Making Mergers Work

post # 414 — August 6, 2007 — a Strategy, Strategy and the Fat Smoker post

A reader offers this anguished cry:

Given what is happening in my firm these days, I felt compelled to blurt out some observations and questions and see if they resonate with you, or whether your audience would care to comment.

I am part of a firm created in a merger with the assumption that the combined skills of the merged entities would lead to an integrated powerhouse. The idea was that some sort of combined/integrated methodology would emerge and we would operate as an integrated entity.

In the following few years, this is what has occurred:

There is not a single instance where the legacy firms have worked together on an integrated offering, delivered to a client. There have been a few cross-sells, but these have been matters of luck more than skill.

Each legacy firm operates as if the merger has not occurred. My group proceeds semi-autonomously, unable to see the value or need to link to the “other” side of the business. Their specialty rarely enters our discussions. And vice versa — the delivery of their work rarely leads to a discussion with the client CEO about what we can do. We’re like two separate islands.

The cultures of the merged firms could not be more different. One was loose and entrepreneurial, the other was tightly controlled and process driven. People from the latter firm seem to have taken over firm management, so we are drowning in process and layers of account management.

Everyone is unhappy. We are now on our 4 th reorganization.

David, I was wondering: How frequently do firm mergers fail? Why? If the original value proposition of a merger seems sound, then why does it still fail? If the merger is based upon integration and complementarities of offerings/skills, does it make more sense to simply ram a new integrated methodology down everyone’s throats and announce this is the way the new form works, or take an organic approach and hope that a few smart people will make it work and let momentum take over? We tried the organic approach and it has not worked.

David, I send this to you not expecting a reply, not expecting you to post this on your site, but more trying to reach put to someone I trust “virtually” (you!) to unburden myself of the pain this merger has caused me and many others. Thanks for “listening.”

******

MY reply is this: I first wrote about mergers in my book TRUE PROFESSIONALISM.

The key points I made there were as follows:

“ ‘Alchemy’ mergers are based on the expectation of synergy – the hope that the firm will be able to create something new. However, firms will not do so merely by bringing these (different) specialists in-house (whether through merger or hiring). The key added-value (from the client’s perspective) will be the ability to design, coordinate and integrate a variety of diverse specialists. This will place significant stress on firms, as well as challenge their abilities to manage a completely different beast than the one they are used to.

“Another way to think about this is to recognize that on complex transactions, clients need a “prime contractor” who will take responsibility for the total job, including the management, coordination and integration of a variety of technical discipline specialists needed to take care of the various detailed issues (managerial, accounting, legal, financial, consulting, business strategy, and so on.) The question, then, is who credibly possesses the project management skills essential to be the prime contractor?

“Many firms have merged or acquired their way to bringing multiple specialists in-house. Few have convinced the market that they have created (and can manage) a seamless, integrated service.”

So, for me, the answer to the core question posed by the reader is clear. Unless you have a clear formula for creating the new, truly integrated service, don’t combine the firms. It’s combined services that appeal to clients, not combined firms. And, of course, creating something truly new and valuable is incredibly hard unless it’s pursued with passion by the people inside the firm who want to be part of something different. (Which doesn’t seem to be the case here.)

It’s not about “ramming a new methodology” down everybody’s throats. That won’t create the energetic innovation that will produce what clients want. A better approach is to form a special unit that dedicates itself solely to the integrated approach (being protected from short-term economic pressures while it does so), so that they can dveloep and market test the theoretical synergy. If it survives the market test (clients actually pay for it and like it) then you can roll it out.

But, as always, that takes patience. And one thing recently merged firms rarely have is patience. (The Fat Smoker Principle Strikes again: we don’t want to incur short term discomfort to get where we want to be tomorrow.)