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Corporate Acquisition Strategies Impact on Vision and Values

 

Why corporate acquisitions take place and why most fail. How acquisition success can be enhanced by following best practice in managing corporate vision and values.

Company A has spent decades building up and refining its vision and values. It’s one of the few to follow all seven best practices. Customer loyalty has never been higher. Employees are highly motivated. And finance providers are very satisfied. Then suddenly… big news.
Company B, a larger rival, has made a hostile bid. After months of haggling, you are acquired. Company B’s main rationale is cost reduction. It reckons that 10 000 jobs can be ‘saved’, and moves rapidly to integrate. Many of your friends and colleagues disappear. The best ones move out fast, and others are made redundant. Your customers complain about poor service and communication. Operationally, Company B is very efficient, but its outlook is short-term, and it has no interest in vision and values.
So, was all the effort Company A devoted to building commitment through vision and values a waste of time? No. It resulted in the profitable growth, loyal customer base and high calibre workforce that led Company B to pay a high price. Company B, though is in danger of destroying these assets through clumsy short-term management.

Acquisitions are usually disruptive. They often involve a change in vision for the new combined enterprise. They can erode deeply held values. And when vision and values clash, both companies become unhappy places to work in or do business with.

Why do acquisitions occur?
Objective studies show that half to two-thirds of acquisitions fail to meet their financial or strategic goals, and the majority do not achieve significant gains in value for acquiring shareholders. The figure is much higher for cross-border acquisitions – a recent study by KPMG concluded, “83% of mergers were unsuccessful in producing any business benefit as regards shareholder value”. Yet the long-term trend in acquisitions spending is upwards.
There are two answers to why acquisitions occur at all. The first is the official one, which goes something like this:
Many companies are stuck in static markets. But shareholders still expect profitable growth. Costs have probably already been cut to the bone, while new product development or home-grown expansion into other categories is slow, expensive and risky. Acquisitions enable us to:

  •   buy competitors, so saving costs and increasing market share;
  •   enter new markets at low risk;
  •   expand geographically;
  •   acquire new people, products or technology;
  •   use acquired brands, people and resources more effectively.

An unofficial answer explains the continued pursuit of acquisitions, despite a high failure rate:

  •   CEOs like publicity, bigger businesses, more money, buzz. Few chairmen and CEOs are shrinking violets. They like to see their pictures in business magazines, to be talked about by peers. A major acquisition will result in a larger company, more power for the CEO, and higher remuneration.
  •   Acquisitions as sport. Acquisitions are a form of conquest. A merger of equals rarely occurs. It is a myth put around by winners to persuade losers to merge or make them feel better about it afterwards. The winner in the short-term is the acquirer, even though he may have overpaid. Executives enjoy sport, and acquisitions are the nearest thing to it in business.
  •   Acquisitions are fun, although they often involve work and pressure to the point of exhaustion. It’s more fun to work on acquisitions than on budgets, planning or the everyday slog of management.
  •   Investment banks stimulate big deals, because they build client relationships, and generate large fees. Every bank wants to top this year’s table of acquisitions revenue.
  •   Executive delusion that failure is success. The KPMG study of 700 cross-border deals showed that 82% of acquiring executives thought their deal was a success, whereas objective analysis suggested a success rate of only 17% . Acquiring-minded executives wear rose-tinted spectacles and only 45% had carried out a formal post-deal review. However, a minority of companies, like GE or BP, are very good at acquisitions.
  •   Acquisition is easier than building… and quicker. Acquisitions can be completed in weeks or months. Home-grown revenue building, through new products, takes years, is very expensive, and has a higher failure rate than acquisitions. Speed is important to CEOs. Their average tenure is now 4–5 years, and they have little time in which to make an impact.

