The Destructive Force of Acquisition Denial: A buyer with a superiority complex courts deal failure

With the modern merger movement now midway through its third straight decade, acquiring managements seem to have mastered most aspects of the M&A process, except the one that may count the most in a successful deal – the psychology of buying a company. A virtual assembly line of studies consistently affirms that up to three-quarters of all deals either destroy value or don’t meet objectives despite often benefiting from elegant strategic conceptions, optimal financing, and other textbook advantages. Both front-line observers and direct players can trace most failures to an inability to integrate the target companies correctly. Yet in the face of the unpleasant evidence, the sentiment among most managers launching a new acquisition continues to be that “failure can’t happen to me.” Read that as denial. After 20 years of working on M&A integrations and uncovering a number of interesting psychological developments that go with the process – some of which have been reported in the pages of Mergers & Acquisitions – I must add denial to the list. For a number of reasons, executives, even those who have tasted failure before, often grasp the illusion that this time they have the magic bullet that will guarantee success. And the more they think they’re immune to failure, the greater their tendency to make mistakes that will foul up the deal. Denial is one of several common psychological reactions that can be expected in making an acquisition: Accomplishment The first, is a sense of accomplishment. Taking over another firm can be one of the greatest milestones in any executive’s career. To the victors go the spoils. Acquisitions are exhilarating for the winners. There are few moments in business that equal the intensity and satisfaction of buying another company. Superiority Second is the sense of superiority. Buyers are heady, confident, on a roll. This translates into a strong sense of superiority in the lead firm. There is an assumption that one’s own ways of doing things are better than those in the firm just acquired. At the very least, the acquisition validates that the buyer’s business practices are appropriate for the combined company. In reality, the acquisition may have changed the size or complexity of the combined entity and calls for an earnest look for new and better ways of doing things. Urgency This leads to a third common psychological response to making an acquisition – a sense of urgency in moving forward. Buyers feel impelled to move fast and consolidate their gains. The team that has orchestrated the deal – the CEO, outside lawyers and bankers, and, perhaps, a few senior executives – often hands off the task of integration to a business unit leader and functional managers, each of whom has his or her own agenda and plans. What they have in common is a need to gain control. Denial These normal and to-be-expected reactions lead to denial. Although 75% of all mergers and acquisitions don’t achieve their financial or strategic objectives – and despite the fact that we have known about this high failure rate for decades – most executives and managers in buying companies deny outright their own susceptibility to this reality. Their sense of accomplishment, sense of superiority, and sense of urgency conspire to make buyers somehow feel immune to the 75% deal failure rate. Executive denial of susceptibility to the merger and acquisition failure rate is expressed in a variety of ways: “We’ve got things under control.” Hopefully, there is some compelling strategic rationale for doing the deal and care has been taken in identifying and negotiating with a merger partner. However, in even the most thoughtful acquisitions, there are bumps along the road to success. Messages and assumptions that leadership is in complete control create a false sense of security and quickly turn the marriage made in heaven to the honeymoon from hell. In reality, people want to be leveled with and have the confidence that their leadership is being realistic about both the deal’s long-term opportunities and its short-term potential for inadvertently compromising employee well being, work-team performance, and organizational effectiveness. “I don’t want to burden my people with merger-related stress.” This common expression assumes that employees are blissfully whistling away at work and that communication about the merger somehow creates stress and distracts them from doing their jobs. In reality, it’s the absence of information that creates stress among employees. And, it prompts employees to search for other sources of merger-related information. When employees do not feel that information is forthcoming from leadership, they huddle around water coolers and coffee machines exchanging the latest merger gossip. Rumors spread like wildfire in acquired organizations and, of course, tend to suggest much more dire consequences than leadership’s actual intentions. “The more I learn about our new partners, the more I see that we’re exactly the same kind of people.” Executives who have been negotiating a deal get to know their counterparts from the other side. The completion of the deal may suggest harmony and effective cross-company working relationships. In reality, research shows that employees initially notice differences – not similarities – between the combining companies. Cultural clash and a lack of cross-company cooperation are the norm in every combination, no matter how well intentioned leadership may be. Employees tend to find their ways superior to the other side and act to defend their practices and systems rather than work for the common good. “The quicker we integrate, the better things will be for all involved.” Many buyers hold onto the fantasy that speed at any cost is the prescription for a successful combination. They argue that letting