Last month during the Microsoft Worldwide Partners Conference we hosted a panel discussion on M&A, presided over by myself and three of your Microsoft partner peers with experience in managing through what has often been described as one of the most unnatural acts in business. It was a lively discussion about the role of M&A in building a vibrant IT services company, and while we touched on some of the pitfalls in consummating a successful M&A deal, I thought the topic is so important that this would be an opportune time to highlight just how and why mergers and acquisitions can go awry.
And awry they do go if the business literature is a guide, with something like 50% to 80% of all mergers and acquisitions failing to live up to the intended goal. The reason cited most often for why M&A stumbles is the failure of planning for and implementing correctly the post-merger assimilation of cultures, people, values, attitudes and styles… what is called the soft side of the equation.
It’s an odd and intriguing twist of management fate that one of the most critical elements of a company’s long-term growth strategy is governed upside down. Most of management’s attention is focused on the upfront number crunching, due diligence phase of the project, which evidence suggests is one of the least likely areas where M&A runs afoul. The back-end—the post-acquisition assimilation phase of the M&A—where research suggests 65% of the failure occurs and where management’s experience and firm hand is needed, is what gets the short shrift.
Let’s be fair and not put all the blame for these troublesome failure rates on post-acquisition blunders. There are other textbook culprits eager to contribute to this dilemma, and sadly we’ve seen them all, and far too often. You would think that with all the real life experiences we’ve all encountered that we could maneuver around many, if not most, of these obstacles. But alas, this is not the case, and yet executives go on making the same mistakes, over and over again.
In no particular order, here are some of the most common pitfalls, some of which are so obvious that I hesitated to mention them, but their incidence of occurrence is so universal and so often that they bear repeating:
- Flawed corporate strategy by one or both companies, buying or selling for the wrong reason, and/or doing so out of desperation or fear.
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- Executive hubris – thinking the buyer and/or seller key executive is bigger, more important, and more powerful than the act.
- False, rosy-eyed, wishful expectations of a savings bonanza.
- Too little focus and effort on building a relationship with the seller and understanding/empathizing with their position and why they are selling. Remember it’s all about them, not you.
- Flying solo, trying to manage a long, complex, time-demanding process that novices never believe is long, complex or time-demanding.
- Relying too heavily on your lawyer, who in his or her role as counselor will often surface demons that are not really there in an effort to manage every risk.
- Not vetting a deal carefully for Strategic, Cultural and Financial fit, in that order, and only in that order.
- Getting cold feet, which is a natural reaction, and completely understandable, which is all more the reason you have to undertake an M&A for the right reasons and stick to a proven process.
- Surprises in the last 3-5 days before closing, when emotions are most fragile, and when a steady hand on the tiller is required to cross the finish line. This is the time to find middle ground. It’s not the time for a “my way or the highway” message.
- Getting deal fever as the buyer, again when emotions are high, or getting the deal done at any cost, will be deadly in the end.
- Talking yourself into believing you can build it for what you would pay to buy it. This is simply not true.
The consequence of failure for small-to-midsize IT services firms—without the financial reserves of their larger brethren, who can withstand an M&A miss or two and emerge humbled and bleeding but not broken—can be devastating. The question for these executives should not be whether to embark on an M&A strategy, but how to do it right, which is the topic of our next column, or for those can’t wait, you can always contact us.
Mike Harvath is CEO of Revenue Rocketsm Consulting Group, an IT services growth consultancy. You can reach Mike at 612-298-7737 or at mharvath@revenuerocket.com.
Next topic: So you want your M&A to succeed. Here’s how to do just that.
