group benefits, instead of the five or six they had before the acquisition. About 18-months after the acquisition, the Aetna CEO was quoted as saying that had they understood the importance of culture, they would have approached the acquisition very differently. Of course, by then it was too late and he lost his job...to one of the vanilla guys. So there’s more to successful mergers and acquisitions than just focusing on the numbers.
To consolidated different companies successfully, consider using the following guidelines:
- Be clear about the logic of any potential acquisition. Rather than relying on ‘synergy,’ ask how the combined companies will leverage their assets and abilities to make the whole worth more than the sum of the parts. Understand just how the new combination will create value.
- Besides examining a prospective partner’s financial and legal standing, use cultural due diligence to examine organizational health, leadership talent and managerial abilities. While some differences can be worked out, others are insurmountable and should be avoided.
- Apply the guiding principles that were important to the success of the acquiring company to the acquired business as well. If core values remain at odds, today’s merger will likely become tomorrow’s breakup.
- Design the integration as carefully as the initial deal. If you’re Quaker Oats, don’t buy Snapple and then dismantle the distribution system that made it successful.
- Specify specific roles for the top executives of each of the merging companies in advance. Working it out as you go is usually a recipe for disaster.
- Standardize transferable practices and apply what’s worked in the past. If the acquired company insists on doing things its own way, be sure it’s essential to achieve strategic leverage rather than a way of resisting change. Allow full autonomy after a sustained period of excellent performance during which the acquiring company learns to trust the acquired company’s leadership.
- Avoid engaging in further acquisitions to fix, justify or further leverage the original deal. If it doesn’t provide the anticipated value, fix what can be fixed and cut your losses.
Some additional tips:
- Define where you want to be before you define the “as is.”
- Identify issues of common concern and rally everyone around these issues.
- Get the leadership established as quickly as possible.
- Promote some high-performing people and give them responsibility for managing the integration process.
- Reward the behaviors that support the culture you want.
- Make sure the executive compensation system rewards the behaviors you want.
- Make it painful to hold on to the old.
- Focus on getting to the point where no one talks about the merger anymore.
- Get the transition over with as quickly as possible.
Showing posts with label Mergers and acquisitions.. Show all posts
Showing posts with label Mergers and acquisitions.. Show all posts
Thursday, January 14, 2010
Wednesday, January 13, 2010
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.
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.
Tuesday, January 12, 2010
Observations about mergers and acquisitions.
Post 405 - Most mergers and acquisitions do little to increase the acquiring company’s bottom line. A KPMG study of 700 mergers found that only 17% created real value, and that more than half destroyed it. And a McKinsey study of mergers that took place in the nineteen-nineties found that less than a quarter generated a positive return on investment.
The myth of synergy seems to appeal to many executives’ sense of themselves as magicians. As Warren Buffett has observed, executives see the companies they acquire as handsome princes imprisoned in frogs’ bodies, awaiting only the “managerial kiss” to set them free. Unfortunately, most frogs turn out to be as ugly as they look, and magic kisses are harder to bestow than executives believe. Only a few companies today - Cisco is one - have consistently been able to acquire firms and then improve their performance and profitability.
Merger mania also rests on the fallacy of ownership - the assumption that you have to own a company to make money from it. However, much of the benefits that mergers are supposed to accomplish can be achieved instead through partnerships and alliances. Google has made deals to handle searches and advertising for companies like A.O.L. and I.A.C., giving it access to their customers without the hassle of acquiring them. And I.B.M. has marketed the products of its competitors, Sun Microsystems and Novell, aallowing it to expand its offerings and its potential customer base.
According to a recent analysis of a number of merger studies, mergers that rely more on cost-cutting - combining back-office operations, eliminating redundancies - than on promises of fast growth are more likely to be successful. Acquisitions of smaller, newer private companies are usually a better idea than acquiring publicly traded companies as they’re more likely to provide access to new technologies or products, and more likely to be acquired at a good price. In 2000, for instance, Microsoft paid less than $40M to buy the video-game developer Bungie, the creator of Halo. In the six years that Microsoft owned the company, Bungie’s products brought it well over a billion dollars in revenue.
So, history suggests that, when it comes to mergers, the best response is often to do as Nancy Regan advised and "just say no." A decade ago, America Online merged with Time Warner in a deal valued at a stunning $350 billion. It was then, and is now, the largest merger in American business history. The trail of despair in subsequent years included countless job losses, the decimation of retirement accounts, investigations by the Securities and Exchange Commission and the Justice Department, and countless executive upheavals. Today, the combined values of the companies, which have recently been separated, is about one-seventh of their worth on the day of the merger. To call the transaction the worst in history, as it’s now taught in business schools, doesn’t even begin to tell the story of how some of the brightest minds in technology and media collaborated to produce a deal now generally regarded as a huge mistake.
Richard Parsons, the former Chairman and CEO of Time Warner said recently, “It was beyond my abilities to figure out how to blend the old media and the new media cultures. They were like different species, and in fact, they were species that were inherently at war.” Seems like managing the soft stuff is always the hardest part of running a successful business.
The myth of synergy seems to appeal to many executives’ sense of themselves as magicians. As Warren Buffett has observed, executives see the companies they acquire as handsome princes imprisoned in frogs’ bodies, awaiting only the “managerial kiss” to set them free. Unfortunately, most frogs turn out to be as ugly as they look, and magic kisses are harder to bestow than executives believe. Only a few companies today - Cisco is one - have consistently been able to acquire firms and then improve their performance and profitability.
Merger mania also rests on the fallacy of ownership - the assumption that you have to own a company to make money from it. However, much of the benefits that mergers are supposed to accomplish can be achieved instead through partnerships and alliances. Google has made deals to handle searches and advertising for companies like A.O.L. and I.A.C., giving it access to their customers without the hassle of acquiring them. And I.B.M. has marketed the products of its competitors, Sun Microsystems and Novell, aallowing it to expand its offerings and its potential customer base.
According to a recent analysis of a number of merger studies, mergers that rely more on cost-cutting - combining back-office operations, eliminating redundancies - than on promises of fast growth are more likely to be successful. Acquisitions of smaller, newer private companies are usually a better idea than acquiring publicly traded companies as they’re more likely to provide access to new technologies or products, and more likely to be acquired at a good price. In 2000, for instance, Microsoft paid less than $40M to buy the video-game developer Bungie, the creator of Halo. In the six years that Microsoft owned the company, Bungie’s products brought it well over a billion dollars in revenue.
So, history suggests that, when it comes to mergers, the best response is often to do as Nancy Regan advised and "just say no." A decade ago, America Online merged with Time Warner in a deal valued at a stunning $350 billion. It was then, and is now, the largest merger in American business history. The trail of despair in subsequent years included countless job losses, the decimation of retirement accounts, investigations by the Securities and Exchange Commission and the Justice Department, and countless executive upheavals. Today, the combined values of the companies, which have recently been separated, is about one-seventh of their worth on the day of the merger. To call the transaction the worst in history, as it’s now taught in business schools, doesn’t even begin to tell the story of how some of the brightest minds in technology and media collaborated to produce a deal now generally regarded as a huge mistake.
Richard Parsons, the former Chairman and CEO of Time Warner said recently, “It was beyond my abilities to figure out how to blend the old media and the new media cultures. They were like different species, and in fact, they were species that were inherently at war.” Seems like managing the soft stuff is always the hardest part of running a successful business.
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