If acquisitions give acquiring executives more power, fame, money and fun … quickly, their continuing popularity is not surprising. Nor is the fact that longer-term issues, like vision and values, get overlooked in the frantic rush to establish synergies, agree a price, arrange financing and fix a myriad of legal details, before the deal is struck. By then it may be too late to rescue the vision and values, even though their loss can wreck all the ‘hard’ numbers supporting the deal, and render them illusory.

A study of acquisitions sponsored by Harvard Business School concluded:

  •   Acquirers usually pay too much.
  •   Friendly deals done using stock often perform well.
  •   CEOs fall in love with deals, and don’t walk away when they should.
  •   Integration’s hard to pull off, but a few companies do it well, consistently.

Why most acquisitions fail

  •   Companies overpay. Most acquirers pay 25% to 50% above the pre-bid share price. This premium is rationalized as representing the benefits of the acquisition. Buying a company is a cross between buying a house and attending an auction. People get emotionally involved and competitive instincts become inflamed. Reason can fly out of the window.
  •   Benefits usually overestimated. Everyone gets drawn into the excitement of the chase. If the CEO appears keen on the acquisition, executives will make ‘best circumstance’ estimates of cost savings and revenue gains, cheered on by investment bankers and consultants. These usually look most attractive at a distance, because the irritating details of people, customers and markets are invisible or ignored. And the high-flying team that calculates the gains is different from the practical people who implement them. Skeletons will fall out of cupboards, and surprises will occur. “I’ve never seen a positive due diligence surprise,” said David Coulter, former President of Bank of America. He resigned after the discovery of $1.46 billion of unexpected losses following the merger with Nations Bank.
  •   Too much focus on shareholders, not enough on employees and customers. The balance between the three main stakeholders of the Committed Enterprise can be badly disrupted by acquisitions. The acquirer focuses on convincing Wall Street that the deal is positive, with a very strong emphasis on financial results. This is necessary but often downgrades the interests of customers and employees. “There’s a saying in the acquisitions world that integrations would be easy if no people were involved… unfortunately, too many organizations fail because they treat integration as an engineering exercise, not one that affects people’s lives and futures.”  Acquisitions are unlikely to succeed unless they consider both employees and customers. For people in the acquired company, life can become a negative question mark. For customers acquisitions often disrupt relationships and service levels.
  •   Cultural issues not prioritized. Before acquisition, emphasis is on the deal, the price, and the host of mechanical details. After acquisition, focus shifts to structure, strategies, systems, remuneration, cost savings and branding. All these issues usually have to be resolved fast, often between relative strangers in an emotionally charged atmosphere. They are best decided within an agreed framework of vision and values.  Unfortunately, this is rarely the case. Vision, values, people and customers, are either trampled in the stampede for change, or suffocated by inaction.
  •   Weak planning and integration. This was highlighted by the KPMG study of 700 cross-border deals as a major reason for failure.

Five different types of acquisition and their effect on values
While the segmentation of customers and markets has become very sophisticated, the segmentation of acquisitions by type remains rudimentary. There are signs of improvement, mainly from academics and the international accounting firms.

1 Overcapacity. This is the most common type of acquisition, especially in mature categories like chemicals, energy, consumer goods and automobiles. These markets are growing slowly or not at all, there is spare capacity, and large companies think bigger is better. Their solution is to buy competitors, thereby raising market share, and removing costs and capacity. This usually leaves lots of blood on the carpet, since people have to go.
Success in this situation can be achieved if the two companies develop similar vision and values, pre-plan the acquisition carefully and integrate skilfully. If not, expect trouble.
This type is usually a Win–Lose game, and acquirers tend to impose their own vision, values and processes.
2 Category expansion. The acquiring company wishes to enter a new market or sector, and does so by buying brands and skills. Quaker Snapple is an example of a disastrous acquisition of this type, while PepsiCo Tropicana was a success. Cultural issues are very important. Acquirers lack the confidence and know-how to enter the new category on their own. They are buying new customer franchises and people. Imposing inappropriate values risks destroying what has been bought.
3 Geographical expansion. The objective here is growth, not capacity reduction. Friction is therefore less likely, and it is tempting (though often unwise) to delay integration of vision and values.
4 Industry convergence. This type of acquisition is usually dependent on a distinctive vision. It is high risk, since the vision may be flawed. To have any chance of success, both the vision itself, and the way it is to be implemented, must be shared by each party. AOL Time Warner is an example of a failed acquisition of this type.
5 People and technology. Shared vision and values are critical to the success of this type of acquisition, which is growing in importance. If you lose the people, you’ve wasted your money.

