Monday, December 6, 2010

The Invisible Hurdles of Acquisitions

You must have heard about it or you have lived through it yourself. The selected Company is a target for acquisition. Financials are calculated. Consultants and lawyers are paid huge fees. The acquisitions is completed. Now what?

The reality comes into question. The details are not thought through. Synergies from the paper do not materialize. Employees live in uncertainty for many months. Nobody is sure about the future vision, strategy or structure. Original top management is no better off, as the information embargo continues towards them as well. The conquerors do not trust the "old guard". They better exchange them. New management team comes to rule. Neglecting all the good and bad things from previous leaders. Links to customers, consumers and brands heritage are broken. Uncertainty and unclarity begins to prevail.
Why the top leaders did not properly think about the people and cultures involved? Why they did not value the experience and roots of the target company? Why only the "hard" financial risks have been considered?

According to official data up to 70% of all mergers and acquisitions do not meet financial expectations because of people factor. Either the key employees leave and keep the knowledge to themselves or different company cultures stop them to utilize their knowledge and experience. Many top people do not manage to accept the new management style or they struggle with conflicting management objectives. The pain begins. 2+2 equals just 3.

Fortunately there are leaders who put the consumers, customers and employees first. Like Mars acquiring Wrigley or P&G acquiring Gillette. These belong to a small group of about 17% of all transactions that bring ROI back to shareholders. They can be happy not only that the stock price grows, but the brand equities are further built, customers are kept satisfied. The drivers of success of  the successful cases lay not just in their high professional know-how in business and people side. "Gillette and P&G had similar cultures and complementary core strengths in branding, innovation, scale and go-to-market capabilities, making it a terrific fit,"as P&G chief executive A.G. Lafley summarized in 2005. Last but not least they benefited also from the fact that one American Company acquired another. Americans understand their own business language.

It will be interesting now to observe the outcome of PepsiCo acquisition of Russia's Wimm-Bill-Dann Dairy and Juice Company from Dec.2nd at $ 3.8 billion.Will it belong also to the successful 17%? Yes, looking gorgeous on the paper. PepsiCo becomes the largest food-and-beverage business in Russia, and it also strengthens its position in fast growing Eastern European and Central Asian Markets. But how will American direct and transparent, quarterly results driven PepsiCo culture cope with Russian hierarchical, relationships to government based Company mentality?

The value and volume of M&A transaction is much lower nowadays during crisis, however the successful companies continue to look for their targets. Procter&Gamble's CEO Bob McDonald during his September 2010 visit of Romania proclaimed that he is interested in acquisition of Beiersdorf if the price is right (Beiersdorf market capitalization estimated at $ 14.7 - 15.3 billion). Steve Jobs's Apple has according to official declaration from this October available $ 51 billion for acquisition of another company. Knowing Steve's art of making things happen right we will learn soon about the target. He is known for his PR announcements for things to come.

Successful companies understand that if they want to keep the momentum, organic growth is not enough. If they want to further build their competencies and competitive advantage in technology, if they want to expand geographically or just capitalize on synergies, they have to keep looking for their targets. But only if they manage the people side well, they can hope to achieve the desired 2+2=5 effect.

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