Half of all mergers and acquisitions fail - and only 17% truly pay. For them to succeed, says Robert Heller, there should be a clear growth strategy, good management fit and the involvement of employees.
The mighty rush of mergers and acquisitions thunders on, and the buys get mightier yet. Billions ride on the success of deals such as Boeing and McDonnell Douglas, Ciba and Sandoz, or Varity and Lucas.
Yet there's no evidence that managements are any better at making corporate wedlock work. The rough statistic, that half of all deals flop, has become gospel. It's a gross underestimate: according to one highly believable study, a further third make marginal returns, and only 17% truly pay.
In the winning fifth, the hard-nosed merger-masters no doubt outnumber the soft-hearted. The hard line is exemplified by Lucas-Varity. This alleged Anglo-American marriage of minds looks more and more like a Varity putsch. Not one Lucas executive survives in the boardroom as American CEO Victor Rice, aided and abetted by Briton Tony Gilroy, forces through the process of cutting costs - and perhaps 3,000 jobs.
Hard-line supporters would argue that, since the axe is usually essential to takeover economics, the sooner it is wielded the better. At Lucas, however, the philosophy generated distasteful headlines about the 'culling' of surplus managers - as if they were so many diseased cows, rather than able, experienced human beings. In the takeover world, the newly unfashionable downsizing still rides high; and so does the potential damage to growth strategy.
If there is no such strategy, there should be no deal. M&A disasters are probable where there's no clear strategic intent; or acquirers know nothing about the acquired business; or the carrying cost appreciably exceeds the return on acquired assets; or buyers swallow a whole company, rather than buying or keeping only specific businesses which bolster their strategic aims. That's the key - how far the deal strengthens the chances of logically planned competitive success.
The three mergers above easily pass the knowledge test. The senior parties, Boeing, Sandoz and Varity, know their partners as intimately as their industries. Whatever is superfluous to the unions, moreover, will assuredly be ditched. Whether the deals proceed to cover the cost of capital depends, however, not just on immediate savings from squeezed operations, but on mobilising the joint human assets.
At Boeing that is especially obvious; it needs McDonnell engineers desperately to meet booming orders (737 production alone is rising by 150%). As Ciba and Sandoz unite under the Novartis banner, the human issue is partly job losses, but even more compatibility. Ciba had been committed to empowerment, leadership and total quality, while Sandoz is renowned for top-down, heavy-handed control: hard versus soft.
Senior Lucas management paved the way to their own disappearance by falling between the two stools. They neither fully developed the soft collaboration of the Japanese whose production methods they adopted, nor pushed hard enough for results. Nobody doubts Rice's downward push. But Gilroy has shown, with hundreds of project teams at Landrover and Varity, how well he understands that success is bottom-up as well as top-down.
The human aspects, though, start at the top. Nestle's Helmut Maucher, veteran of $18 billion of takeovers in a decade, stresses the all-importance of the top management fit in determining the value of a buy. The abilities of the acquisition's managers matter more than the balance sheet in adding future value. How these people are managed themselves, and how they manage others, must profoundly affect the outcome.
As Philip Condit, Boeing's boss, told the Financial Times, his mega-merger hinges on seeking hard results through soft people management: it won't work if Boeingites insist on 'everything being done their way and fail to recognise McDonnell Douglas's strengths'. That's an ever-present danger in takeovers, especially a disputed one like Granada-Forte: acquired dogs given a bad name get no chance to prove their goodness.
Frequently, excellent personal qualities have been buried under previous strategic misdirection and tactical ineptitude. A merger or acquisition, since it should be based on strong strategic perception, will in theory provide forward thrust. But that essential strategic rationale is too often hard to find. 'I cannot understand why some of these mergers have been done', says Astra's Hakan Mogren, referring to drug mega-deals like Novartis. He suspects that low-growth, high-cost operations will 'mix old problems with new problems and get drowned ... If you are growing at high speed, you can't do mergers and acquisitions at the same time.' His fears are real. If managements seek to compensate for inadequate organic growth by purchasing expansion, they will be disappointed.
In companies which want to be innovative, customer-focused, responsive and entrepreneurial, hard and soft must go hand-in-hand. Speedy decisions and fast action are hard elements which are crucial in lowering the cost base, clearing the decks, and setting the growth strategy in motion.
But decisions and actions will be more effective for being shared, and growth follows fastest if people are enrolled and encouraged. The iron fist needs more softness than a velvet glove.