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Passion, People and Principles

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.)


Carl Singer said:

Write on — right on!

I would be interested in exploring a bit upstream here — with a focus on the why and how of evaluating / making the merger decision. It seems that the rose colored lens oft comes to play. Or the merger decision is made for whatever reasons (retiring partners, etc.) and then is justified via rosey pronouncements.

Differences such as mentioned above — controlled / loose, for example pre-merger are looked at as some kind of “best of both worlds” — vice post-merger the reality of incompatible cultures.

Similarly, overlapping client base (we both market in the same space) is seen as an asset pre-merger. Then again, distinct client bases is also seen as an asset (bigger market space.)

Perhaps a key organizational question (and I’m oversimplifying via extremes) is, is the post-merger organization planned as [a] an integrated single firm with minimal unique pre-merger artifacts / distinctions or [b] two independent entities with minimal sharing (perhaps only administrative functions & new business cards — if that.)

posted on August 6, 2007

Prem Rao said:

I feel most mergers fail – not because of a lwrong business strategy- but more because of a misfit of cultures. The due diligence process in evaluating the merger should give huge emphasis to the understanding of the culture fit.

posted on August 6, 2007

Harry Alexander said:

All of David’s comments are dead on.

Here are some more practical “make it happen” solutions that effectively work while avoiding the grief and frustration normally associated with M/A companies:

1. Get everybody on incremental Incentive Compensation Programs centered around operating margins, inventory turns (where applicable), and revenue levels of the new merged entity.

2. All motivational programs, such as Award & Recognition, along with the new Incentive Compensation Program, must properly answer the question “What’s the behavior I am trying to drive?”. An example: If you want to drive the top line with organic growth, do your Programs financially and emotionally drive selling and managerial behavior to do that or can they sit back at the trough feeding off of their old customer base???

posted on August 6, 2007

Susie Wee said:

I think that mergers are hard and risky, but they can be very worthwhile if executed properly. I lived through the HP-Compaq merger. The combined portfolio allowed us to get to the #1 or #2 position in many of our product categories, which has many positive business consequences.

  1. Have a clear objective strategy for how to mix the assets and create the new merged company’s offerings, especially when dealing with overlapping offerings. It’s a good idea to use external goals to measure this. For example, one thing we did when choosing between overlapping pre-merger offerings was to choose the one with better financials.
  2. Have a “clean room” team that decides how to do the merger. HP and Compaq took people out of their jobs and put them into the clean room for a year to work out the details of the merger, such as making the tough decisions in point 1.
  3. Recognize that the cultures are different and have fun employee workshops to deal with it. We had workshops for the employees where we were told to list the stereotypes we had for ourselves and the other company, and to describe what happens when we enter a meeting together. This started emotional but then turned into a good deal of fun, and at the end of the day the workshop made you realize how silly it is to stereotype the people of one company and it made you realize that people are people, regardless of what pre-merger company they came from.

As for culture, today I get to work with pre-merger HP and pre-merger Compaq regularly. An interesting thing is that while the two pre-merger cultures were very strong and very different, when I meet a new person today I can’t tell which company they came from.

posted on August 6, 2007

David (Maister) said:

Thanks, Susie. Very helpful.

posted on August 7, 2007

Dan Murray said:

I’ve felt the disappointment, frustration, and pain that the original poster felt except that the merger I was part of landed in bankruptcy court just over a year later! I think that too often mergers make sense “on paper” where the rationale can be easily illustrated with data; only to fail when it gets to fuzzy things like relationships and teamwork. The stuff that’s easy to measure creates an appealing but ultimately oversimplified picture. Would anyone enter a marriage on the same purely analytical terms?

My firm did some of the things that Susie enumerated – we worked especially hard on the cultural component (#3) – but failed anyway. David, you are correct that clients may want combined services but not necessarily combined firms. My perspective is that mergers are often the result of firms considering what’s in it for themselves without truly considering whether or not the merger will really enhance client value. My experience has been that the mention of “cross-selling” is an indication that the merging firms are probably thinking of the benefit to their own profitability and not the benefit to the client. It’s a red flag for me.

posted on August 7, 2007

Joseph Heyison said:

HP-Compaq illustrates the high risk, high return model of trying to select and combine the best of both cultures. (Note also the chaos at the top that resulted when the combined company went for a charismatic CEO, Carly Fiorina, to transcend the pain of merger.)

But combinatorial mergers (or “mergers of equals”) rarely, rarely work.

An alternative is the slash and burn approach, used by Pfizer, Cisco, and most tech firms. The acquirer makes it clear that its people will rule and be protected, except for key operations or experts who do not duplicate expertise in the acquirer. Those relatively few essential individuals are well compensated and wooed. Staff executives and employees and anyone else whose functions are already in the acquirer are dumped (hopefully with hefty stock option or 401(k) gains). No attempt is made to adopt best practices from the acquired company.

This minimizes disruption at the acquirer and can rapidly increase revenue and margin. One loses potential gains from melding the best to the best, but the odds are that melding will fail. The danger is that essential acquired employees will flee because of overbearing management or because those stock option gains free them. Also, the acquirer’s employees tend to get arrogant and complacent after two or three such mergers and lose focus on improving the business.

posted on August 9, 2007

Joseph Heyison said:

One additional thought (hoping that I’m not suffocating this thread):

Many PSF mergers have nothing to do with meeting client needs. Often, a rainmaker or group migrate to another firm to associate with a larger, more prestigious firm and thus get access to richer clients or justify charging more — or obtain ego satisfaction. Failing firms merge to reduce costs or make their way up the league tables. Successful firms merge as a reaction to other mergers, on the assumptions that sheer size matters or that cross-selling will work.

All of these are perceived alternatives to practice improvement and integration. In fact, since so few mergers actually are done to improve client service, we shouldn’t expect integration to be a priority. My advice to the original poster is to sit back, recognize that the actual motivations for the merger probably had nothing to do with the professed ones, and build his or her own practice.

posted on August 10, 2007