Archive for October, 2012

Why Mergers and Acquisitions Come Unstuck

Sunday, October 21st, 2012

I recently re-read the book “Unstuck” by Keith Yamashita and Sandra Spataro. The “unstuck” model focuses on the need as a leader to create balance in the system of business in order to be able to succeed. Leaders need to unify the following six elements: strategy, purpose, culture, personal interactions, structures and processes, rewards and metrics. According to the authors, the inspiration for this model came from two sources: a “classic Friday afternoon conversation” with a former CEO of HP Carly Fiorina, and David Nadler and Michael Tushman’s “congruence model” for organizational effectiveness.

At about the same time, I serendipitously came across an article in the Financial Times (HP counts cost of ill-fated acquisition – August 10, 2012) lamenting HP’s turnaround efforts and how they failed to leverage a decade of acquisitions that included Compaq in 2001, EDS in 2008 and Autonomy in 2011. This led me to review the “unstuck” model which in turn prompted me to redraw it in relation to acquisitions, as shown below.

The fundamental logic of acquisitions is usually financial, along with market share and growth, and is based on synergy of strategy. In most cases the senior management team and investment bankers make the case seem undeniably persuasive. However, the reality is that in the short term this synergy of strategy is the only element of the model that is in fact in alignment in a converged company. After the acquisition closes, all other aspects of the model can go off balance. It is a little bit like thrusting two atoms together where only one of the neutrons can survive; all elements of the model will go through a period of adjustment with the probable outcome being that the elements of the acquiring company dominate. This is not guaranteed, however; there are other possibilities, particularly in a merger, that can play out over time, including the blending of elements or the creation of a hybrid that takes the best of each of the originals to create a new component.

This behavior of acquisitions over the long term became all the more relevant in light of the recent proposed but failed merger of EADS, the makers of Airbus, and BAE, the UK defense contractor. The main thrust of their argument for merging was the ability to create an effective competitor in terms of size against the U.S-based company, Boeing. The biggest concerns being surfaced were related to the agreement of a new ownership structure and the consequential reduced political influence of the 3 governments. In theory, the new combined company would have been free to compete with Boeing, however based on the above model and perspective, I think that the challenges for this company would have been enormous and long term; not only in terms of political interference but also cultural differences as it attempted to integrate people and create a unified purpose.

Size alone does not guarantee success, particularly where multicultural aspects are embedded in the character of the company, as has been proven by HP and Daimler-Chrysler. The short term benefits of size and financial growth struggle to offset the long term challenges of balancing other elements of the model. The resulting company will often take years to achieve a rebalance. Given this scenario of multicultural challenges on the model, it is doubtful that the recently announced acquisition of Sprint by Japan based Softbank will result in instant success in the market for the company. The Japanese propensity for long term thinking and patience, however, will probably mean that the resulting company will have a better chance of success than many others. In the case of both HP and Daimler-Chrysler they never managed to achieve this; in fact the anticipated advantages from a market and financial perspective were never translated into market success nor shareholder value.

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Steve Bell, President, KeySo Global