Why Capabilities Are Critical for Successful M&A

Alan Marash, CEO of performance improvement consulting firm Oriel STAT A MATRIX, had a similar experience—but with the opposite result—when the company purchased a business that was also focused on performance improvement—but in the service arena as opposed to manufacturing, where Marash’s company had a strong foothold. “In hindsight, I think we made a tremendous tactical error of the important job of clearly defining the authority of the CEO who stayed on and perhaps trying to be too collaborative with her. It caused a great deal of disruption in the integration within the business and a lot of problems with staff.”

Even when the synergies seem right, cultural differences can blow up into major personnel issues, which is partly what happened to the Bank of America acquisition of U.S. Trust, said Ted Henderson, managing director at U.S. Trust. Mergers are difficult, as a rule, in financial services because the market is intensely competitive. “Bank of America had a different culture than U.S. Trust and I think it was a classic example where the best people at U.S. Trust decided they were going to be better off elsewhere.”

When a foreign acquirer is involved, cultural differences only intensify the challenge of integration. Gould Paper’s sale of a 51 percent stake to Japan Pulp and Paper in 2010 is a case in point. The merger gave the two companies, which had almost no overlap as far as suppliers and customers were concerned, the ability to cross-pollinate supply resources and achieve greater global reach. But the two had very different cultures and JPP, as the acquirer, needed to understand that it could not simply apply Japanese principles to an American company. “In Japan, as you know, nobody gets fired, nobody quits. It’s a job for life. So the concept of somebody being unhappy and maybe going to a competitor is beyond their capability to understand.”

The Need for Scale
Some mergers are doomed because they happen as a result of pressure from stakeholders responding to a current trend. When the economy recesses, for example, people want to retrench and consolidate rather than diversify or grow. That doesn’t necessarily mean the underlying deal is a good match. Higher costs of running a business can make consolidation necessary, too. “Like in banking, if you’re not big enough, with the new costs of regulation, you can’t survive, so you have to find somebody to buy you,” noted Larry Senn, founder and chairman of Senn Delaney, a Heidrick & Struggles global culture-shaping firm. “About a quarter of our work is around the cultural aspects of mergers and acquisitions, but I see another quarter as companies who never really did merge; they just came together and they’re still apart.”

In other cases, a company will bite off more than it can chew—and lose sight of the goal. Meeta Vyas, interim CFO of NanoViricides, recalled her time as CEO of Signature Brands, which was acquired by Sunbeam under Al Dunlap’s management. “He did it exactly the wrong way,” she said, noting his purchasing three large companies in one day, without a solid plan for integrating them. “The second mistake he made was that I had gone around the company and rebuilt it in every way—and he never met me once after buying the company.”

Even with the best-laid plans, the integration can fail on the people end, said Doug Mellinger, managing director of Clarion Capital Partners, which has overseen numerous acquisitions by its portfolio companies. “For us, ultimately, it comes down to people and integration. Where we see these things just get murdered is if you don’t pick appropriate leaders.” By starting with a focus on capabilities, CEOs can not only choose the right partners but also ensure that they preserve what is special about the company they’re buying—not to mention their own.