14 Apr 2016 20:27 IST

Making mergers and acquisitions work

Most M&As fail because while a lot of attention is give to strategic fit, cultural fit is ignored

Companies face pressure from shareholders to grow faster, since organic growth has its own limitations, firms take the Mergers and Acquisitions (M&A) route to fast track their growth. This makes sense because not only does it consolidate one’s position in the industry, it also reduces the intensity of rivalry in the sector. Fewer and more visible the competitors, lesser the unpredictability.

However, a quick glance at the global track record of M&As over the last four or five decades narrates a different tale. In spite of all due diligence done by the (top five consulting/audit firms) experts, almost 75 per cent of the M&As end up destroying value.

Why does it happen?

Is this due to bad decisions based on inadequate analysis? Is it due to bad execution? Or is it a combination of both?

Sometimes, M&As go wrong because of miscalculations — more often, benefits are over calculated, and as a result, more than required value is paid for. The recent incident of Tata Steel’s UK facility is one such example. The British operations were bought out with much fanfare, and to ward-off the competing Brazilian suitor, Tatas paid almost 30 per cent more than what was originally thought as the right price for Corus.

This is not an anomaly — history is replete with such stories. The famous trans-Atlantic marriage between Daimler and Chrysler went sour and ended up in divorce within a few years. Both lost huge value in the process. While the Tata steel case appears to be of over valuation, the Daimler-Chrysler looks like one of poor execution.

The former happens when you are too eager and lose the negotiation and the latter when you go about making the marriage work with either too less or too much sensitivity and enthusiasm.

Research says

Research found that the major cause for M&A failures has to do with post-merger integration of the erstwhile independent and separate organisations — mostly of culture and people. A lot of attention and effort is made to find the strategic fit, but not enough is done to assess and map the cultural fit. The un-stated assumption seems to be, ‘Things will fall in place and organisation and people will figure out a way’.

It is shockingly naïve, but that’s what happens. No deep study is done before the merger in terms of the match between the organisational DNAs in most instances. It is true that the organisational side of the enterprise is messier and more complex, but ignoring people does not help either. It would help if every aspect of the merger is explored and scrutinised minutely. And if all stakeholders are involved, the odds of failure is beaten.