people know their fate eliminates stress and distraction from performance. In reality, being offered an assignment in the combined company generates a slew of additional questions and concerns. Who will I report to in the new structure? Will he or she know my track record? Will I fit in with the culture of the new organization? What are the promotional opportunities here? And, moving too quickly results in poor integration decisions like selecting the wrong systems or policies. Some executives counter with, “Let’s at least get something in place and then we can come back and make better decisions.” In practice, they rarely revisit initial integration decisions and, if they do, they find it considerably more difficult to undo wrong systems and procedures than to get things right in the first place. Unfortunately, when senior executives act in ways that indicate they are denying or ignoring the realities of the integration process, it sends a message to middle managers to get on with things at any cost. The result is an unintentional, but nonetheless powerful, negative impact on employees’ perceptions about the benefits of the acquisition, as measured in both business and personal terms. Even in these difficult economic times, this prompts individual contributors to consider leaving the firm. Of course, it’s the people the combined company needs the most – those who have the greatest skills and are the most marketable – who tend to jump ship first. Seeing the best and brightest leave lessens remaining employees’ confidence in the combined company. And, employees’ trust in leadership and faith in the new company become further eroded when they have to struggle with culture clash, inappropriate or ineffective systems and procedures, and a leadership team that is denying the human and cultural impact of the merger. Intervening to Increase Acquisition Success Most executives who ask me to advise them on the post-merger integration process, frankly, have screwed up a merger or acquisition previously in their career. They have learned, firsthand, how difficult it can be to manage corporate combinations. For some reason, they have to go through the pain of a botched combination before settling on a more careful and constructive approach to integration. But it doesn’t have to be that way. Buyers and sellers can learn from the merger mistakes of the past to better manage their own combinations. More positively, integrators can benefit from the teachings of successful cases of mergers and acquisitions. Certainly, there is no one-size-fits-all approach to making a merger work. If you’re looking for a shortcut or “10 easy steps” to post-merger integration, then you’re still stuck in denial. If managing a merger or acquisition were that easy, there wouldn’t be such a high failure rate. Recommendations for how to manage a transition to maximize the achievement of financial and strategic objections depend on the context of the deal, the dynamics of the organizations, and the people involved. Among the many factors that influence integration architecture are the friendliness of the deal, the intentions of target leadership to remain, the number of headcount reductions, the extent to which there is a clear vision of the integrated company, the extent to which that vision is shared by the buyers and sellers, the compatibility of current IT and other systems, the natural communications style of the leadership team, the communication skills of middle managers, and the depth of culture clash. While there can’t be a generic blueprint for smartly managing a combination, what follows are three streams of activity that repeatedly have been shown to be effective in: * Raising awareness of the dynamics and difficulties of meshing two previously independent companies into one integrated operation and, * Managing the resulting integration process in a manner that maximizes the achievement of financial and strategic objectives. The objective of each of these activities is to prepare people for the rigors of integration. As a client once commented to me, “So, you’re preparing us to get hit by a Mack truck.” “Yes,” I responded, “but at least you’ll know what to do after you pick yourself up from the pavement.” Preparing people to manage the integration effectively As the deal closes and responsibility moves from making the merger happen to making it work, reality hits hard. Operating managers see what they consider to be inflated projections and become overwhelmed at how they will meet the numbers. Usually these executives are busy running their current businesses. Their performance evaluations and rewards are based on how well they meet their core business targets, not on how the integration goes. They see integration as a distraction from getting products and services to customers. Thus, what seems like a comprehensive and sophisticated integration program on paper is, in practice, implemented in a rapid and shallow manner. The best way to prepare people for the rigors of managing a merger is to execute an intensive program that combines educational and experiential activities, like an “integration boot camp.” The idea is to alert executives and managers who will be involved in the integration process to common pitfalls and to provide a realistic accounting of what needs to happen and what resources are needed to integrate effectively. This boot camp can be held as an offsite executive retreat or an in-house workshop. Whatever it’s called and wherever it’s held, this session will consume the most precious of resources – time. So, smart buyers do their best to conduct this activity prior to the deal’s legal closing – before executives and managers become overwhelmed with the dual responsibilities of managing the combination and running the core business. By contrast, most acquirers underutilize the time between announcement and closing. They justify their inaction