A guest blog by David Forman
Mergers and acquisitions are a huge business. In 2015 alone, almost $5 trillion dollars were spent on mergers and acquisitions globally. That’s trillion with a T, and this figure eclipsed the previous record established in 2007. A number of major deals continue to be in the works, and while it is unclear how the incoming administration will impact these activities; there is every reason to believe that industry consolidation will likely continue.
There are, of course, a number of reasons why M&As are pursued. There are promises of synergies, more efficient operations, new markets, better consumer practices, improved product innovation, stronger strategic fit, and greater shareholder returns. But what looks good on a financial statement may not translate to actual benefits. In fact, according to McKinsey, 70% of mergers fail to achieve their financial objectives; and so for the activity in 2015, $3.5 trillion did not achieve its expected return. And interestingly, the greatest benefit in M&As often goes to the seller, not the buyer. This phenomenon is known as “the winner’s curse.”
The reasons for this less than stellar record are complex. It can certainly vary by which strategy of brand integration is embraced: assimilation, federation, confederation or metamorphosis (Bouchikhi and Kimberly, 2012). The most commonly attributed reasons for under performance are that most companies routinely overestimate the value of synergies and underestimate the impact of one-time costs. These technical factors can restrict the new deal right from the beginning, but there are other considerations. The costs of disruption can also be significant for both customers and employees as illustrated by the following data points:
- The average newly created company will see 2 to 5% of their combined customers disappear (McKinsey, 2004).
- There is a 20% rise in actively disengaged employees after a merger/acquisition (Forbes, 2017)
- It can take three years to return to pre-merger engagement levels (Forbes, 2017).
- It is reasonable to expect that at least 20% of executives will leave during the post-merger period.
- Pritchett indicates that a 15% decline in productivity should be expected from middle management during the implementation period.
These talent and cultural impacts have significant ripple effects, but many companies do not get serious about the human side of bringing organizations together. The landscape is littered with examples of failed efforts to create synergies and integrate cultures: AOL-Time Warner and Compaq-HP to name just two. It is assumed to be more about the balance sheet than the hard work of cultural due diligence, communication and integrating two distinct organizations. But according to Deloitte, at least 30% of the reason for the under performance of mergers and acquisitions is precisely for these “soft” reasons.
Calculating the impact of poorly leveraged HR practices on mergers and acquisitions
Conservative estimates are that:
1) 70% of M&As fail to achieve their financial objectives (a KPMG study puts the estimate at 83%) and
2) 30% of the reasons that M&As fail is because of “human factors.”
Given the $5 trillion M&A activity from 2015, human factors account for about $1 trillion in lost opportunity.
HR levers in 2015 M&As, therefore, represent a 13-figure upside (i.e., $1 trillion has a lot of zeros). This amount is worthy of our consideration; just to put it in context, a trillion dollars could buy:
- Apple and have $250 billion left over.
- College education for 8.3 million people.
- 769 Yankee stadiums.
- Cover the entire state of Delaware with $100 bills.
Fanciful: certainly, but let’s not forget that an unrealized investment (from poor M&A human factor integration) is quite real to the people affected. “The soft stuff, again, turns out to be the hard stuff.”
Achieving the right balance
There are no simple answers, or one easy formula, to achieving greater success in mergers and acquisitions. So many economic, political, legal, personal and contextual factors pertain, but it is true that if the human-side is ignored or undeserved, then success is virtually impossible to achieve. It is important to see M&As as a process, not an event.
People factors need to be addressed throughout all stages, including;
1) pre-deal analysis
2) due diligence
3) integration planning
4) eventual implementation after the deal is consummated.
HR must be a fearless and continuous advocate to protect and optimize the investment potential of the newly formed organization.
“…the deals with the most successful business outcomes are those where people issues have been identified early and then appropriately addressed” Marc Hommel, PwC