The Merger Post-Mortem: Learning from an Acquisition

How do you account for the ultimate success or failure of mergers and acquisitions? Many factors are critical: you need to buy the right company for the right price at the right time. Even with all of the correct elements in place upfront, a corporate marriage “made in heaven” can turn into the “honeymoon from hell.”

In this article, Mitchell Lee Marks focuses on a factor that is key to a successful combination—the process through which integration is executed. Reprinted with the permission of the author, portions of this article also appear in his book, Joining Forces: Making One Plus One Equal Three in Mergers, Acquisitions, and Alliances, co-authored with Philip H. Mirvis. Dr. Marks, head of JoiningForces.org (www.joiningforces.org) in San Francisco, regularly advises executives on issues related to organizational change and transition.

Many factors account for the success or failure of mergers and acquisitions: buying the wrong company, paying the wrong price, making the deal at the wrong time and so on. Another factor, however, can be at the core of many disappointing combinations—the process through which integration is executed.

With first hand involvement in over 100 combinations, I have seen my fair share of both successes and failures. While there is no “one-size-fits-all” prescription for managing a merger or acquisition, a recent case sheds some light on how to prevent a corporate marriage “made in heaven” from turning into the “honeymoon from hell.”

GOOD INTENTIONS GONE AWRY

HD Solutions, a computer software development firm, fared the bursting of the technology bubble much better than most of its competitors (while the events described here are factual, the names have been fictionalized at the request of the companies involved). Both of its business lines were leaders in their niche sectors and the company registered consistent earnings during a period when many Silicon Valley firms went on a roller-coaster ride of expansion and contraction. CEO Dan Stiller was pleased with his company’s performance, but concerned that one business unit accounted for nearly three-fourths of the company’s revenues.

Guided by outside advisors, Stiller concluded that he had to bulk up the smaller business unit but that internal growth would not achieve the desired critical mass quickly enough. So, the CEO adopted a strategy of growth by acquisition. A business broker shopped an opportunistic acquisition to Stiller.

Sanchez Software had sound products that nicely complemented those of HD’s smaller business unit, but had very little marketing muscle and never realized the full potential of those products. As a result, the company was on the ropes financially and in need of a buyer to avoid a dive into bankruptcy. Here was the perfect acquisition, thought Stiller—a firm that had good products and was available at a good price. As a condition of doing the deal, CEO Donald Sanchez insisted on staying on board after the acquisition. Stiller had no problem with that, and consummated the acquisition.

Nearly a year to the date after the acquisition became legal, I received a call from HD Solution’s CEO Dan Stiller. “Productivity has just plummeted since we made the acquisition,” lamented the CEO, “the cultures are still clashing and key talent from both sides has jumped ship. Is there anything you can do to help us understand what went wrong, both to fix this acquisition and prevent us from going down the same path again?”

I replied that there is much that can be done to put a combination that has gone awry back on a successful path. But the first step is to learn what went wrong with the integration. “Sort of like conducting a post-mortem on a deceased patient,” noted Stiller. “Yes,” I agreed, “but we have a chance to resuscitate this one.”

FINDINGS AND ACTIONS

One-on-one interviews were conducted with several senior executives and middle managers, as well as a few focus group interviews with other employees. The vast majority of interviewees came from the HD business unit that had absorbed Sanchez, but I also spoke with some individuals from the other business unit. Clearly frustrated by the integration, executives and employees alike were eager to share their perspectives on what led to its disappointing results.

The post-mortem identified three key problems in the combination process: the partners did not have a shared view of the desired end state of the integration, integration planning teams produced meager recommendations and leadership was denying or ignoring the human and cultural issues in the integration.

LACK OF SHARED VIEW OF DESIRED END STATE

Executives from the combining organization did not have a shared view of the desired end state of the integration. The people I spoke with from the buying company used language like “acquisition” and “integration” to describe the deal. Counterparts from the selling company, in contrast, spoke of “merger” and “hands off.” When I shared this finding with CEO Stiller, he confessed that he and Donald Sanchez “were not on the same page when we initially discussed the combination, but I assumed that he would come around during the integration process.” This is wishful thinking. My experience is that if executives do not have a meeting of the minds during merger negotiations, there is no reason to believe that they suddenly will after the ink dries on the acquisition contract.

As a first step in resuscitating the integration process, I coached Stiller to put a stake in the ground by clarifying his expectations for the combined organization. To assist him in doing this, I showed the CEO a figure* called “Defining the Post-Combination End State” and asked him where he saw the combined HD/Sanchez organization landing. Corporate services—areas like finance, marketing, IT, and human resources—were to be HD way, with the acquired company conforming to the acquirer.

Stiller wanted to build on the strengths of both partners in the core area of software development, however, and pointed to the “Best of Both” cell in the middle of the figure which indicates that the area is additive from both sides. Nowhere was there to be a “hands-off” relationship between the combination partners.

(*A copy of the figure, "Defining the Post-Combination End State," is available by writing to info@focusbankers.com.)

