Financial Executive: December 2012

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Acquire More, Fail Less: A Growth Acceleration Strategy for a Rapidly Changing World

In today’s rapidly changing world, executives ignore mergers, acquisitions and other innovative partnerships at their peril. Financial leaders should not forego acquisitions; they should forego handling them so poorly.

By Randy Ottinger

Financial analysts often cite a curious statistic: 70 percent of mergers, acquisitions and other business partnerships end in failure. This, for sure, is “curious” because management experts are also fond of noting that 70 percent of all strategic initiatives fall short of their intended goals.
Regardless, at the beginning of 2012, merger and acquisition activity was on the rise. According to a report from PwC, Asset Management M&A Insights, M&A values for the previous year were said to exceed a trillion dollars, a 15 percent increase over 2010. And forecasts for 2012 are optimistic: a study conducted by KPMG and The Wharton School of the University of Pennsylvania of 825 executives, entitled Executives Show Guarded Optimism about M&A in the Year Ahead, shows that nearly seven out of 10 companies planned to make at least one acquisition in 2012, up significantly from 2011.
In the first six months of 2012, the number of corporate M&A deals jumped to nearly 5,900, up from about 5,100 in the first six months of 2011, according to research firm Dealogic.
A year later, however, the dismally high rate of failure, coupled with a still-sputtering economy, has begun to weigh on corporate leaders, financial executives and boards of directors, alike. Analysis on Sept. 25, 2012, Ernst & Young M&A Tracker, shows, M&A activity has fallen to the lowest levels since the first quarter of 2010. Indeed, many business leaders are shifting their focus more on organic growth strategies — creating efficiencies, integrating business units, consolidating departments — and less on mergers and acquisitions.
In today’s rapidly changing world, however, executives ignore mergers, acquisitions and other innovative partnerships strategies at their peril, removing sharp arrows from their strategic organizational quivers. Instead, companies and their financial leaders should not forego acquisitions, but should forego handling them so poorly.
The Case for Acquisitions
After significant study, the case for pursuing acquisitions is clear. Several years ago, the Boston Consulting Group examined organizations with sustained strategies of growth through acquisitions. Analyzing about 700 large U.S. public companies over a 10-year period, the study found that companies that focused on and made acquisitions achieved the highest shareholder returns, outperformed companies that solely focused on organic growth, created more value for shareholders and grew market share more quickly than their competitors.
An even stronger argument for acquisitions can be found by looking at companies like Cisco Systems Inc., which has for many years pursued a strategy of growth through acquisition.
Cisco has stayed relevant over an extended period of time. While 87 percent of its peers in the Fortune 500 have disappeared over the last 17 years, Cisco remains vibrant. In a recent interview with broadcast journalist Charlie Rose, the company’s CEO John Chambers revealed that since he joined Cisco in 1991, the company has completed 150 acquisitions, accounting for 50 percent of the company’s revenue today, and a 1,000 percent return for shareholders on their investment over that period of time.
Though Cisco briefly stumbled recently, its stock is back on the move, and Chambers is back to his acquisitive ways with the recently announced acquisition of NDS Ltd. NDS is part of Cisco’s strategy to win the race for market share in the fast-growing cloud computing and online video marketplaces. There is significant evidence that Cisco and others have created strategic value through acquisitions.
The Boeing Co. and General Electric Co. are two other leading global companies that have prioritized acquisitions, business partnerships and other joint ventures as key elements of their growth strategies. Both have reaped the benefits of such activity and have continued to stay relevant in the face of an ever-shifting marketplace.
KotterInternationalM-AGrowthChartFinancial-Executive.pngOf late, Boeing has brought on considerable knowledge and expertise in the form of cybersecurity and intelligence companies, allowing the aerospace giant to better navigate new pressures on defense spending. GE has moved to acquire a number of mining equipment and services companies to further solidify its position in vital and emerging markets such as China and Australia.
In each of these cases, acquisitions have enabled the companies to stay ahead of the curve and the competition. But that success hinges on adept management of those deals and the subsequent integrations, something many companies struggle with.
Why Acquisitions Fail
The naysayers will claim that there are a significant number of studies about the failure of acquisitions. The typical reasons for failure fall into four categories:
- Financial Engineering Issues. For many companies acquisitions are primarily a financial engineering exercise rather than a strategic one. For financial executives, this is a particularly important point. Various assumptions are made relating to revenue and cost synergies, however, many of these assumptions prove to be overly aggressive after the fact.
According to Bain & Co., only one in three business development executives are satisfied with how their firms conduct deal diligence and are wary of the unexpected surprises resulting from many acquisitions. They learn that they paid too much for a company, they are unable to achieve the cost savings they anticipated, or the synergies they expected to boost revenues never materialize. The net result is the combined company often underperforms Wall Street’s financial expectations.
- Organization and Culture Issues. It is said that “culture eats strategy for lunch.” Well, it also eats acquisitions. Perspectives on Merger Integration — A New Generation of M&A: A McKinsey Perspective on the Opportunities and Challenges, a study by McKinsey & Co., found 92 percent of respondents believe that greater cultural understanding in advance of a merger would have been significantly beneficial. Seventy percent claim that too little effort was paid to cultural issues during the post-merger integration phase.
Due to cultural issues, key people often leave. They wait until retention packages expire, and then they are out the door. Culture clashes are often the reason that merged companies do not achieve the financial synergies expected as well. In this regard mergers are similar to any other large-scale change requiring lots of people to behave and act differently.
- Leadership Issues. In the same McKinsey study cited above, nearly half of respondents said poor leadership was to blame when M&A efforts fell short of their intended goals. Oftentimes, directives come from the top down, with little effort put toward engaging employees or generating enthusiasm for the new approach.
