M&A Success & Soft Skills

 M&A activity reached an all time high in 2015 with $3.8 Trillion in deals (Bloomberg)  in with the vast majority of transaction volume in the low to mid market. Unfortunately, the majority of those transactions will not realize the intended results. Why? Consider the similarities between M&A and organizational change initiatives:
Merger & Acquisitions Change & Transformation Initiatives
  • Success rate 10-30% (HBR)
  • Firms see a drop in productivity (KPMG)
  • People problems cited as most common reason for failure (FinTimes)
  • Existing people problems cited as most common reason for failure (Accenture)

 

What’s going on? Culture assessment is ignored, never considered, or poorly managed ~70% of the time whether in an M&A transaction or a change management initiative (Fortune, Business Week & CFO Magazine). Does this prove the quote often attributed to Peter Drucker, “Culture Eats Strategy for Breakfast?” Those who say “yes” often ascribe to the belief that culture is fixed and tied to the leadership style of the senior leader.

It would be easy to follow the syllogism to conclude that the senior leader is the problem. But, that would be both a logical fallacy and an incomplete understanding. Organizations are people based systems and systems are fundamentally designed for homeostasis (status quo). Successfully pushing them beyond this point requires a robust understanding of how the system works. Culture will only eat strategy for breakfast when strategy fails to account for culture.

A 2013 study by Strategy& (formerly Booz & Company, currently a team at PwC) puts a spotlight on the challenge. Change is a broad category that encompasses everything from IT implementations to HR initiatives to wholesale reframing of value propositions and market strategy.  For the purpose of this discussion, let’s narrow the focus and agree that M&A activity is the most comprehensive form of change a firm is likely to face. Then, let’s agree that studies, statistics, and post mortems are only useful if they can solve future business challenges. That leads to the question, “where is the potential to increase M&A success?”

M&A strategy development, due diligence and the actual transaction are focused squarely on the “hard” side of business.  Do the numbers work? Will the deal achieve the competitive advantage we’re looking for? How much downside risk can be mitigated? During this process, parties on both sides of the deal are mired in analysis that often leads to overlooking 3 important “soft side” fundamentals. Getting these 3 right at the outset can drive the deal across the success threshold:

1. Culture assessment: Bain & Co sites culture clashes as the single biggest reason for failed mergers. By formally and objectively assessing the cultures of both the target and the acquiring firm, potential clashes can be identified and planned for. This key data point can inform not only the post-acquisition integration process but, the entire deal process.

  • Mergers: how far apart are the respective cultures? How do we integrate and align the cultures of both firms to achieve the strategic goals?
  • Acquisitions: do we fully understand the culture we are buying and how will they help us achieve our strategic goals? Can this culture adapt to the changes that will happen post acquisition?
2. People: the lifeblood of any business is the people that get it done. Understanding the nature of existing skills, staff, and style provides a rich source of critical insights that can be integrated into the strategic approach.
  • What is the level of change fatigue that exists in both firms?
  • Do the senior leader and management team have the “soft side” leadership skills required for post transaction success?
  • If the senior leader and management team will be exited, what key staff will be retained? For those retained, what level of resistance can be expected to the new management team?
  • How do people get stuff done? What do they value? Who do they listen to? What are the implications?

3. Senior Leader and Management Team Health: Culture eats strategy for breakfast when the firm lacks “soft side” skills at the top of the firm. This is not the same as saying that the style of the senior leader is the culprit for change failure. But, understanding the natural style of the senior leader and their management team along with their team dynamics is absolutely critical for informing a post transaction approach.

  • Is the management team cohesive and is there organizational health at the top?
  • Do they understand the soft side requirements?
  • Have they demonstrated success at leading through complex soft side change in the past.
  • What is the natural style of the senior leader and members of the management team? (Particularly important if they are staying on post transaction.)

The soft stuff is hard, no doubt about it. Most CEOs, advisors, and transaction intermediaries have their hands full with the “hard stuff”, are not as skilled in the “soft stuff”, and are not inclined to add anything that isn’t essential or could derail the deal to the “to do” list. Truth be told, the 3 soft side issues will be uncovered. The question is, “do you want to learn about it the hard way or the easy way?”

The hard way is to skip due diligence on the 3 soft side issues. The easy way is to partner with skilled providers using proven scientific methods that assess and evaluate the 3 soft side issues early in the deal process. By choosing the easy path, both sellers and acquirers have the potential of increasing deal and post-transaction integration success.