In a recent blog post, we explored the reasons why a sizable number of M&A deals fail to complete every year. As discussed in that post, the closing of an M&A deal does not necessarily announce the success of a transaction. In fact, as high as 60% of M&A deals fail to deliver value even after a victorious closing, as an A.T. Kearney study shows. The Harvard Business Review reports that the failure rate of an M&A deal falls in the range of 70 – 90%.
Extensive research has been conducted to locate the elements that are fatal to M&A deals post-closing. With the surging interest in tech M&As, people have started to look at the reasons why the high death rate has also translated to the tech industry. While numerous factors can be named, the consensus among commentators directs our attention to mistakes in post-M&A integration of culture and business.
Company culture is the soft metric that defines the relationship between employees and drives them to achieve business goals together. This is of critical importance when it comes to tech M&A, where, most of the time, the ability to innovate, as embedded in the target’s culture, is one of its most valuable assets. Thus, maintaining the innovative spark of the target while integrating it into the acquiror firm presents an extra layer of complexity in a tech M&A deal.
A common mistake observed by Chris Barbin, CEO of Appirio, is that companies usually spent most of their resources mapping out cultural alignment in the due diligence stage and the early stage of the deal, but quickly lose sight of this issue as they became distracted by day-to-day operations. Even if the management did not allow the culture integration to fall by the wayside, too often, they focused on the wrong things, such as whether employees can wear jeans on Friday, rather than the underlying management practices and working norms, as reported by McKinsey & Company.
Botched business integration
After an M&A, product ownership can be easily transferred, but the unity of people and process requires a great deal of execution, the lack of which Barbin identifies as the biggest cause of most failures. The extent of execution covers implementing integration of every aspect of the business, from financial systems and HR to product portfolios and sales compensation, which is a different job from running the business.
Besides the amount of work, business integration is challenging as it also requires the unifying of the business models and strategies of the two companies. In a tech M&A deal, a typical question the acquiror management may face is how to bring comfort to a target employee who now has to adjust his or her mindset from being a star in a growing successful start-up to becoming just one of the many employees in a big corporation?
At the leadership level, Barbin suggested that management from both sides should stay focused on the reason that brought the two companies together in the first place and to ensure the delivery of that promise. At the same time, James Fillingham, head of transaction service at PwC, pointed out that it is crucial to retain talented employees at all levels and what makes them special, as it allows the merged company to preserve the ability to innovate and really derive value from the acquisition.
As a recent BCG report suggests, buying high-tech targets has become an instrument of choice for companies across industries to boost innovation and access the technologies which can advance their businesses. To capture and realize the value of tech M&As, it is important for companies and investors to look through the potential of the deal presented on paper and think about the challenges post-M&A to ensure the initial good intention and planning are carried through.
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