M&A – Still Learning?

A couple of articles dropped into the inbox last week that seem to confirm that despite decades of experience, organisations are still struggling to unlock the value in mergers and acquisitions. First up, a McKinsey survey (here), tells us that despite an uncertain economic outlook, M&A is still prominent in the minds of senior executives:

nearly half of the respondents expect their companies to explore more deals in the next 12 months than in the past 12, and small majorities expect them to start or complete at least as many, if not more.2 In addition, nearly half of the respondents report that their companies are looking outside the core business for new ways to grow.

No doubt, this is good news for nervous corporate financiers in investment banks worried about a diminishing bonus pool. However, shareholders and other stakeholders may not view this survey with quite as much relish. This is because within the survey there are clear indications that the ability and vision to successfully execute the basics is still lacking in even the largest companies:

The results also indicate that many companies still need to build critical capabilities, including integration planning, responding to cultural issues, and establishing standardized deal teams. That effort may well be complicated by a striking number of areas in which CFOs’ opinions differ from those of other C-level executives on topics as basic as which deals to do and what capabilities a company has.

The basic question this prompts is that with so much economic uncertainty, why would organisations appear to be so bullish to take risks on transactions that are notoriously variable in outcome? Personally, I think that this comes down to skewed perceptions. M&A is still seen to be a quick fix, an additive process. However, as with many things, people tend to oversimplify the complexities of each situation. Rather than two plus two equalling four, in many transactions two plus two has gone on to equal three, or even worse. In many ways these acquisitions are the ultimate example of the role of unintended consequences.

Clearly, a more subtle and nuanced approach to M&A is required. This has to do with having a greater understanding and appreciation of the intangible aspects of each transction. This requirement is highlighted over at Strategy + Business (here)  in an article by Barry Jaruzelski, Marian Mueller, and Peter Conway who list some great points about common fallacies and misconceptions about the way to manage the acquisition process. The broad theme of this is that organisations fail to appreciate that each deal is unique, requiring a tailored approach to the key factors. This combined with an overestimation of the organisation's own capabilities reduces the chances of a successful outcome.

Whilst the mechanics of M&A are well understood, the existence of these articles and many others like them show that organisations still struggle with the more intangible side of transactions, namely the people and cultural issues. Maybe this blinkered approach has something to do with the people in charge of acquisitions? Arguably, the managers in charge of acquisitions are too keen to focus on what is certain and easily quantified. When looking at an acquisition the tendency to focus on the black and white numbers of the deal is a common error. This is touched on in the S+B article:

Many executives assume that if the financial arrangements are secure, the rest of the deal will follow. But all deals have two other significant factors to consider that are often not accounted for in the numbers: the human element and the need to develop the capabilities required to succeed in the new or merged business. This is especially important if the new business model is different from the company’s established model. A comprehensive due diligence process should take into account both the cultural and capability aspects of the deal.

This transactional viewpoint dramatically underestimates the complexity of M&A integration. Organisations by their nature are hugely complex, I'm not talking about the systems and processes that need integrating, this is complicated but not complex but the act of integrating two distinct organisations with different values, culture, behaviour and relationships. Unfortunately use of the standard organisational chart to understand the entity you are trying to integrate is a useless exercise in hubris. By looking beyond that which is most obvious acquirers need to understand the network, culture and relationships they are buying as well as the more tangible assets.  For example talent drain is a key issue with many acquisitions, yet it is simply not enough to look to identify the star performers or "talent" in the target company without an appreciation for the networks and context that enable these people to perform.

Acquisitions need a fresh pair of eyes and need to be driven by people with a different outlook. The fact that we are still seeing articles like the one at S+B is a clear indication of this. Instead of the traditional M&A leaders, the finance and operations people, how about letting acquisitions be managed or designed by people who understand and are comfortable with the language of complexity? This could include people from a variety of disparate fields such as network scientists, anthropologists, brand experts and psychologists. As well as limiting the downside of transactions, a more diverse approach would also increase the upside by helping understand the possibilities of greater integration and collaboration.

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