Mergers and acquisitions are exciting. They make us feel like Gordon Gekko and are taken as tangible evidence that a business is growing and prospering. They can be a great way to bring in new competencies or to open up new markets. Unfortunately, in practice they’re usually more bad news than good. Here are the top reasons why.
1. Synergies and economies of scale are overestimated. You know how this goes. Management waxes lyrical about how everything will be a magical paradise once the two companies are merged. With a broader foundation and mega purchasing power, everything will be easier, better, faster and cheaper.
Except it doesn’t happen. Companies don’t merge as well in real life as they do on paper. Geography, inertia, parochialism and resistance to change are ever-present hidden dangers. The hoped-for synergies and economies rarely materialize.
2. Cultural conflicts and challenges are underestimated. Merging two different cultures is often impossible, and always painful and costly. Even when two companies are headquartered in the same country, it’s inevitable that their corporate cultures will be distinctly different.
Most employees of the newly merged company will have to learn to do things differently. The vast majority won’t like it. Productivity, turnover and morale will all suffer. Some folks will even refuse to comply altogether with the new way of doing things, sometimes explicitly, sometimes surreptitiously. If you overlook these challenges (which almost everybody does), you’re in for a world of hurt.
3. They frequently hide an underlying lack of organic growth. If revenues aren’t growing, a merger or acquisition won’t help. Mergers and acquisitions should only happen when there are real strategic reasons for doing so.
Growing through M&A when your own business model is failing is like fixing a leaking ship by setting more sails. It’ll distract people from the impending doom, but it won’t address it. Look to the underlying strength of the two firms in question. If there isn’t any, combining them won’t solve anything.
4. The psychological toll on employees is usually overlooked. Mergers and acquisitions always take a serious toll on the firms’ rank and file employees. People are asked to change, to take on new responsibilities, to report to new managers, to learn new processes and to take part in a culture unfamiliar to them. Those that aren’t laid off will live in constant fear of the axe until the dust settles.
The results take many forms: more stress leave, lower productivity, reduced morale, insidious gossip, cliquishness, sabotage, turnover and absenteeism — not to mention the impact on customer care, defect rates on the production line and a dozen other effects that directly impact revenue. Management rarely accounts or properly prepares for these challenges.
5. The projected costs and timelines are too optimistic. This one is simple enough. However long you think it will take and whatever you think it will cost to complete the merger and realize your vision, you’re way off. Nothing new about that in the business world, but the stakes are rarely higher than in an M&A scenario.
If the financial success of the merger or acquisition depends on meeting tough cost and time milestones, you may want to rethink things. The risks of M&A are so high that you should only enter into them if the upside is huge. Otherwise, there’s too great a chance of unforeseen problems turning the whole thing into a crippling loss.
6. The acquiring company always overpays. For big companies, backing away from a much-publicized merger is a public embarrassment. For firms of all sizes, cancelling a merger means wasting all the time, effort and money that went into the process (even though that kind of thinking is a sunk cost fallacy). For these reasons, the acquiring company is usually unwilling to walk away, and that’s a lousy negotiating position. Management gets caught up in the excitement and inertia of the deal and invariably gets hosed.
Mergers and acquisitions aren’t always bad. There are certainly some success stories out there, and there are times when it makes sense to merge or acquire (particularly in slow-growing industries). Just don’t forget this lesson: the biggest costs and challenges don’t appear on the balance sheet, and you can’t afford to ignore them.
Jay Lebo is one of the founders of Gravitas Business Architects, and has been helping companies multiply growth and outperform the competition for more than a decade.