Cross-Border M&A: Downstream Implications
Mergers and acquisitions continue to be a global craze: over $1.3 trillion has changed hands in the first half of 2006 alone on more than 13,482 deals worldwide1.
But, as previous statistical summaries have indicated, the M&A failure rate continues to range between 60% and 75%. Why?
It’s All About Integration
There are five misconceptions that continue to plague cross-border deals, in particular, even those consummated by the most brilliant officers of corporate development or M&A.
- Functional Integration: “Marketing is marketing, IT is IT, and finance is finance.” While some functions do share common terminology and professional training, in the post-acquisition period standard practices for processing claims or administering the IT function may not be so compatible.
- Geographical Integration: “Geographies will meld together; my Northern Germany EMEA HQ will serve as a fine headquarters for the acquiree’s team, who will happily relocate from Stuttgart in the South.” Even in an era of transnational management, many employees are still very much tied to their local communities and family commitments and will leave an organization that demands them to move.
- Customer Integration: “Customers who previously used two competitive suppliers will be happy to benefit from a single-source solution. Our pricing strategies for the combined organization will be easy to implement.” Customers tend to have their own way of looking at the world, and may not see the merger of rival suppliers as a plus from their standpoint.
- Manufacturing/Supply Chain Integration: “Closing redundant plants and merging supply chains into one robust system will be a relatively straightforward consolidation exercise.” In many regions of the world, personal ties to employees and longtime suppliers, along with deep-rooted organizational systems, can lead to highly charged debates that make supply chain rationalization surprisingly difficult to achieve.
Human Integration: “Our corporate cultures seem to be pretty compatible.” Acquiring companies consistently underestimate the challenges of post-merger integration of human capital. Often the most critical success factor in making a deal work is not the financial projections, the strategic plan, or the organization chart, but the ability of the principals to mesh as a new team. Different personal styles thought processes, and informal patterns of communication shaped by both organizational and national cultures can all make human integration a challenge.
Sneaks Up On Us
Come on, we’re all smart people, we’ve read the articles, we know we need to concentrate on these issues as we contemplate a joint venture, a merger, or the acquisition of another organization. So, why do these issues continue to challenge us? Why can’t we anticipate these challenges and develop a plan to minimize the “noise in the system?”
“Our Way Works”
It is quite common for employees from an acquiring organization or a new partner to think, “For years we have been successful with our methods of manufacturing, financial reporting, and staff training. If the other organization’s ways were so superior, wouldn’t they be in better financial shape?”
It’s also about ego, confidence, and comfort. We naturally tend to feel that for years our way has worked well for us, so all we have to do is “teach them” our systems so that they can make the necessary changes to “come on board,” and everything will turn out okay.
The challenge lies not so much in whether one way is more right than another. The challenge is getting the other side to agree. Would you adopt their ways of manufacturing, or account management, or quality assurance? At the end of the day, we are comfortable in our own shoes. We like precedent and the status quo; “if it isn’t broke, why change it?”
Building a Third Culture
Over more than twenty years of working with companies that struggled with these issues, we have found that one good way out of this perpetual hurricane is to build a Third Culture, or a Third Way of operating that rises above either party’s traditional methods.
It has been said many times, “the whole is greater than the sum of its parts.” But the whole is not simply gathering all components to make a big heap in the center of the warehouse floor. In our view, the whole is actually the cumulative effect of the best ideas derived from the individuals/teams/organizations involved, AND, the contribution of new, innovative thinking arising from the synergies of the merger.
In other words, the best success stories we’ve seen begin when a topic is placed in the center of the table. All the best minds available gather to discuss and brainstorm great ideas and innovative solutions, and if an element from a previous system or organization should contribute to the final solution mix, fantastic.
Building a Third Culture requires humility, open-mindedness, flexibility, and creativity. It also depends on the ability of group members to value other opinions, fresh thinking, and the potential to create something original. But most of all, the team, or pair of individuals, can only achieve Third Way solutions if they are in a place where they can successfully navigate stylistic differences.
Consider the following example:
For Ingrid Peterson, trying to focus her sales team on getting this international acquisition back on track was proving to be more challenging than she had anticipated.
On paper, it appeared fairly straightforward. The deal made sense: a small roll-up of a peer competitor into one of her fastest growing product lines should have mapped beautifully, function by function, customer by customer. Even geographical synergy should have been easy. So, why was everything falling apart?
As she sat on the plane somewhere over Eastern Europe, she thought about her latest meeting with the regional team in Singapore.
- No one could explain why sales continued to slide; customers of both organizations were slipping away like water through a sieve;
- The performance management system/bonus scheme which was used successfully for years in Europe and North America was having little or no effect with the new employees in SE Asia;
- Ingrid’s ability to gather high-quality data on this last trip was limited; every question she asked seemed to lead to additional complications and vague answers;
- There seemed to be so many layers added to the decision-making process, with an almost hierarchical, power-hungry reaction from members of the entire group her company had inherited from the acquisition;
- It also seemed to be difficult for some members of the new management to accept their fate; to understand they needed to join the Asia-Pacific management team and demonstrate ownership for the integration strategy laid out by senior leadership at headquarters.
