Three Reasons Why Acquisitions Fail and How to Ensure Success

Initial acquisition agreements represent a scenario of possibilities and excitement, yet over 75% of the acquired firms lose value in the first year.  Why does it happen that time and time again the best of intentions do not yield predicted results?

This blog Is based on the scenario of a large international firm expanding its product line through an acquisition. While the cultures are vastly different, the retention of the acquired firm’s talent is vital to the success of the acquisition.

The Acquisition Phase:

It’s been months since the initial acquisition discussions began. Due diligence is done. Synergies have been identified and an integration plan is on paper and approved by stakeholders. Legal papers are ready to be signed by both parties. The internal and public announcements are ready and, assuming the acquired firm has been assured of autonomy, the overall mood is upbeat. The acquisition process seemed like an exhausting uphill climb, but the hard work has only begun.  It’s now up to the integration team to make it real.

The Integration Phase – What could possibly go wrong?

The integration process is likely to be more rigorous than the acquisition. It’s also the point at which acquisitions begin to unravel. This is generally blamed on a combination of underestimating the financial, human and time resources needed and overestimating the synergy cost savings. Studies abound on this, and the advice is pretty consistent – plan ahead, overbudget the cost of integration and underestimate the savings from synergies.

But what if it’s too late to follow that advice? Or you did plan ahead but now foresee serious obstacles that were not evident during due diligence? By avoiding the 3 mistakes listed below, it is possible to get things back on track and minimize financial surprises.

Mistake #1 – Not fully partnering with the acquired firm to identify unexpected business risks.

Establishing trust is challenging as each side evaluates the other with a wait-and-see attitude.  The acquiring firm: “Will the new executives measure up?”  The other side, “They promised autonomy.  Let’s see what that means.”

It’s likely that a strong sense of partnership was present during the acquisition process. It is equally likely that this will diminish during post-acquisition.  The decline in trust often happens because, in the midst of integration activity, the acquiring firm starts to view the acquired firm as a newly acquired territory, the business equivalent of colonialism. This dampens motivation, delays progress and creates loss of critical talent.

TO AVOID THIS MISTAKE:

1. Resist allowing traditional patterns of hierarchy to determine priorities following the agreement.  (This is characterized by goals that are set by the acquiring firm with the task of implementing left to the acquired entity.)
2. Continue the rigorous due diligence which led to the initial agreement with a team balanced by executives from both sides of the acquisition. (This will also help you avoid Mistake #2). Agree to show up to the integration staff as a united leadership team, regardless of inevitable disagreements.
3. Reject a “check-the-box” approach for completing the integration, which is characterized by only performing to goals.
4. Acknowledge the potential differences in business structures and policies and strive to develop creative solutions to address differences.  For example, human resource policies needed for a stable, geographically centered organization will differ from a high growth, geographically diverse start-up.

Mistake #2 – Failing to share the integration budget and goals with everyone working on the integration

It’s not uncommon to keep integration budgets and other details at a high “need to know” level and share only the details of the desired outcome with a broader group. While there are sometimes good reasons for this, sharing more broadly spreads ownership for the outcome and keeps costly mistakes at bay. Issues tend to surface early in the process and rumors and speculation at all levels about “what will happen next” are kept at bay. This puts the important leadership skill of transparency front and center which in turn improves both performance and engagement.

TO AVOID THIS MISTAKE:

1. Share, in person, the detailed budget with the integration team and, ideally those who may be on the fringe of the team but nonetheless directly impacted by the change. (This assumes that those whose jobs are at risk are fully aware of this and incentivized to stay on board during the integration.)
2. Share an even more detailed version of the budget with each functional group so they will know specifically what their goals are.
3. Assign senior management from both organizations to present this information – together – to both teams. It is important that everyone hear the same thing at the same time.
4. Don’t make this initial budget meeting the sole meeting during the integration. In fact, proactively look for problems during integration and schedule regular meetings to discuss and resolve them. Encourage and reward efforts to identify risks and preempt problems.  Keep a level of vigilance about ‘what could go wrong.”
5. Be alert to burnout among the integration staff, especially those who have their regular pre-acquisition job to do simultaneously with the integration. This is a frequent and serious issue that tends to lie dormant for a while and emerge suddenly in the form of mistakes, frustration, flaring tempers and budget failures. Ensure the team that you are available to speak with anyone experiencing burnout. If possible, provide a neutral “sounding board” resource who can also make recommendations to help employees with burnout.

Mistake #3 – Underestimating the impact on revenue of not supporting talent.

The uncertainty following an acquisition contributes to several challenging issues facing leaders, including a collective focus away from a team toward a more protective lens of focusing on oneself.

Acquisitions are entered with positive energy, yet there’s often an exodus of senior talent during the integration.

Why does this senior executive exodus occur?

Increased demands on a leader’s time resulting from running their business while meeting the myriad of new challenges the integration creates add up to a stressful situation.

Their loss can be devastating because leadership in the acquired firm is a significant factor in its appeal.  Leaders have contributed to the firm’s success through innovation or identifying market opportunities. They have important industry connections. The systems and business practices supporting the unique market niche may be tailored to the business and not easily integrated.

The larger, acquiring firm typically has a carefully constructed succession plan, with the goal of minimizing the impact of any executive departure.  Often, acquired firms may not have the depth of talent to support a meaningful succession plan – a fact that is often overlooked by the acquiring firm.

TO AVOID THIS MISTAKE:

1. Recognize that there is heightened sensitivity and that both sides are evaluating the other with more scrutiny.  Actions may be metaphors of how an executive’s talent is evaluated.  “If they valued me, they would…..”   And on the other side, “They need to demonstrate their commitment to the broader entity.”
2. Seek to understand the personal motivations of the leaders.  Often, the driving forces behind exceptional leaders are highly personal and value-based.  Conversations to gain clarity will help the acquiring firm’s leaders to understand and avoid talent exodus.
3. Don’t evaluate the leader’s performance without seeking to understand the challenges they face.
4. Don’t assume that employment contracts with performance and non-compete clauses will ensure high performance or retention.
5. Acknowledge that the increased demands of integration will factor into the performance of leaders.  Provide executive coaching support to assist in maintaining perspective.

Ensuring a successful acquisition:

Injecting new talent and ideas into an established business can accelerate growth and increase the business potential of both firms.  Here is a summary of some of the key points that will ensure that the goals of both firms are met and the acquisition stays in the 25% of those that are successful.

1. Spend enough quality time with the new leaders to understand with depth their motivations and the unique perspective which fueled their success.
2. Place a priority on respecting and supporting the acquired firm’s culture in a way that is harmonious for both companies.
3. Level with employees at all levels, as soon after the acquisition as possible, if their jobs are at risk. This may feel counterintuitive, but companies who do this early and in a caring, transparent way, and concurrently offer incentives and support, including outplacement, tend to have far less regretted turnover than companies who do not.
4. Keep two-way communication throughout the integration as a top priority for the integration teams and create an environment of trust through transparency.

Even the best efforts to get ahead of management and cultural issues early in the acquisition process won’t fully shield companies from unpleasant surprises later. In my experience coaching executives during significant change, it is rarely too late to improve outcomes by stepping up the leadership behaviors and skills that reflect transparency, listening and empathy.