Merger and Acquisition Success: People Count More than Numbers
Contributed by Ed Johnson.
There are lots of good reasons for one company to merge with or acquire another. Maybe it is to expand a product line or add new technology. Perhaps it is to add customers or establish a new market presence or channels of distribution. Possibly to lower costs and achieve economies of scale. Or perhaps just a simple “roll-up” of smaller units and/or competitors to rapidly grow the existing business.
Lessons Learned from the People Side of the Business
But despite all of the logical business reasons for doing the deal — not the least of which are expectations of accretive revenues and earnings — most mergers fail — a well-documented fact. Why?
There are many reasons, but research cites incompatible cultures as the leading cause for failure. The body rejected the transplanted organ. And when the deal-makers are so intently focused on the legal and financial issues that they underestimate or disregard the people and culture issues, it often comes back as the Achilles heel that undermines the intended effect. In international deals, the added complexity of different countries and cultures makes the people issues all the more difficult and increases likelihood of failure.
The Hard and Soft Issues
So, “What do I need to do?” you ask. There are “hard” people issues to evaluate and “soft” issues to evaluate. Of the “hard” issues, make a checklist of things you need to know. Examples include: What are the pay levels, by grade and by title? What are the benefits? Are there employment contracts? Severance agreements? Other government mandated notice and/or severance requirements? Pending or expected employment-related litigation? Union contracts? Seniority provisions? Pension liabilities? If the acquiring organization is going to alter the pay and benefits, how will this be communicated to the affected employees in a way to ensure that they perceive they are being treated fairly with no “take-a- ways”? Once the deal is finalized, the engagement and acculturation of the acquired workforce needs to start very respectfully, but assertively, on Day One.
A Hard Lesson
While with Solectron (and later with Quest Software), our due diligence processes included detailed and careful review of the people side of a proposed acquisition. Even in the context of the people side of the deal, there are “hard” costs/issues (i.e., staffing levels, pay rates, benefits and pension costs, etc.) as well as “soft” people issues (i.e., will the acquired team – especially the leadership – quickly successfully transition over to the new culture). In Solectron’s case, the operating unit being acquired was typically a manufacturing site of a major OEM (i.e., IBM, HP, NCR, etc.) that was to be transformed from a cost center into a profit center, complete with its own highly incented reward structure – even in a very low margin business (gross margins were under 10%). Getting the people side of that transaction right was as critical to the success or failure of the unit as were manufacturing methods, supply chain optimization, and financial management.
Of the “soft” issues, the most important is whether the individual and collective leadership of the acquired organization can and will successfully transition to the new (acquiring) organization and its culture. What management styles will work best with the acquiring organization? Interview the individual execs of the organization to be acquired to assess whether they can and will successfully transition into the new culture. Where you sense resistance, better to know up front and cleanly sever the employment relationship rather than bring the resistance into your camp.
In the costliest example of the latter, Solectron overpaid for the acquisition of Smart Modular Technologies in 1999. The founder CEO of the acquired organization (Ajay Shah), was paid handsomely for his equity share of the $2.2B acquisition and gained a seat on Solectron’s Board. He also convinced Solectron’s CEO at the time (Ko Nishimura) to stay on to lead the acquired entity. Smart remained virtually autonomous to Shah’s leadership, largely ignoring Solectron’s direction and processes, successfully rebuffing efforts to rein them in. A few short years later, Smart was divested in 2004 for $100M cash – or roughly 4.5% of the purchase price – to an investor group led by Shah. Even if you factor in the diminishment in value of tech stocks when the tech bubble burst, that was a big hit to Solectron’s balance sheet. Ouch!
To Contrast the Smart Modular deal with an example of a more successful acquisition, Solectron was much more effective with the integration of C-Mac Industries, a Canadian-based EMS provider comprised largely of former Nortel Networks manufacturing plants that was acquired in 2001 in a $2.7B stock deal. In this case, the lead executive, Rick Rollinson, a veteran of Nortel and later C-Mac with great leadership and people skills, made a rapid and smooth transition to the highly entrepreneurial culture of Solectron, and was a key contributor to the success of the acquisition and its integration into the Solectron culture. He continued to lead the operation until the acquisition of Solectron by Flextronics.
In my experience with many deals, large and small, domestic and international, the people issues were more likely to be instrumental in the success of the merger or a primary contributor to the failure. Having a well-planned and comprehensive approach to the due diligence AND to the subsequent business integration can substantially enhance the odds of success.