Helping companies do the best possible due diligence

After a brief lull, the pace of mergers and acquisitions is picking up again. This is due, in part, to the stores of capital that many organizations have built up over the past several years as they waited for the starting gun signaling an economic recovery.

Well, the starting gun never sounded, and the returns on invested capital are fairly anemic, so many leaders of organizations have decided that now is a good time to accelerate their growth through acquisition. This, in spite of the fact that, depending upon the research data base you consult, 1/2 to 2/3 of all of these combinations fail to achieve their business objectives. A recent report from Wharton tracked all M&A activity over a 20 year period up to 2003, and found that the net impact was a 3% decrease in equity.

That figure, by the way does not include the AOL/Time Warner debacle that, by the time it was unwound, cost shareholders a half a billion dollars in equity. It should be noted that these figures are for public companies, but it seems logical that private companies would not fare much better.

With such a dismal track record, why do companies continue to follow such a risky strategy? Well, the short answer is that they have to. Every industry goes through consolidation, usually over a 25 – 40 year span, and every company within the industry is affected. In the early stages of consolidation, industry population is reduced by up to 70%. In the later stages, this is reduced by another 50%.

So, in this Darwinian system, there is no maximum or optimal size: to survive, companies must continue to grow. And organic growth will not produce scale rapidly. That is why we advise our clients, even at startup, to develop their growth strategy, eat or be eaten, as they will be faced with that choice once they become viable.

So why do acquisitions (there is no such thing as a merger) fail? There are lots of reasons: bad business analysis; poor due diligence; CEO testosterone or hubris, but the most commonly given reason is culture clash – the inability of the people in the combined organization to find ways of working together.

The problem is neither new nor rare.  In fact it is so commonly talked about that it is only a matter of time before those who have fiduciary responsibility in corporations will have to engage in some form of Cultural Due Diligence to avoid the charge of negligence.  And negligence pierces the corporate veil, making directors and officers personally responsible.

We have found the critical success factors to be the comprehensiveness of the integration plan, and the speed of execution. Unfortunately, most integration plans are focused on infrastructure: computer systems, financial systems, HR processes, budgeting processes, etc. with scant attention to the critical assessment and planning necessary for bringing the cultures together.

Without including cultural assessment and integration planning, the overall plan will not be comprehensive, and the easily predictable speedbumps in the cultures will not be identified, thereby slowing integration. Of course, best practices in the two organizations will not be capitalized on either, as so much information about how to make them work resides in the informal organization, where culture lives.

In many mergers there is an apparent belief in some form of “managerial pixie dust” that will enable managers and supervisors to simultaneously continue managing their operations and daily problem while incorporating new values, behaviors, expectations, measures and directions. 

When most companies hire a new supervisor or manager there is a careful selection procedure, an indoctrination or orientation program, and usually some form of support or mentoring to help the new person become acclimated.  Clearly, the new hire is making a break from the past to the future – she is changing jobs and companies overtly.  The break between jobs and time involved in the change (weeks to months usually) is all part of the ending of the past and the beginning of the new.  Yet in post-deal integration this process is often ignored.

What is needed, particularly to help managers and supervisors, is crystal clarity about the new expectations and focus coupled with some orchestrated time away from task to systemically review, rethink, and plan as necessary how one goes about his “new” job.  Preferably this time would include a no fault opportunity to rethink if the job is still something that he wants to do.  In any transformation of a company, either through an acquisition and integration or through an internal initiative the relative “rules of the game” are often being fundamentally altered.  The things you did to get to where you are in management may no longer be valid, the things you do in the job daily to be considered successful may have changed substantially.

This situation quite reasonably calls for an opportunity to rethink what this means to you personally, what this means to your work unit, and whether or not this is what you want to do with your life.   There are tried and true methods to achieve this personal reassessment for each manager quickly and the success of these approaches in speeding up implementation of the new plans and in retention of valuable management is notable. After all, the foundation statistic is that more than 2/3 of managers leave within two years of an acquisition. This approach could certainly reduce that brain drain.

So, in addition to the paramount need of including cultural assessment as part of the integration plan, is there anything else that can be done post-implementation to reduce the pain and anxiety? There are four basic overriding principles of effective organizational change that are often forgotten in the “logic “of the merger and new business plan.  When it comes to the people engaging in the change successfully the organization needs to: 

1. Enhance the clarity – Make sure there is clarity about what is going on, why the deal was done, progress being made, and performance expectations.
2. Enhance the benefits – anything that can be done to clearly indicate the benefit, organizationally and personally, to all involved is worth a lot of time and effort.   If necessary, create benefits to reinforce the change.
3. Diminish the effort required to make the changes – lots of support, reference materials, avenues for queries/questions that provide rapid and definitive responses, mentors, case examples and facilitated organized support groups of peers are all things that can make a clear and measurable difference in speed to achieving the changes needed.
4. Diminish the uncertainty – do whatever is necessary to leave no lingering doubts or unspoken/unvoiced questions.  Orchestrated forums to encourage any and all questions, to voice any and all doubts, and receive a thoughtful and considered reply are very helpful.

As part of the cultural integration plan, all four of the above can help to ensure that people get focused quickly on pursuing the value drivers of the deal, rather than on any unresolved cultural baggage that they may still be carrying, thereby greatly increasing the odds of success.

Gene Drumm is a Senior Partner with Vector Group, Inc. an international consultancy that helps clients design, implement, and sustain strategic change. Lately a particular emphasis has been on cultural assessment and integration planning for M&As. Achieving Post-Merger Success: The Stakeholder’s Guide to Cultural Due Diligence, Assessment, and Integration is the newest book from Vector. Gene can be reached at 303-758-0773, or drummvectorscan com.

Vector Group is a Business Partner of Due Diligence, Inc., led by Charles Bacon.

This article originally appeared in the April 15, 2006 issue of NewShare, published by LearnShare, Inc.