Typical effect of acquisitions on stakeholders
Most acquisitions are advantageous to the acquired company shareholder because the acquirer has overpaid. Despite this, the acquirer’s employees are likely to be happy, since at a senior level they may gain money and power, and at more junior levels, greater opportunities. Employees of the acquired company are likely to be apprehensive, except those negotiating personal deals. Customers will have many questions, and plenty of memories of poor service and disruption from past acquisitions. They need and desire strong communication from both companies. Suppliers will experience a mixture of hope for new contracts, worry about business loss, and price reductions.
The Committed Enterprise will avoid sole focus on shareholders, and consider the interests of all stakeholders, especially those of the company to be acquired. This is the way to succeed with acquisitions.

Example of failed acquisition due to vision and values clash
Daimler Chrysler. In May 1998, this was trumpeted as a merger of equals. Chrysler was the world’s most profitable car maker. Daimler Benz the most prestigious. The assumption was that technologies would be shared over higher volumes and a more global product base. This spanned two types of acquisition – overcapacity and geographical expansion.
In February 2001, Daimler Chrysler announced a 49% fall in underlying operating profits, 26 000 job losses, and 6 plant closures at Chrysler. Daimler Chrysler’s stock price plummeted from $108 in early 1999 to $42 in late 2001 and was at a similar level in spring 2004. A number of things had gone wrong, many related to differences in vision and values:

Opaque positioning. Daimler sold the deal as a merger of equals, but in reality it acquired Chrysler. Influenced by this, many of Chrysler’s best people left, and others ‘were fired … as the red ink flowed’.

Different styles and values. Chrysler had an open, empowered, fast-moving style, and was sales/marketing-focused. Daimler was more hierarchical, and numbers-driven, with a strong engineering bent.

Language barriers and lack of cultural understanding added to the difficulties: “The Americans earned two to four times as much as their German counterparts. But the expenses of US workers were tightly controlled… Daimler-side employees thought nothing of flying to Paris or New York for a half-day meeting, then capping the visit with a fancy dinner and a night at an expensive hotel. The Americans blanched at the extravagance.”
Slowness in integrating the two businesses. In 1998, Daimler Chrysler’s vision (called ‘Mission’) was ‘to integrate two great companies to become a world enterprise that by 2001 is the most successful and respected automotive and transportation products and services provider’. That certainly hasn’t happened yet.

Examples of how successful acquirers manage vision and values
IBM and Lotus. IBM decided to acquire Lotus in the mid 1990s, in order to build its software business through networks. After months of fruitless negotiations, IBM made a successful hostile bid in June 1995, paying $3.3 billion for a business with revenues of only $970 million a year, and modest profit levels. This was a ‘category expansion’ type of acquisition, but it also involved ‘people and technology’.
Both sides knew there was a big difference in cultures. Lotus was only 13 years old, irreverent, hard-driving and fast-moving. IBM was a long-established colossus. When IBM’s senior software officer first opened negotiations with IBM, he dressed down in jeans and T-shirt. To his surprise, Lotus did the opposite – their people wore dark suits and ties.
It was essential for IBM to retain most of the Lotus people. Lou Gerstner, the IBM Chairman, therefore promised to allow Lotus to continue as a separate entity, and kept the promise. Lotus retained the identity of a medium-sized software house, and using IBM’s cash and distribution muscle, increased its user base from 2 million in 1995 to 22 million in 1998. By 2000, many IBM people had moved to Lotus, and vice versa.
IBM’s strategy with acquired companies is to quickly apply its key metrics – e.g. customer satisfaction, market share, employee satisfaction, financial performance – and strategic planning processes, while being sensitive to cultural and branding issues. It has retained the Lotus brand.
IBM’s key values of customer focus, winning, respect for the individual and teamwork, are relevant to all acquisitions, but an effort is also made to retain existing positive values and processes in acquired companies.

