Here are the 5 pitfalls to avoid in mergers and the 3 A’s for success
If you’re contemplating a merger, be very careful about your human capital – whether you’re in government, a small business or a global company.
Investment bankers salivate over the prospect of new mergers, but senior finance executives need to listen to human resources experts to insure success.
Bad HR strategy means many mergers fail. All too often, the two cultures don’t make for a happy business marriage.
From 2005 to 2008, more than 50 percent of the largest mergers should not have been consummated, according to a 2010 Bloomberg report, “M&A Losers in $10 Trillion Takeover Binge Led by McClatchy, Sprint Nextel.”
The 53 largest businesses were considered sub-par just 24 months afterward. They include Boston Scientific Corp, McClatchy, and Sprint Nextel.
Now, they’re valued less than for what they when the deals were struck.
Yes, any financial decisions about mergers should be based on input regarding human sources. There’s another precedent for this precaution.
Hewlett-Packard and Compaq
Actually, in contemplating this topic, I was reminded of my 2002 Seattle-KING5 media column that warned about the Hewlett-Packard and Compaq merger. It simply did not make any sense. The cultures in such a merger were obviously doomed to fail, and it did.
She was eventually fired by HP. Later, it was difficult for me to refrain from writing a “I told you so” piece in 2004.
It seemed odd that some people had been dazzled by the sales pitch for the merger by HP CEO Carly Fiorina. For those people, she was a charismatic salesperson as Forbes’ top-ranked businesswoman.
You might recall her unsuccessful bid for the Republican nomination for president in 2016 and her 2010 failed campaign for U.S. Senate in California.
Her campaign for senate created a video touting her business experience at HP, but it neglected to mention her dismal record, especially her merger of HP with Compaq.
Why the merger failed
Initially, HP’s stock price dropped significantly despite good revenue and market share. It served one billion customers in 160 countries worldwide. Ranked no.14 among the Fortune 500, it employed 145,000 people and budgeted $4 billion for research and development.
HP was proud of its No. 1 market share in several products: Laser jet printers, disk storage systems, ink jet printers, UNIX servers, Windows servers, storage-area network systems, Linux servers, and notebook computers. Its printer market share was 47.1 percent. It ranked No.2 in handhelds, external RAID storage systems, and desktop computers.
But HP’s share price had dipped about 25 percent and the company did not appear robust.
Prior to the controversial merger, Ms. Fiorina was warned. Along with director Walter Hewlett, a son of one of HP’s founders, and 49 percent of HP shareholders, my media column raised questions about the merger’s feasibility.
The concerns: Merger opponents were extremely vocal, the HP and Compaq cultures were vastly different, and the latter’s reputation for quality wasn’t strong as HP’s. I had products from both companies and that was my assessment, too. In fact, my firm has had a myriad of printers – black and white and color. My HP printers had always performed better than others.
She had her ups and downs, including criticism for purchasing a $30 million corporate jet and her unsuccessful bid to buy the consulting business of PricewaterhouseCoopers for $18 billion a few years previously.
Pundits complained HP had lost its focus in competing with Dell and IBM.
HP’s $586 million profit for the fiscal third quarter ending July 31, 2004, which was announced on Aug. 12, was below Wall Street’s expectations. As Dell began its larger foray in the printing business, HP’s profit in its core strength, printers, dropped.
Ms. Fiorina made another misstep: She was openly critical of Dell’s approach in not investing in research. Ms. Fiorina touted HP’s niche as being between Dell’s so-called low-cost products and IBM’s emphasis on costly consulting and information technology services. However, Dell’s profit jumped 29 percent and IBM was also growing and announced plans to hire 18,800 workers in 2004.
HP was vulnerable because of its broad strategy in publicly taking on such venerable foes, especially when corporate and consumer spending on technology, in general, wasn’t robust. Plus, Dell had hired away Alex Gruzen, a HP senior vice president, responsible for HP’s notebook, tablet personal computers, and personal digital assistant division.
Merger fever peaked in 2007. But the next year mergers plummeted to $1.97 trillion in value.
Merger due diligence
Finance pros are naturally concerned about money. Also at-risk are credit ratings and the improbability of profits after a merger.
If you’re contemplating a merger – it doesn’t matter how big or small or whether you’re in the public or private sector – there are several precautions to take.
