Microsoft has stopped trying to go steady with Yahoo! and flirted a bit with Facebook. Mars and Wm Wrigley Jr are getting married. And Sprint and Nextel may soon file for divorce. Corporate deal-making, as we’ve seen recently, is a lot like dating and marriage. Success in forging a partnership has as much to do with propitious timing and mutual attraction as it does with adroit negotiating — and it’s often difficult to predict the outcome.
Illustration: Jayachandran / Mint
So, while Yahoo!’s CEO, Jerry Yang, rejected Microsoft’s latest offer, the companies could start bargaining again down the road, say people familiar with the matter. For one thing, Microsoft covets a partner to compete online against Google, and it understands that privately held Facebook is still growing up and not yet ready to head to the altar. Meanwhile, Yahoo!’s investors and even some employees were tantalized by Microsoft’s offer and are angry that the value of their Yahoo! shares has plummeted.
“Mergers go bad more often than they don’t, but mergers are also indispensable,” says Ted Rouse, a consultant at Bain and co-leader of its mergers and acquisitions practice. At least 50% of all deals fail to create meaningful shareholder value within three-five years, according to many academic studies. “But,” Rouse says, “it’s very hard to substantially grow a company and remain competitive unless you do deals.”
Executives who don’t overpay and who acquire businesses that are smaller than their own but in the same or related industries have the best chances for success. But even more important than a deal’s price tag, size or product synergies is people compatibility.
Executives who don’t conduct thorough “human due diligence” before completing an acquisition suffer steep long-term attrition, says Jeffrey Krug, an associate professor of strategic management at Virginia Commonwealth University. His research on 23,000 executives at 1,000 companies found that targeted companies lose some 21% of their managers each year — more than double the turnover experienced in non-merged firms — for at least 10 years after an acquisition.
Many failed acquisitions stem from problems that first surfaced at the negotiating table. The merger that created Sprint Nextel was hailed as a smart way for Sprint to quickly gain the scale it needed to compete against bigger rivals and become the nation’s No. 3 wireless provider. But Sprint’s slow-moving, bureaucratic culture clashed from the start with Nextel’s entrepreneurial style.
Sprint took a $29.5 billion (around Rs1.18 trillion, now) loss in the fourth quarter because of a write-down related to its Nextel business, and it is now considering spinning off or selling the business that was supposed to make it stronger.
No two companies manage employees and operations in precisely the same way, but the more their decision-making styles and values overlap, the more chance they have to benefit from a merger. Privately held Mars and publicly held Wrigley sell similar products and, unlike poorly matched Sprint and Nextel, share similar cultures. Both are family-run companies, “and that should help them respect one another’s traditions,” says Bain’s Rouse.
Parker Hannifin, the Cleveland-based industrial products manufacturer, has made around 100 acquisitions in the past 10 years, “and everything fits our core business and is something we know well,” says CEO Donald Washkewicz. In many cases, Parker Hannifin has acquired former rivals, “so we know the customers, the markets, and the margins we can achieve,” he adds.
He also strives to keep talent at acquired companies by communicating frequently with employees and sticking to an orderly integration process. He assigns an “integration manager” to each acquired company to get to know its managers and rank-and-file employees and to help them understand Parker Hannifin’s goals. He then sends teams of supply chain and sales managers, who share how they get the best prices for both supplies they use in manufacturing and for their own products. Finally, an innovation team urges acquired companies to launch new products to expand their units.
“We don’t try to ram our ways down everyone’s throat because that won’t fly, but instead try to get employees’ approval by showing how they can be even more successful (with us) than before they were acquired,” says Washkewicz. But he also doesn’t hesitate to replace managers who don’t get results.
When an executive he had assigned to a Swedish company Parker Hannifin had acquired disclosed that he had given up trying to persuade managers there to purchase some supplies from non-Swedish companies, Washkewicz assigned someone else to do that job. “They were sitting on $5 million in annual potential savings because they wouldn’t place a purchase order with a company outside Sweden, and we had to persuade them otherwise,” he says.
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