BP Amoco. BP meets most of the criteria for the Committed Enterprise, and its acquisitions of Amoco and Arco are considered a success by analysts. Like Daimler Chrysler, these were partly ‘overcapacity’ acquisitions, partly ‘geographical expansion’. Aims were higher market share and reduced cost.
Amoco’s vision and values appeared bland and by no means identical with BP. However, BP studied issues of cultural fit closely before acquisition. Amoco was initially sceptical about some BP values, especially its environmental ones, but ultimately bought in, because BP people were so committed. BP adapted its values and business policies to incorporate Amoco views and thinking.

High technology companies. Microsoft and Oracle Microsystems have succeeded without making large acquisitions, not least because they are concerned at diluting their culture.

Cisco Systems has been built on friendly acquisitions, “designed to accommodate the people first, then the product”. It aims to buy people and technology, and bad chemistry with the management team or conflicting values are deal-breakers.

Five keys to successful acquisition
The KPMG study of 700 cross-border acquisitions identified five keys to success . They boil down to pre-planning – understanding what you are buying, and how you will generate extra value – and sorting out people and cultural issues early. “Deals were 26% more likely than average to be successful if they focused on resolving cultural issues.”
Sony’s 1989 acquisition of Columbia Pictures is one example of a failed deal that broke all five keys:
. Lack of pre-deal synergy evaluation. The vision – synergy between Columbia film and Sony’s existing music business – was vague. Film was a new business that Sony knew nothing about. There was a lack of due diligence, and Sony overpaid. Post acquisition, it discovered that the ‘production pipeline was nearly empty’.25

  •   Selection of unsuitable management team. Sony did pre-select the top management team, but put itself in the hands of traditional Hollywood big spenders. Subsequently there were many changes in key personnel.
  •   Cultural issues. There were problems of expectation and management style.
  •   Communications with the outside world and between Sony USA and Sony Japan were weak, and ‘the spectacle of Japan’s apparently most sophisticated company being eaten alive by Hollywood was reported with uncontainable glee’.
  •   Integration. There was little attempt to integrate Columbia with Sony’s existing American businesses in the early years. Sony paid about $6 billion for Columbia in September 1989. By mid 1993, it was losing $250 million a year, and in mid 1994 took a massive write-off of $3.4 billion, related to Columbia. The Columbia name has now been dropped. Sony is one of the world’s most exciting companies, and the original vision, which motivated the Columbia acquisition, may still succeed in the long term, but overall, this was a lesson in how not to do it.

Best practice vision and values in acquisitions
Identify cultural differences before acquisition. A cultural due diligence is at least as important as a financial one. The two can be run together. Questions to ask include:

– Do the two companies have similar or different visions?  If different, who changes? Is a totally new vision needed? To answer these questions, acquirers need to have a clear understanding of their real vision and values, and an ability to communicate them clearly. This understanding is often lacking.

– What are the values and practices of each company? Similarities, differences, conflicts? Speed and manner of integration?

– How does the acquiring company embed and measure vision and values? What changes need to be made, and how quickly?
– If redundancies or company name changes are planned, how will they be handled?