Yes, crunch the numbers. Perform forecasts. But conduct an HR risk analysis – strengths, weaknesses, opportunities and threats. If you decide to proceed, plan and execute your strategy.
There are at least five questions to consider:
- Are the cultures compatible?
- Will senior managers be compatible?
- Will you lose key talent?
- How can you be sure about financial sustainability?
- What about productivity?
Note: 60 percent of these pitfall questions are HR-related.
People-related issues are paramount. Employees are your human capital and should be treated as assets. If you don’t pay early attention to human-capital issues, you’re risking failure. There are many elements to investigate, such as employee morale, benefits and payroll management. Not to mention information technology issues.
Remember, your customers buy from you because of their relationships with your employees. If your employees are uncertain about their future, then your customers will become apprehensive about their relationship with you.
That’s because all customer-buying decisions are made on five value-motivating perceptions. My research shows 52 percent of customer buying decisions depend on what customers think about your organization’s leaders and employees, and their attitudes. (For more on these perceptions, they’re included in this article, “The Seven Steps to Higher Sales.”)
An unsuccessful merger hurts in employee retention. You must be able to thwart your competitors who will be savvy predators in recruiting your best workers. You’ll be forced to tell your employees about possible layoffs.
So, there are the three A’s for merger success:
Awareness. Properly assess the risks. As in the merger of HP and Compaq, it’s important to note it isn’t feasible to achieve success after launching such endeavors for five reasons:
1. Strategy and focus – public agencies and companies lose focus when the merging cultures aren’t compatible.
2. Synergy – firms at the opposite ends of the spectrum culture-wise, don’t function well as a unit, no matter how much overtime the CEO works. This also means employees don’t respond well to new leadership, which leads to a breakdown in communication and infrastructure.
3. Apathy – such internal challenges lead to ennui in company initiatives; nothing great has ever been achieved by a lack of enthusiasm or passion.
4. Decrease in competitiveness – marketplace forces seemingly weaken a company, such as HP, as it learned in facing its opponents, Dell and IBM.
5. Effects from macroeconomic events – terrorism and recessions, for example, hover as challenges. As a result, consumers and businesses will spend less on technology. Ask any government agency or business about 9/11 and the impact on their revenues.
Acceptance. Just as analysts were adamantly opposing HP’s focus and its inability to discern challenges accurately and to adapt accordingly, customers will likewise become indifferent about a merged company’s products and services.
The concept behind the principle of acceptance also requires resourcefulness in creating solutions to deal with reality, hidden or not.
Action. To sustain performance, implementation of an action plan requires a checklist of six key elements:
- Analysis by an astute analyst to ascertain strengths, weaknesses, opportunities, and threats
- Close monitoring and participation by top executives, especially during periods of change or unrest by stakeholders
- Prudent assessments of strategy and tactics combined with implementation by an outside participant – an assertive, objective traffic cop – to monitor and insure success in sustaining performance
- Due-diligence and patience so that not even small details are overlooked
- Accurate anticipation of the needs of customers
- Performance-based compensation
Avoiding the five pitfalls and using the three A’s for merger success will insure any company adapts extraordinarily well in a climate of change and uncertainty. But leadership must consult HR professionals first.
From the Coach’s Corner, here are links to articles about leadership:
Leadership: The Best 11 Steps to Become a Leader — Whether you aspire to become a leader or want to get better at leading people, it’s certainly a huge job. Here’s how to lay a foundation to become an effective leader.
How to Grow Your EI for Leadership Success — Emotional intelligence (EI) is important for communication and leadership. A person who has EI is able to evaluate, understand, and control emotions.
Leadership: How Leaders Employ 11 Strengths to Grow Businesses — Ascension to the C-suite doesn’t automatically qualify an executive as a leader. Leaders have 11 strengths that enable them to manage their companies for greater effectiveness and elasticity despite a fast-changing marketplace.
To Become a Leader, Develop Strategic-Planning Skills in 5 Steps — A salient characteristic of leadership is strategic thinking. If you’re ambitious, the ability to be a strategic planner is critical for your success. Here are five ways to achieve your goal.
For Promotion into Leadership, Develop 5 Personality Traits — In selecting candidates for leadership, the risks can be great for both the company and managers in lost time, effort, and money. Managers need certain traits to be promoted in leadership.
“Sometimes the poorest woman leaves her children the richest inheritance.”
-Ruth E. Renkel