In the particularly turbulent times that result from mergers and acquisitions, major impediments arise — and employees look to leaders for cues. All too often, leaders fail to exhibit credible confidence in the face of such obstacles, and integration efforts come off the rails.
- Strategic Issues. Study after study identifies the lack of clear strategic rationale for an acquisition as being a factor that leads to failure. Much like other large-scale strategic change initiatives, if the picture is unclear as to why the acquisition is being done, how it will help the company take advantage of a window of opportunity in the marketplace and the benefits the combined company will yield to stakeholders, then employees will resist the change consciously or unconsciously.
Making Acquisitions Successful: A Different Model
Companies would benefit by taking more of a strategic change acceleration approach to acquisitions than a mechanistic or financial engineering approach to acquisitions as described above. Strategic change is unlike incremental change, and there are several key elements to a strategic change acceleration approach that are all relevant to mergers, acquisitions and a host of other business partnerships:
- Alignment Around a Clear Strategic Plan (Pre-acquisition). Acq­uisitions are most successful when they come about as part of a strategic planning process. A good strategic planning process results in the alignment of a senior leadership team around a window of opportunity in the marketplace, as well as the strategies a company decides to pursue to capitalize on that opportunity.
With a clear strategic plan in place, it is much easier to identify when an acquisition can help accelerate a company’s strategy than when there is a poor strategic fit. Alignment by a senior leadership team around a market opportunity and key growth strategies is part of creating urgency, and creating urgency is the first step in any large-scale strategic change process.
Top financial executives have the ability to evaluate not only the potential synergies of an acquisition or partnership, but the strategic rationale as well. They are not only looking at whether an acquisition is accretive, but whether it can help the company achieve its growth, product innovation and other operating objectives faster.
- Winning Hearts and Minds. All large-scale change requires buy-in from individuals across an organization. Unfortunately, many leaders, if they set out to win employees’ support at all, only speak to people’s minds, not their hearts. Rarely do leaders paint a clear picture of what success looks like for the integrated organization. Without an emotional pull, employees are unlikely to devote the time, energy and commitment required to put the organization’s success front and center.
Instead, during acquisitions, roles evolve and cultural issues can get in the way, creating obstacles to success for the organization. Success depends on employees seeing and feeling the importance of a strategic partnership or acquisition.
This is a particularly salient point for leaders in the finance function who tend to rely heavily on spreadsheets, economic analysis and numbers. Data may help a senior team to see growth opportunities, but they are less of a motivating force in driving tens, hundreds or even thousands of employees to change their ways and embrace a new and oftentimes challenging course.
“The point is not that careful data gathering, analysis and presentation are unimportant,” writes Harvard Business School professor and leadership authority John Kotter in his book, Heart of Change. “They are important. Sometimes it is behavior changed by analysis that sends people into a see-feel-change process.”
However, Kotter continues, “Good analysis rarely motivates people in a big way. It changes thought, but how often does it send people running out the door to act in significantly new ways?” (Note: The author works for John Kotter’s strategy implementation firm, Kotter International.)
- Engagement of a Cross-functional Integration Team (Post-acquisition). Most large-scale strategic change initiatives are managed from the top down, potentially fueling resentments and raising the chances that challenges and obstacles — unforeseen to those at the highest echelons — will crop up and potentially derail the process. A better alternative is for the efforts to be led by a cross-functional team with representatives from both companies that, working with the acquiring company’s senior team, are empowered to identify and knock down barriers that inevitably will arise during the integration process.
As noted, mergers and acquisitions tend to fail when cultures collide. Establishing a cross-functional guiding team helps to address this pitfall by bringing diverse perspectives together to determine the most effective way forward.
During a merger, acquisition or strategic partnership, financial executives can best serve their companies by focusing as much on the integration process as on pure financial synergies. It is hard to achieve the projected cost savings or revenue acceleration when meteors collide.
It is people who are responsible for achieving results. Understanding what makes people tick during a merger or a strategic partnership is key to achieving financial outcomes. And while incentives are important, they are not a panacea. A disengaged leader waiting for an earn-out can be highly destructive.
- Adoption of a Large-scale Change Framework. A merger or an acquisition is a large-scale change, and large-scale change cannot be led with the same methodology as smaller changes that can be handled by the existing hierarchical organization. Smaller changes can be addressed with a project or change management approach.
Large-scale, strategic change, on the other hand, requires a more transformational process. Understanding the difference between an incremental change process and a strategic change process is critical for financial executives.
A project management approach to strategic partnerships is well understood, and is often within the comfort zone of financial managers. Project management, however, is rarely sufficient to make acquisition integration successful. Financial executives can benefit from understanding the principles that underpin a large-scale, strategic change approach.
Bottom line: mergers and acquisitions are not the problem; the high failure rate of acquisitions is the issue, just as the high failure rate of most large-scale change initiatives is a cause for concern. Ignoring mergers, acquisitions and other business partnerships is akin to arguing that organizations should stop attempting to transform or accelerate their competitive position. The key, simply, is to do it right: acquire more, fail less. 
Randy Ottinger ( is executive vice president at Kotter International, a firm that helps leaders accelerate strategy implementation in their organizations.