Ingrid has the challenging task of successfully integrating this acquisition across the geographies, functions, and customers for which she is responsible. To minimize the costs inherent in unsuccessful cross-border M&A/JV activity (longer cycle times, opportunity costs, and even business failure), she should consider the following seven steps to resolve her current predicament:
- Scope the Activity
Ingrid needs to be very focused on the problem she is trying to solve. For example, what will be the key account strategy for the region, what system needs to be built, or which function needs to be integrated? In other words, how does this acquisition impact her overall strategy?
- Metrics that Move
If she achieves a successful outcome as a result of bringing key individuals or teams together, what metrics will move as a result? Examples include improved cycle times, cost reductions, increased sales, customer or employee retention, one fully integrated key account or reward system moving forward, and so on.
- Human Interaction Touch Points
Who needs to be invited to the party? Ingrid must identify key stakeholders per category, and involve them in the process by which a creative, innovative solution will be developed to achieve the desired state. We call this a “Human Interaction Across Cultures” audit. In essence, we are looking for the places within the newly combined organization where two or more people will interact across multiple definitions of “Culture” – company, national, functional, geographical, HQ vs. Subsidiary, industry, etc. – in a way that impacts the problem and the metrics being considered.
- Personal Styles Inventory
Each individual arrives at the incubator table with his or her own styles of “human interaction.” It is vital to understand their “pile of styles,” the hard wiring they have received that shapes their behaviors. Team members must achieve a level of acceptance/respect, to gain awareness of each other’s styles, and to understand the “why” behind their behavior, so they can appreciate each individual’s starting point.
- Building Team Systems
Before we can tackle the business issue we want to solve, we need to create a “Human Operating System” that will drive how we interact as a team going forward. The team must define a shared vision of what goals it seeks to achieve, the key business problems it must address, and individual roles and responsibilities. In addition, the team needs to co-author a number of key shared systems, the components of which tend to vary widely according to national and organizational cultural norms:
- Group norms for face-to-face communication: Who speaks and in what order? Are there processes for drawing out less vocal members? What is the relative balance and/or sequence of presentation and discussion, data and intuition, constructive inquiry and debate?
- Virtual communication practices: Who should be copied on messages? Is it considered acceptable and efficient to send out general inquiries or to conduct large-scale debates via e-mail? When do you choose instead to pick up the phone and call someone or arrange to have a meeting in person?
- Meeting management: Are pre-meetings considered to be standard operating procedure or unacceptable lobbying? How strictly should agendas and time allocations be followed? Is it okay to initiate a brainstorm in the middle of a problem-solving session? How should the team deal with members who tend to derail team discussions by engaging in lengthy digressions or by monopolizing air time?
- Conflict resolution: Should conflicts be addressed openly in meetings or is it better to solve them in side conversations? Is it acceptable to display emotion and to disclose negative feelings, or is it better to focus on team objectives and facts while setting personal feelings aside?
- Decision-making: Who is empowered to make what kinds of decisions? What is the process for surfacing and analyzing a problem and for reaching a decision? Once decisions are made, is it permissible to revisit doubts or questions? What is the mechanism to follow up and ensure that decisions have been implemented?
Out of the array of individual styles present at the table, team members need to create the most appropriate “style” together to achieve a successful outcome.
- Solve the Problem
A business work-out can be accelerated in the initial stages by an internal or external facilitator who can not only guide the team through the process of developing an innovative solution to the business challenge but also serve as a process coach. The facilitator helps to enforce, and reinforce, the newly-created Team Culture, ensuring that team members stick to their agreements and utilize shared processes to drive problem resolution. The ideal scenario is that one or more team members eventually takes over the process coach role, just as others may serve as timekeeper, scribe/note taker, and leader (the one responsible for the group achieving its stated goal).
- Loop Back Around
All good processes contain an element of self-reflection and evaluation. We encourage a process of review against the previously mentioned “Metrics that Move.” Measuring progress toward stated goals and experiencing improved results is a powerful elixir with which to motivate any individual, team, or organization. There are many ways to evaluate progress or success. As long as you know that challenges are being addressed and results are improving based on reliable evidence, the team can verify its own contribution to the organization and acquire a growing sense of confidence.
Successful mergers, acquisitions, and joint ventures depend on the eventual integration of two or more organizations. The net impact of the seven steps described above is nothing less than the creation of a “Third Culture” within the newly combined organization. We are ultimately judged on how well we achieve the stated objective: to buy, merge, or collaborate with another entity – sooner, faster, cheaper, better.
Performance outcomes are shaped by our ability to pass through such integration cycles with as much efficiency and effectiveness as is humanly possible. The key ingredient, in our opinion, is to develop a “blended solution” which drives innovation and collaboration in such a way as to achieve superior results.
Success is within our reach if we can ultimately find the path to creative optimization. If left to their own devices, individuals and the teams to which they belong will often revert to the styles they know. These competing preferences and default mechanisms will cause understandable delays in achieving timely outcomes.
However, if we know we are bringing together diverse colleagues and cultures, asking them to merge systems, processes, and procedures into one organization in the future, then there are specific steps we can take to enable these teams to rise above their competing styles and develop a Third Way, one that can fuel integration and superior business performance.
1Kunert, Kurt, ed. “FactSet Mergerstat Release: Global M&A Wrap Up for the First Half of 2006.” Business Wire, June 30, 2006.