KUHN CAPITAL Saturday, February 24, 2018
Dispatches from the front

Raising the Odds of M&A Success

It’s nearly a cliché to say that most M&A deals fail. We’ve heard up to 75% don’t pan out as anticipated. Though we’ve never seen a quantitative study to prove that point, we believe some large number, maybe a third, look like they’re misinformed strategically. And another third get tangled up in post-close integration snafus that damage the value expected from synergies.

Perhaps the greatest example we’ve seen in this last category was the publishing firm that bought a training company heavily dependent on a highly-incented sales force. Directly, the publisher’s HR department went to work on the target’s salesforce, stripping out the luxury cars, club memberships and other perks that had motivated the salespeople toward outstanding performance. Result: in six months, the target's sales were in free fall (the former owners were already gone) and employees at all levels were making for the door.

So the period following close is no time to relax. We like an article we ran across on this subject in the Harvard Business Review called Avoid M&A Meltdown by David Harding, Sam Rovit and Alistair Corbett, three experts who have participated in thousands of deals and who tapped into a Bain & Company database of 1,700 large companies for their study.

The HBR piece makes the point that -- excluding strategic blunders -- post-deal trouble crops up in: 1) the departure of key people; 2) gummed up information systems and internal processes; and 3) ignored customers.

To head off the loss of key people, successful integrators seek out the opinions and suggestions of the target’s employees on all relevant topics: what they think hasn’t been working well in the past, what they believe does work well, and what they think ought to be done to improve things. But merely soliciting this feedback isn’t sufficient: what separates winners from losers is widely promoting and acting upon good ideas.

Contrast Carly Fionas' rather imperious top-down approach after she pushed through HP's purchase of Compaq with her successor’s methodically solicitious style, already now showing signs of success. First thing Mark Hurd did in his new job as CEO was survey and interview everybody in sight, then trapped the best ideas for implementation.

Successful acquirers also closely monitor employee stats and when they see rising or unexpected turnover, they act fast to determine and interdict the cause. Cisco Systems’ John Chambers says, “When we acquire a company…, we’re acquiring the next generation of products through its people. If you pay between $500,000 and $3 million per employee, and all you are doing is buying the current research and current market share, you’re making a terrible investment.”

Another source of unpleasant surprises is the dissatisfied customer. For example, after Kellogg bought Keebler, Kellogg’s distribution centers were suddenly called upon to handle both company’s products and shortly thereafter saw severe declines in shipping timeliness. CEO Carlos Gutierrez immediately halted integrated distribution until the kinks could be worked out, one center at a time, and called or met with key customers to apologize and report on progress.

Finally, while problems with employees and customers may pop up in a few weeks, operational problems can take a year or more to gestate. When Citibank bought Travelers Group, the deal’s raison d’etre was to induce Citibank customers to take out Travelers insurance policies. But a year after the deal, such cross-selling still hadn’t gained traction.

Citigroup’s John Reed and Traveler’s Sandy Weill traced the problem to the management team in charge of integration. Personality clashes and old allegiances were blocking the resolution of knotty integration issues. Solution: goodbye to the team’s popular but obstinate leader, and a reshuffle of other team members’ responsibilities. Result: back on track.

What do these three families of problems -- employee turnover, customer dissatisfaction and operational snafus -- share in common? They can all be resolved by an alert senior management team equipped with the information systems and desire to monitor critical indicators of integration progress... and then act on the bad news decisively.

Ryan Kuhn

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