Mergers and acquisitions can be valuable for a brand for many reasons: improving existing products or services, change of personality or direction, a gateway to foreign markets, and acquiring talented people or intellectual property. Yet despite the compelling reasons for pursuing a transaction, it is startling how few of them create value. One report by KPMG concluded that more than half of mergers destroy shareholder value while one third made no difference at all. The reasons for failed mergers include tangible accounting and operation failures, but the most complex reasons deal with people, culture and human emotion. These are also the most difficult to correct.
Overvaluation: When mergers and acquisitions cost billions, mistakes can not only cripple an acquiring company financially by committing its capital reserves, but a high-profile failure can seriously damage a brand’s reputation among shareholders and other stakeholders. Fraudulent accounting practices are the most sinister cause of overvaluing an acquisition. In 2013, for example, Caterpillar revealed a $580 million accounting charge relating to their acquisition of China’s Siwei, whose fraudulent management team led Caterpillar to wildly overpay.
But not all overvaluations are due to deviance. Bankers and executives can simply misjudge the future of a market, trend or make a false assumption in their calculations. In 2007, Microsoft paid $6.3 billion for digital marketing company, aQuantive, finally taking a $6.2 billion write down for it in 2013. Whether due to fraud or error, overvaluation is a major reason why many mergers or acquisitions fail to add any value.
Intervention: Even when two companies agree to the terms and conditions of a merger or acquisition, third parties with ulterior motives can interfere, adding restrictions which prevent a merger from becoming final or achieving its intended objectives. In most cases, these third parties are governments.
In 2013, for example, UPS announced it would no longer continue pursuing its acquisition of European express operator TNT in the face of European Union resistance that the merger would be anti-competitive. Also in 2013, Anheuser-Busch InBev and Mexican brewing giant Grupo Modelo were set to form one of the biggest beer companies in the world before the U.S. Justice Department began to demand that some of Modelo’s brewing operations be moved locally to create more American jobs. Mandated conditions by bureaucrats can place flexibility restrictions on brands that eliminate the benefits of the merger. In this case, such a concession would dramatically raise Modelo’s operating costs.
Distraction: Often, distractions that accompany mergers can prevent managers from focusing on the real business objectives of their company even after the dust has settled. During the busiest worldwide M&A period leading to a historic peak in 2000, a groundbreaking Wharton study examined the cost-cutting performance of banks in America following a long period of consolidation. Although the reason cited for these mergers was cost-efficiency, the study found that merged entities actually cut costs at a much slower pace than their peers that remain independent. Counter intuitively, mergers seem to prevent companies from achieving goals as fast as they would otherwise.
Fear and greed: Mergers, when motivated by fear of decline, rising costs or dramatic change are rarely the appropriate reason to merge, and may cause companies to pursue transactions for the entirely wrong reasons. Copycat mergers occur in many industries where major deals are followed by a rash of similar consolidations despite the fact that it is often better to be nimble when the rest of your competitors are getting bigger.
In 1999, The Economist magazine provided a shocking perspective on mergers: “For the folk at the top, running a company can be dull. Organic growth, in a mature market, is grindingly slow. Doing deals is easier—hire a bunch of investment bankers and set them to work—and much more exhilarating.” While this may be an overly aggressive take, with average CEO tenure declining, it does stand to reason that the best way to make a material difference to a company’s future in a short time is to lead a highly publicised transaction. With executive compensation increasingly linked to stock performance, the prospect of more money adds a substantial incentive to pursue a merger than may not be entirely in the best interests of the company.
M&As are first and foremost a strategic and financial transaction, but assuming the relevant financial and legal steps are done correctly, true success hinges on how effectively the most important intangible assets of a brand – its people – assimilate. A major downside of negotiations is that the legal and financial arrangements can give management “tunnel vision,” such that the only human capital decisions made with conviction are who will be the next CEO and who will comprise the new Board of Directors. Meanwhile, in the trenches, anxious employees are left to figure things out.
People never fit as easily as flow charts. If cultures are not compatible or managed carefully, the partnership may be doomed from the start. Peter Drucker, whose writings have heavily influenced modern corporations, once famously said: “Culture eats strategy for breakfast.”
In many cases, mergers or acquisitions bring together groups of people who have spent their working lives competing against one another. This is usually referred to as a “merger of equals” because, on the surface, it brings together two similar types of companies with strong market positions, such as the unification of Daimler-Chrysler in 1998. In other cases, mergers or acquisitions bring together two completely different types of companies and cultures, such as the unification of internet pioneer America Online with traditional media giant Time Warner in 2000 – arguably the most prominent internet-media merger in history since AOL was the world’s biggest online service at the time.
The problem with most mergers – as indicated by their often conjoined names – is that they do not actually “merge” as much as they strap themselves together. Both companies intend to co-exist rather than create something new; therefore, cultures can remain entrenched. Chrysler’s collaborative structure, for example, involved engineers, designers and marketing people working on each model but clashed with Daimler-Benz’s philosophy of putting engineers in charge. When mergers straddle national borders, race and language-barriers can add further friction.
When two distinct groups are in conflict, each group becomes more closely knit and cohesive, informally demanding more loyalty to what it believes in order to present a united front. Leadership among each group can be become more autocratic as the group galvanises. As soon as the groups begin to perceive themselves as good guys vs. bad guys, they see only their strengths, deny their weaknesses, and may ignore the synergies the company is trying to create. If these stereotypes remain uncorrected, communication between groups either decreases or becomes hostile and all future strategic initiatives will become a battleground. Very rarely will a brand with deep-seeded cultural conflict become the cohesive, highly integrated, synergistic organisation dreamt of during the early days of a merger.
In AOL Time Warner’s case, the two camps failed to unify on a shared vision of the future of mass media and the internet, leading to highly politicised internal turf wars until the company finally dropped “AOL” from it’s name in 2003. The largest merger in history at that time had failed to accomplish anything.
Cultural conflicts usually have two outcomes. The first outcome is when management mutually admits defeat and dissolves the merger – as Daimler Chrysler did in 2007, selling what was once the third largest auto-maker in the United States. Chrysler would file for bankruptcy in 2009. Similarly, Time Warner finally spun off the AOL unit in 2009 triggering record losses. The second outcome is when the companies do manage to remain whole, one brand assumes a supplicate role within the company. Usually, the winning group whose values have been affirmed relaxes while leadership becomes maintenance oriented instead of progressive or innovative. On the other hand, focus within the supplicate group shifts to assigned tasks rather than the greater vision. Scapegoating and internal fighting may begin while talent slowly seeps from the organisation. In both cases, cultural differences eradicate the merger’s value over time and never truly create a compelling competitive advantage.
If the structural reorganisation of a company is seen as the end, rather than a beginning, mergers will undoubtedly unravel. Great steps must be taken to ensure cultural compatibility before any legal or financial negotiations begin, otherwise, factions will develop along old lines of thinking even when the ink has dried. Merged brands can not simply be bolted on to one another because they intuitively create synergies – there must be a unifying and compelling vision based on shared values and structures around which two like-minded cultures can unite. Without this fit, no amount of legal or financial wrangling can make M&As work.