by pointing to legal limitations on sharing sensitive information on matters like pricing data between the deal parties before the deal becomes legal. However, the intention of the boot camp to is prepare managers for the integration process and not to conduct actual integration planning. An integration boot camp begins with a presentation on the issues and opportunities in the integration process, with an emphasis on the weak points in typical integration programs. Often, data collected from the buying or selling organization – developed from sources that include interviews conducted with executives, employee focus groups, and employee opinion surveys – give executives a realistic sense of their own firm’s readiness for a successful integration. Valid data are a powerful tool for creating a felt need for giving the work of integration management the status and resources it requires. Next, attendees engage in an open and honest discussion of what might interfere with a successful integration in their own organization. In some instances, role-play activities are used to simulate merger dynamics and help convey the requirements of successful integration. The boot camp concludes with executives preparing specific action plans for managing their ensuing integration. Most organizations I’ve worked with conduct separate boot camps for the buyers and sellers. This prevents the exchange of any sensitive information, but also enhances the atmosphere of openness and candor in discussing the delicacies of managing integration. Too often, new merger partners are on their “best behavior” when interacting with the other side before closing and do not want to be cast as the nay-sayers or potential troublemakers. Yet, the very purpose of the boot camp is to surface potential pitfalls in the integration process. Thus, while the session can be conducted with counterparts from the two companies, it’s preferable to run separate sessions for the buyer’s people and the target’s people. Developing an effective transition structure Operating managers who are involved in the integration process, but not in the pre-merger courtship and negotiations, frequently don’t understand or look for the value-added potential of an acquisition. Corporate strategists or senior leaders may have developed a clever game plan, but it’s those at the operational level who have to play the game. Rather than identify and mine sources of strategic synergy in integration planning, the line people take shortcuts that save time but result in poor decisions. This works in the short run because managers can refocus their attention and energy to what they see as their real work but in the long run it results in disintegration of partners and disappointing results One lesson that has been widely learned among integrators is the need to assemble a “transition structure” to focus executive time and talent on obtaining the strategic and financial synergies in a combination. A transition structure is a temporary system that usually lasts three to six months but can extend up to a year to provide for coordination and support during implementation. In a typical transition structure, functional integration teams propose integration opportunities to a senior management steering committee. Just about every combination sports some form of a transition structure and yet we still confront the sobering reality that three-quarters fail. So, the challenge is not merely to establish a transition structure but to develop an effective transition structure – one that brings the deal’s potential synergies to life and builds positive working relations among the partners. I recently was asked by four organizations – one each in the high technology, health care, consumer products, and financial services markets – to assess weaknesses in their disappointing integration programs by interviewing managers who participated in the process. In each case, the most widely discussed issue was the ineffectiveness of transition teams. Three specific complaints were made about the transition teams: * Did not know what their charter was; * Did not know the decisionmaking criteria to be used in evaluating their recommendations; and * Were plagued by dysfunctional group dynamics. Fortunately, each of these weaknesses in typical integration planning structures can be readily addressed with these focused efforts by leadership: Articulate charters Successful transition teams do not begin with a blank slate. Instead, they are guided by clearly articulated assumptions or biases held by senior leadership – e.g., does the top tier prefer a centralized or decentralized structure? A charter designates what a transition team is supposed to do – prepare a plan for implementing the ways of the buyer, select among current best practices of the deal partners, or use the merger as an opportunity to look for new approaches to getting work done. The charter is essential to transition-team success because it directs the members’ energy during a period when people are already stretched between running the core business and managing the integration. Clarification and discussion of decisionmaking criteria Simply stated, if the transition teams do not know what they’re looking for, they won’t find it. If a deal’s strategic synergies are not kept front and center during the integration planning process, the void will be filled by power politics. Rather than identify and lock in ways to achieve the potential synergies in a deal, teams will make decisions based on who yells the loudest or drops the highest-ranking name. A completely different but equally disruptive problem is when transition teams work well together and get energized about their proposed recommendations but get shot down by senior leaders with a message like, “That’s not what we are looking for.” Leaders need to put their cards on the table before transition teams convene. They