The Merger Myth

By: John Grinnell

Recently I spoke with a friend in the financial services industry whose company had announced “a merger of equals.” Such a merger is a big deal. Having assisted clients over the years with this type of leadership challenge, I asked her what they were doing to prepare people. She said, “John, we are all over that--our CEO has instructed us to get close to our people.” It’s one of the dumbest things I’ve heard very smart people say. The approach sounds logical, but it’s also a key reason 83% of mergers and acquisitions fail to deliver expected results (KPMG study, MoneyWatch, April 2012).

I’ve heard all the talk about multiples, competitive edge, market dominance, technology capture, culture compatibility, etc.—all good business thinking that we find at the best MBA schools. Few savvy executives go into a merger without having done their homework, run it through their financial models, and performed a detailed due diligence. So why do so many fail?

It’s a myth that joining two organizations is primarily a quantitative-analytical and rational process. The greatest risk is managing the psychological and social aspects. Hypnotized by the financial opportunity and perhaps the balance-sheet risk, executives often look in the wrong direction and ignore the key factor that will bring life to their investment—the people! For employees of an acquired organization it is one of the most anxiety-producing events in human experience. The acquired employees’ fear of being “not known” is palpable, and many executives and investors fail to see this until the best and most talented start walking out the door.

People within the acquiring organization remain relatively comfortable in their emotionally stable “pasture” of being known by those in authority. These executives, managers, and even the lower-level high potentials still feel safe, as executives in control who determine their fate know them well, many on a first-name basis, but this is not so for the acquired. The emotional instability of the acquired sets the psychological stage for a feeding frenzy by headhunters. This is the real risk—when newly acquired talented employees’ fears are eased by headhunters hired by your competitors. Picked off one by one, the REAL VALUE of your acquisition vanishes—poof! You can argue and rationalize all you want, but when the solid performers start walking out, slow death (entropy) sets in and it is so gradual you may not even notice until it’s too late. Many executives either don’t know this or, as in the case of my friend referred to above, they know, but receive bad advice as to what to do.

What to Do
  • Know that your biggest challenge is to build trust and security with the people of the organization you are acquiring. Before the ink is dry, this must be talked about and planned for EARLY in the process. It is best done while you are speculating about the finances, conversion, and new structures.
  • After the strategic and financial opportunity is clear, quickly begin doing a “human due diligence” of the organization you are acquiring. We have developed a process we call Talent Mapping™ that is an efficient way to work this out. It’s particularly important to understand the folks down in the organization who are key to its success, particularly the younger talented ones, those whom the headhunters will target first.
  • Tell your executives to cross the divide and get close to the acquired company’s key executives and the people that work for them. Sending in HR and Finance is not enough. All executives should be heavily involved.
  • Work at getting close to key mid-level people of the organization you are acquiring. You must quickly build the bridge of relationship before you bring on heavy new demands. The reason performance usually wanes right after a merger is because people do what I call “turtling,” i.e., keeping their heads down due to fear of making mistakes and not taking action until they feel respected and trusted. To return to high performance faster, pay attention to building relationships. It’s the best investment of your time, reducing the cost of the lost opportunity that can result from sluggish execution.
  • An effective tactic is to select groups of 12 to 15 high potentials across key areas. Immediately engage them in an ongoing leadership development program that is aligned with the new strategy, mission, and values. If we are involved we recommend that they meet one day per month for ten months. The group should be staffed very thoughtfully. Half the group should be from the acquiring organization and the other half from the acquired. The focus should be first on developing trust among this mixed group and second on improving their ability to scale their leadership. Make sure to bring in the CEO and senior executives of the acquiring organization to talk with the groups through informal conversations (no PowerPoint presentations). Know ahead of time the questions people care about. Larger organizations can do multiple simultaneous groups. Even if you have an internal training and development group, consider bringing in an outside facilitator that will be perceived as more neutral and agenda-free. Money spent on this type of engagement is a great investment, especially during a merger. If you need a justification, the organization’s financial types should be able to quantify this approach and show how it will reduce the overall cost of replacing lost talent.

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