When Acquisitions Fail

Last updated on May 13th, 2019 at 02:36 pm

A company can adopt numerous strategies for growth; the acquisition of assets, both vertical and horizontal, or focus on organic growth.

Organic growth is growing your organization from within, building on your organizational strengths, product knowledge, service delivery, human resources, intellectual property and the strategic vision of your management.

In recent years, there has been an increase in the number of firms that have opted for growth through acquisition or merger. In the banking, telecommunications, retailing, airline and data management industries there have been a great number of mergers or acquisitions. In most cases, they have been successful, but in others they have failed.

Why do they fail? There are various reasons for failure: poor planning, cultural rifts, ethical differences, technical problems, forced synergies, personalities that clash and management that cannot deal with new markets, customers and ways of doing business.

In this column I will concentrate on the non-financial reasons for a failed acquisition.

One example involves two medium-sized accounting firms that combined in order to expand their geographic reach and service offerings. When they combined offices, and the larger firm assimilated the acquired firm, problems began to surface. The two firms had differences in what was considered aggressive tax advice. Each had different criteria when completing annual tax filings for their clients. One firm was much more conservative than the other, causing changes in filing strategies that were not totally welcomed by the acquired firm’s clients.

After the first year, many clients opted to leave, reducing the revenue flow. Other clients were unhappy with the costs associated with their annual filings. Questions arose regarding what was and what was not ethical. In such a situation, you lose the revenue from the customers who came over with the acquisition and you may also lose one or more of the acquired employees because they cannot make the ethical shift.

Another example involves the merger between two service firms. As a result of the merger, a growing service niche would be exploited by the combination of experience and skill. But after a number of pre-merger meetings, the manager of the acquiring firm realized that there would be friction with one of the new partners due to his/her business personality.

As a result, the merger talks were suspended and ultimately cancelled, preventing a potential rift within the combined organization. Here the synergy was not forced and the acquiring firm was more concerned with the business success factors than the potential profit from the joining of the two companies. Since there was a high probability of ideological conflicts, the risks to the success of the merger outweighed the potential rewards.

When a firm does due diligence prior to an acquisition, they must not only look at the financials, but also at the profile of the customer base, the ethics of the company, the strength of its culture and whether the management personalities are in alignment. When a larger company acquires a firm that is more entrepreneurial in nature, there can be an immediate clash of management styles. The acquiring firm could be in either ‘professional’ or ‘managerial’ stage, while the acquired firm is in the ‘entrepreneurial’ stage where the owner/manager is involved in all decisions and works closely with key customers and managers.

Here again, there is a potential ‘flash point’ because of management style. The acquiring firm can elect to let the acquired firm run independently or slowly integrate the two cultures. The entrepreneur will find it difficult to exist in a line and staff organization, and eventually leave, taking his or her entrepreneurial drive with them. The impact on such a move will definitely impact the profitability of the merger. Many firms initially develop strategic alliances in order to try out cooperative business efforts and to see if they can co-exist. In actuality, it is a type of ‘dating’ to see if they should take it to the next step, a more formalized relationship.

In many cases, when an acquisition occurs, the acquiring firm arranges a ‘back door’ for the top manager/owner of the acquired firm. These back doors can be short-term consulting agreements, management contracts or equity buy-outs after a specified period of time. The one thing you do not want to lose is continuity of management. You want the top manager to ensure a smooth transitional period and that key managers do not leave and take knowledge and your customers with them.

One strategy to prevent such a loss of talent is a non-compete, trade secret or confidentiality agreement. Your employment attorney should draw these agreements up so that they conform to state law and so they properly protect your intellectual property and customer base. Knowing that any acquisition or merger will result in the loss of some employees, you must protect your human capital.

In the data management sector of the financial services industry, many acquisitions are made to acquire specific technology, especially software that will enhance an existing product offering and differentiate it from the competition. Management needs to consider what they want as an end result of this acquisition, the technology, the people or both. Then they need to provide an environment in which both will thrive.

Recent telecommunications mergers have provided expanded networks for cellular communications, and additional service offerings that better position them against the cable companies. The telecommunications companies can now provide high speed Internet connections, local dial tone and long-distance service all under one umbrella. As a result of these mergers, duplicate functions, both field support and customer oriented ones, were eliminated.

Again, these types of moves need to be measured for their impact on morale, customer satisfaction and overall company culture. The financial rewards have already been calculated in terms of reduced salaries, benefits and associated expenses. But how do you measure and predict the impact of culture and morale on the bottom line? Is that consideration even on your radar? If not, it should be. You cannot force a synergy that does not exist. You can force cultural change, but it will disrupt your business and negatively affect your bottom line for many quarters.

Along with the profit and loss statement and the cash flow, we need to evaluate the potential for non-financial risk, the clash of cultures and personalities before we agree to an acquisition or merger. The costs involved in the break-up of a merger, like a marriage, can be devastating. Test for synergy of management style, customer profile, and culture before you acquire.

Otherwise, you may have just acquired a case of corporate indigestion, which can only be treated with a corporate divorce or asset amputation. Neither will serve the existing corporation well.

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