Are acquisitions part of your company's growth plan? Odds are the answer is yes. In the first half of 2012, thousands of merger and acquisition deals were announced globally, worth more than $900 billion. And this was a slow year. Predictions are that 2013 will be even more active as companies that have stockpiled cash look to invest in new growth opportunities.
But acquisitions can be risky business. Studies show that as many as two out of three deals do not realize their originally stated goals. And of course some of these fail spectacularly and end up hurting more than helping. HP's acquisition of Autonomy is a recent case in point in which a transaction that was supposed to be transformative ended up in a multi-billion dollar write-off and messy accusations of fraud.
Given the fact that acquisitions and mergers are critical pathways to growth, companies will continue to pursue them, no matter what the potential downsides. To reduce the risks however, there are two steps that managers can take to make sure their firms are ready for the challenges of integration before committing to an actual deal. So if you and your colleagues are contemplating an acquisition, here's a possible game plan.
First, create a high-level picture of what you want a combined company ideally to look like one year after a successful integration – not just in terms of finances, but also in regard to operational practices, strategic initiatives, organizational structure, and culture. This thought-process will smoke out your assumptions about how much change you think the company needs. More importantly, it will give you a basis for dialogue with other managers about their expectations for change, which might be different than yours. In fact, one of the reasons that integrations falter is the lack of alignment among managers about what will actually happen.
In a certain integration at a healthcare services organization, for example, senior leaders were ambivalent about whether they wanted to allow the newly acquired company to continue its own care standards or adopt their more stringent policies. In the absence of a clear decision from above, product managers and caregivers all made their own choices, which led to quality and compliance problems. The real issue was the extent to which the management team was willing to devote time and resources for training, documentation, communication, and all the other aspects of a major change effort. Knowing this ahead of time would have made the leaders think twice about what they were getting into.
Once you have a picture of the combined company, the second step is to do what we might call "backward resource planning." This means starting with the vision and then working backwards to see what will it take to achieve it – what resources will be needed (e.g. teams, leaders, investments), what oversight and governance might be required, what skills would be essential.
One of the fundamentally flawed assumptions that companies make about integrating acquisitions is that managerial and professional time is infinitely expandable. The reality is that the best people – the ones that need to be assigned to diligence and integration teams – already have full-time and important jobs. So when they are asked to also take on integration assignments, they end up making choices about what not to do. When that happens, all sorts of other things start falling through the cracks, which is why we often see, during integrations, a degradation of customer service, increases in cycle time, and other performance shortfalls.
Some executives deal with this problem by hiring armies of consultants to do the heavy lifting. What they don't realize is that managers still need to work with these consultants, give them direction, share information, and make sure that the work is being done properly. More importantly, unless managers are deeply involved, they won't own the eventual outcomes of the integration process. So there's no getting around the resource issues. What you as a manager can do, however, is prepare. Go into the integration process with a clear sense of the tradeoffs: Given the resources needed, what else can be stopped or delayed? What priorities can be reset? What goals need to be deferred? What work can be eliminated? What managers can be freed up to contribute to the integration projects? And will the eventual outcome be worth the effort?
Combining all or parts of two companies will always be challenging and entail a certain amount of risk. But before chasing the shiny new deal, it's important to take a hard look at what it will take to succeed, and what it will take to get ready.
For more advice from Ron Ashkenas and others on this topic, read The Merger Dividend and Integration Managers: Special Leaders for Special Times.