It seems like everyday you pick up a newspaper you read about companies merging, one company buying out another, or selling or spinning off various parts of their business.
I read somewhere that more than 60% of these mergers, buyouts, and such end up in failure. I'm sure that this figure is somewhat inflated because there are situations where one company buys out another company that's a "basket case" and the chances of success are pretty slim. But even the success rate is not that great when two successful companies merge.
You have to wonder why it happens that way, because when you look at these proposed mergers, on paper they all appear to be pretty good fits. For example, their product lines may complement each other, the merger may make it easier to expand into other markets, or by merging they may be able to reduce overall costs, etc. It also looks like a "no brainer."
So what could go wrong? Let's look at what often happens in these situations.
Let's say that Company A buys company B. Both are successful companies, both have excellent management, the purchase price is reasonable, etc.
Let's also say that the strength of Company B pretty much complements the strength of Company A. So you would think that the smart thing for the management of Company A to do would be to take their time, study the organization structure of Company B and maybe make some adjustments where there are overlapping areas. Further adjustments would only be made if they would clearly strengthen the organization without destroying what has worked successfully in the past. This is what I call the velvet touch.
Unfortunately, this is not what happens in a typical merger. What happens is just the opposite. The takeover company, in our example Company A, takes what I call a "meat axe" approach to the organization of Company B.
In this approach the key people in Company B's organization are replaced by people from Company A. This usually is rationalized by the management of Company A by saying that they can be more effective by using people they know and are comfortable with. How cozy.
To me it's plain idiotic to replace a team of people who have proven that they can run an operation successfully with an unknown quality. This reduces the chances for success for no reason other than to be more comfortable.
Many years ago I was a plant manager of an excellent running plant. The No. 2 man, who had a lot to do with the success of the plant, got promoted. His replacement was an excellent man, smart and very aggressive. He wasn't on the job more than four hours when he wanted to see me. He came into my office and proceeded to tell me about all the changes that he wanted to make. I sort of egged him on about any other changes he had in mind, and consequently the list got pretty long.
I told him that the plant had been operating very successfully for a long time and that he should take more than four hours to study how it worked before he proposed making any changes. As a matter of fact, I told him to take a month, get familiar with the operation and during that period I didn't want to talk to him about anything to do with the plant operation. If he wanted to talk about golf, the family or anything else other than the operation of the plant, that was fine.
After a month he came back into my office and we had our discussion. I have to give him credit for keeping an open mind because it became quite apparent when we started talking that he really tried to find out how the organization worked and began to understand why things were done the way they were.
He still had some proposed changes he thought would improve the operation. I thought his suggestions made a lot of sense. Later, there was no problem incorporating the changes he proposed because he had by then developed a good working relationship with the people involved.
What happened here, although on a smaller scale, is basically the way I believe a merger should be handled, especially when you are talking about the merger of two successful companies.
Successful mergers are usually characterized by their smooth almost uneventful transition. Mergers that use Attila the Hun tactics, while dramatic and ripe for media attention, almost always end up in failure.
Mergers and takeovers will continue. But I think it is important that the board of directors involved be concerned with not only the financial aspect of the proposal but also a transition plan that maintains the integrity of the target company and supports the velvet touch approach. o
- Stephan Sharf is a formerCorp. executive vice president for manufacturing