Next, Stiller convened a meeting of key executives of Sanchez and the HD business unit into which it was being integrated. He carefully outlined his rationale for the acquisition and then presented his desired end state as a “non-negotiable.” He invited questions and comments about the degree of integration he was looking for, but ended the meeting with a clear message that each individual in the room either had to “sign up or ship out” for the desired end state.

After a weekend of soul searching, acquired CEO Sanchez came to Stiller and committed to supporting the integrated organization. While one acquired executive quit in protest, the large majority of Sanchez executives followed their leader in supporting the desired end state. The lesson learned from the post-mortem: straight talk from the buyers up front prevents wishful thinking by the sellers from delaying integration.

UNPRODUCTIVE INTEGRATION TEAMS

Soon after the acquisition became legal, Stiller convened six task forces to identify integration opportunities. As occurs in most combinations these days, these teams were supposed to recommend ways to achieve the objectives of the integration. Based on reports provided during the post-mortem interviewees, however, the output from these teams was abysmal. Interviewees cited three specific complaints—the teams suffered from unclear charters, poor leadership and dysfunctional group dynamics.

Integration planning teams can make or break a combination. Either team members have a positive experience and report back to their constituencies how they are working well with new counterparts and producing high quality work; or, they go back and report negative experiences of domination, politicking, and low quality decisions. This sets the tone for how the vast majority of employees not directly involved in integration planning view the combination.

At HD, three steps were taken to revive the integration planning process:

  1. Re-focus the process. Stiller set up an Integration Steering Committee to spell out clear charters for integration teams and specify the criteria that would be used to evaluate the team’s recommendations. The teams’ charters were linked to the newly articulated desired end state for the combination.
  2. Re-staff the teams. Initially, integration teams were staffed with function heads and their direct reports. This perpetuated status quo thinking rather than openness in deliberations. I advised Stiller to select integration team leaders who were more diplomatic than dominating. Even with teams with charters which specify that the lead company’s ways will predominate, the style brought to team meetings by leaders who reach out and listen to participants from the acquired organization makes all involved feel more like architects of change and less like victims.
  3. Re-start the teams. Comments about how the transition teams were conducting their work included common complaints about ad hoc decision making teams—hidden agendas, multiple conversations, and members agreeing to something in the room and then badmouthing it outside the meeting. When the stakes are high in integration planning, it is difficult for team leaders and members to keep an eye on team process (how the team goes about its discussions) along with team content (what the team is discussing).

DENYING OR IGNORING HUMAN AND CULTURAL ISSUES

The merger post-mortem revealed symptoms of what Organizational Psychologist Philip Mirvis and I have dubbed “The Merger Syndrome”—tremendous employee uncertainty and stress, constricted communications, distraction from performance and the clash of corporate cultures. (Our research has shown that the merger syndrome occurs in even the most carefully planned and best managed integrations.)

Employees spoke of their upset with leadership for keeping them in the dark on integration activity, expressed concern about how the integration could adversely affect company performance and cited examples of on-going culture clash ranging from very different compensation philosophies to meeting starting times.

Senior executives can “win back” employee support by clearly acknowledging, rather than denying or ignoring, the human and cultural dimensions of the combination. To demonstrate awareness of the human and cultural issues raised in the post-mortem interviews, Stiller asked me to conduct venting meetings with employees. These sessions let people blow off some steam by expressing their concerns about the acquisition, but also engaged employees in understanding why the deal occurred and how they could contribute to its success.

“Maintaining Productivity During Transition” workshops for team leaders were initiated to help them keep their employees focused on short-term business objectives. Culture clarification activities were used to educate both sides on their partner’s values, interpersonal behaviors, and business practices, overcome misperceptions about the culture and take a step toward building a “one company, one team” mindset. This put culture “into play” and, after Stiller articulated his “cultural non-negotiables,” engaged employees from both sides to discuss how to build a shared culture within that context.

ON THE ROAD TO RECOVERY

It is still too early to tell whether these and other activities will put the HD-Sanchez integration on the path to success. One thing is certain, however: new life has been breathed into the combined organization. The energy of managers that had gone into bickering and politicking about whether this was a “merger” or an “acquisition” now is being directed toward offering combined products and services.

Transition team members are reporting productive meetings resulting in consensus and high quality problem solving. And, rank-and-file employees are having fun with the work of building a new corporate culture that benefits from the partners’ strengths and addresses their weaknesses. The feeling among all involved is that this patient is making an excellent recovery and is well on the road to a long, prosperous life.

A merger or acquisition often exposes on-going issues that linger in organizations. It also presents an opportunity to address them as the organization moves through the integration process. However, as the HD-Sanchez case shows, doing so requires the collection of accurate data, the acceptance of the data and the commitment of senior executives to back up the data with their actions.

Mitchell Lee Marks, Ph.D., heads JoiningForces.org in San Francisco (www.joiningforces.org). He is the co-author of Joining Forces: Making One Plus One Equal Three in Mergers, Acquisitions, and Alliances and regularly advises executives on issues related to organizational change and transition. He can be reached at 415.436.9066 or at MitchLM@aol.com.