need to clarify any biases, sacred cows, or desires for the combined organization so that planners can generate recommendations that are aligned with these criteria. Strengthening group dynamics For transition teams to be effective, they must develop positive working relationships in a short period of time. Anything that can plague a group’s process – multiple conversations, unprepared members, hidden agendas, forced decisions – can afflict a transition team. One manufacturing company I worked with addressed the requirement of strengthening transition team dynamics head-on. First, I trained the internal human resources staff to be transition team facilitators. They sat in on each transition team meeting and helped team leaders identify and correct impediments to effective team performance. Next, I conducted a workshop with transition team leaders to raise their awareness of group dynamics in general and in integration planning team effectiveness in particular. Third, I designed and conducted a full-day transition team “launch meeting” in which all participants came together to prepare for their roles. The meeting engaged team members in discussing and clarifying their team charters and the criteria that would be used to evaluate their recommendations. It also provided time for team members to discuss potential hindrances to team effectiveness and to establish group rules for their team’s work over the ensuing several months. Examples include how the team would make decisions; what was expected in terms of member participation, preparedness, and attendance; and how to allocate time on the team’s agenda. Raising awareness of the human and cultural issues in integration Naively wishing for the best – but occasionally being intentionally deceptive – many executives accompany an announcement of a merger or acquisition with seemingly calming words like, “It’s business as usual.” I think what leaders are attempting to say is, “We don’t know what changes there will be yet so, in the meantime, keep doing your work.” The problem is that, for rank-and-file employees, a merger is anything but business as usual. Seeing their leaders ignore or deny the realities of employee stress and culture clash only makes matters worse. Employees feel that their concerns are not understood and have little confidence that the integration will be well managed. Several years ago, organizational psychologist Philip Mirvis and I wrote about the “merger syndrome” in Mergers & Acquisitions. We identified symptoms of the merger syndrome, including distraction from performance, rumor mongering, increased stress, a crisis management orientation, decreased communication, and culture clash, as a primary cause of the disappointing outcomes of otherwise well-conceived mergers and acquisitions. Since then, firms ranging from multinational giants like Pfizer Inc. and BP PLC to small businesses and high-tech start-ups have conducted workshops to educate employees about the merger syndrome and its impact on integration success. The purpose of these, and other interventions, is not to try to eliminate the merger syndrome but to help people manage its sources and symptoms. Soon after Pfizer announced its acquisition of Warner-Lambert Co., the president of the buyer’s R&D function announced that he was using the integration to transform the structure and processes through which the pharmaceuticals giant discovered and developed new drugs. This sent shock waves through all employees, including veteran Pfizer employees who had assumed that their practices – and their jobs – would prevail in the combined organization. I worked closely with senior HR professionals at Pfizer to raise awareness of the human and cultural realities of the transition. To begin, we held a series of workshops on how to manage the merger syndrome to alert employees to the signs of the syndrome and teach them methods for minimizing the unintended impact of stress, uncertainty, and culture clash. In showing them how they could contribute to a successful combination, we helped employees understand that their stress-induced reactions to the merger were completely normal and showed them ways to control their emotions rather than have their emotions control them. An evaluation of the workshops found that employees appreciated that they were being leveled with about the stresses and strains inherent in a combination and found the activities helpful for managing their personal stress and building positive relations with new colleagues across the partner organizations. Intervening at Multiple Levels The three streams of activity presented here each engage an increasingly larger number of people. The integration boot camp readies senior executives for leading a successful combination, the transition structure prepares a broader number of managers for their roles in implementing the merger, and workshops engage the overall workforce as it moves down the inevitable rocky road that accompanies most every merger or acquisition. By conducting these, and similar, activities among the various levels of employees, the interventions support one another and set an overall tone so that leadership has a realistic sense of the difficulties of merging or acquiring. That is, leadership is acknowledging the human, cultural, and organizational dynamics that influence eventual merger success. This awareness, when coupled with proper actions for managing the integration effectively, is critical to overcoming the sense of immunity to the 75% deal failure rate and putting the integration on the successful path toward meeting its financial and strategic objectives. Mitchell Lee Marks, Ph.D., leads JoiningForces.org in San Francisco. He is the co-author with Philip Mirvis, of Joining Forces: Making One Plus One Equal Three in Mergers, Acquisitions, and Alliances. Copyright 2005 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com