Making the Acquisition Work

By Anthony J. Mulkern, Ph.D., Janas Associates.
Reprinted from The Quarterly, July 2001, Issue 21, Volume 1

Numerous studies indicate that no more than 40% of surveyed acquisitions are successful in terms of providing adequate returns. This dire statistic may make growth through acquisition appear too risky to the mid-sized company. What often is not mentioned is that most of the failures occur when the acquisition is hostile or significantly adversarial in some way. This is good news for those pursuing acquisitions in the small to mid-cap market, because in that segment the transaction is usually collaborative and frequently sought by the seller.

Even under the most favorable conditions, however, success cannot be taken for granted. Our experience indicates that the following actions are essential to ensure that an acquisition strategy produces the hoped for results:

Decide why you want to acquire.

Is the objective to increase market share, to obtain patents or new technologies, to gain certain talent, or to diversify product or service offerings? In other words, what is your strategic plan? Evaluate potential target companies in light of your plan.

Find out why the seller wants to sell.

Is there overcapacity in the industry, or is the owner/founder simply ready to retire? Are the company's sales declining, or are they growing so quickly that the owner recognizes the need for new executive talent and capital? It is also important to clarify what degree of involvement the owner wants or is willing to have after the transaction. Significant assistance from the seller after the sale is virtually a must in a successful acquisition.

Assess the degree of "fit" between your culture and that of the potential acquisition target.

Different corporate cultures can be informal or bureaucratic, managed top-down or bottom-up, hierarchical or egalitarian, autocratic or participative. They can be sales-driven or service driven, customer oriented or regulation oriented. No one style is better than another in all circumstances. When significant differences are discerned, plans must be made for accommodating or integrating the different ways of doing things or a new target sought.

Decide if acquisition means consolidation.

Not every acquisition must lead to a full merger or consolidation of the two firms into a single entity. One of our clients was acquired and allowed to thrive with its own President while being managed at a distance in a "hands off" fashion by the acquire. The latter formed a holding company of which both it and the acquired firm were subsidiaries or "sister" companies, though one was clearly the "big sister." In this way, the acquire avoided the common mistake of smothering the unique expertise and client relationships which made the target company so valuable to begin with.

Assess the morale and opinions of the employees to be acquired.

No buyer would consider completing a transaction without due diligence regarding the target company's balance sheet. But the most critical assets, the human capital, are often overlooked. In properly structured confidential surveys, employees will provide a great deal of insights not readily accessible otherwise about challenges and opportunities they face daily. Much of this information may be unknown to the seller. Armed with this "insider" information, a new owner can begin immediately to address employee concerns and thus win instant credibility.

An investment group retained by Janas Associates to complete a transaction ruled out a potentially disastrous post-acquisition senior management promotion based upon critical facts uncovered in the human capital assessment we provided. In another case, serious sexual harassment complaints were revealed.

Clarify targets, dates, expectations.

Change is difficult enough for people when the direction and destination are clear. When they are ambiguous, fear and chaos reign. The result: serious declines in productivity and service. Determine what synergies are expected in terms of technology, marketing, automation, products, and services. Set measurable, timebound goals, and assign responsibilities and accountability.

Plan for both changes and transitions.

As change management expert William Bridges explains, changes are the observable events that occur when something new happens. Transitions are the emotional processes that people undergo in adapting to the changes. Typically there is first shock or anger, then grief or guilt over the loss of the past, followed by fear and confusion, before enthusiastic acceptance can occur. By the time leaders enthusiastically announce a change, they have had a great deal of time to deal with their own processes of transition but then are often puzzled that others take so long "to get with the program."

Poorly managed transitions led one company to call asking for help. Post-acquisition frustrations among employees had led to repeated and escalating threats of violence, which we dealt with just in time. Less dramatic but equally effective sabotage of change efforts is more common when management pays scant attention to the emotional component of change.

Involve seller and managers from both companies.

Integration plans that succeed are not made in isolation but with participation from key personnel who know what is happening day to day. Top leaders should have the large strategic picture, but "the devil is in the details." Create an integration team with authority for assigning responsibilities and overseeing results on a department by department basis throughout the newly formed entity.

Communicate, communicate.

You cannot overestimate the amount of anxiety that a major change can cause. Your goals, expectations, values, and vision need to be conveyed again and again in various forms: speeches, memos, newsletters, conversations, videotapes. Some companies even send letters to the employees' spouses and family members to reassure them. When there is to be a consolidation, anxiety may also be high among the acquiring firm's employees. If you fail to inform, rumors will fill the vacuum created by the lack of information. In most cases, the rumors will be worse than the reality, and morale will suffer.

Make the tough decisions, and let everyone know what is in it for them.

If layoffs are required at the outset, get them out of the way once and for all so that you can get on with the positive message. As the company owner, you clearly see the advantages of the acquisition in terms of future growth, earnings, and career opportunities for employees. None of this may be obvious to others, and so this message also needs to be sent emphatically. Keep in mind that those who survive layoffs will remember-when you most need their support-how well or how badly you treated their friends and former colleagues when they were laid off.

Seek feedback and make adjustments as needed.

No plans are perfect, and certainly no implementation ever is. Create an environment in which people feel encouraged to point out what is not working and to suggest solutions. Don't dismiss all criticism as resistance to change. Evaluate feedback evenhandedly and adjust requirements, deadlines, or resources when necessary. If you succumb to the temptation simply to dominate, you will be perceived more as an occupying power than as an ally or rescuer.

Establish trust.

The most productive, effective, and satisfying relationships are all based on trust, and a successful acquisition is no different. You establish trust by speaking the truth and keeping your word. Not everyone has a right to know everything, but if employees catch you in what they see as a lie, you have created a liability. Resist the urge to seek quick popularity by over promising before you have carefully planned what changes are feasible. Once you have committed, follow through, and make sure it happens. This applies especially to promises made to retain key employees.

How long does it take to complete the integration of the acquiring and acquired companies? That depends on how well the changes and transitions are planned and managed. Resentment and resistance last for years, if not indefinitely, when the acquisition is mismanaged. Sometimes the acquires just give up and later sell their acquisition for a fraction of what they originally paid. When skillfully designed and implemented, a sound integration strategy can be judged successful in 12 months or less, with any remaining work viewed by most as an exciting challenge that energizes the work force. It is all a question of leadership.