These are high profile tests of the culture of the acquiring company.
Companies in the same industry often have different cultures:
Loblaw is one of the most effective retailers in North America, with around 35% share of the Canadian grocery market. It bought Provigo, another grocery chain, mainly to strengthen its position in Quebec. Loblaw spent a lot of time in Provigo stores pre-acquisition, looking closely at both culture and performance. They concluded that the stores were well located but the people were not well tended. The CEO said, “It’s never sensible to make an acquisition and let the acquired company continue independently – in that case you’re just acting as a banker. You don’t need to change culture instantly, but must get in your own key managers early.”

Companies like GE or SBC with an excess of effective managers have a better than average chance of success with acquisitions, by transplanting their cultures:
At SBC Communications, we do look at culture pre-acquisition. We’re based in Texas, which is somewhat different from the West Coast (where we acquired Pacific Bell) and the mid-West (Ameritech acquired). In some cases senior executives of acquired companies leave, influenced by the size of their old company’s change of control packages, but this is not a problem for SBC because we have many excellent managers and promote from within.”

Walk away if culture clash is likely
A Chairman with a successful record of major acquisitions said: “Before any acquisition, we always find out about the target’s behaviour and screen its culture. If cultures are different, we would not acquire, because the idea that you can easily convert people is unrealistic.”

Much depends on the type of difference. If there are fundamental differences in attitudes to ethics, people, or customers, you walk away. Equally an organization built around highly incentivized individuals would clash with one committed to teamwork. But differences in values like fast/slow, entrepreneurial/cautious or innovative/pedestrian, can often be bridged, as at Diageo: Diageo was a merger of Grand Metropolitan and Guinness. Grand Met people were fast-moving, entrepreneurial and didn’t overanalyse things. Guinness people were thorough, analytical, and deliberate. They viewed Grand Mets as ‘hip shooters in a data free zone’, but were seen by Grand Mets as suffering from ‘analysis paralysis… and if they ever did make a decision, it was probably wrong’.

These value and style differences did prove bridgeable at Diageo, with Guinness people becoming more entrepreneurial, and Grand Mets more considered, though the Grand Met culture generally prevailed.”

In the Astra Zeneca merger, there were known differences in culture, but these were manageable: “Astra was more hierarchical than Zeneca, and Zeneca was more effective in translating values into practices. There were also differences between Swedish (Astra), UK (Zeneca) and USA (both Astra and Zeneca) cultures.
However, there were many similarities. Scientific thinking in US, UK and Swedish pharma companies has much in common (whereas German and Japanese have a different approach). And fit by type of drug area and geography was good. Astra Zeneca developed a new vision, and blended the values of the two companies into one.”

For big deals, agree the people, vision and values early
It’s preferable to decide who will do the top jobs before acquisition, especially in big deals between companies in the same industry. This prevents damaging clashes later, and, if fairly done, will reassure less senior managers, especially in the acquired company.
If there is to be a change in vision, it should be agreed in outline pre-acquisition.
Differences in values should also be discussed candidly, and a judgement made as to whether they can be successfully bridged. For example, Cisco Systems insists that the management of target companies believe in employee ownership.
For small deals, communicate acquirer’s vision and values, train and integrate
Small deals will not change the acquirer’s vision and values, and the only issue is how far and how fast to integrate.

Treat acquired people like long-term employees
This means fairness in deciding who will go, who will stay, who will be promoted and avoiding the colonial approach of always giving preference to your own people. Such preference is tempting because it is natural to opt for those who have already proved themselves and know how the company works. Some organizations, like Unilever and GlaxoSmithKline, use executive-search firms to interview and recommend candidates for each senior job in newly merged companies. This builds objectivity and makes it manifest.

Integrate acquisitions quickly
A key issue is the trade-off between speed of integration, which maximizes savings, and the need to build a common culture.34In practice, post-acquisition effort is often concentrated on cost reduction and revenue building, while vision and values are deferred. This can be damaging, and it’s essential to give vision and values the highest priority, since resolving them will make change easier, and quicker to achieve. Many CEOs said that they favoured much faster integration, to generate acquisition benefits early, and to reduce uncertainty.

 

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