According to authors Chip and Dan Heath, authors of Decisive: How to Make Better Decisions in Life and Work, over 80 percent of merger and acquisition decisions end in failure. There’s been a lot of discussion about why that is. I believe that one primary factor contributes to this monumental waste: lack of strategic relationship alignment. We must change the compensation and culture of M&A deals to reward focus on relationships – before, during, and after the transaction!
To get a clear picture of how a lack of focus on strategic relationships harms M&A outcomes, consider the example of two companies with different distribution models. Company A, which sells predominantly via a direct sales force, buys Company B, which sells through channel partners. It’s easy to see that sales management is going to need to resolve that conflict once the acquisition takes place. What’s more difficult to see is the relationship conflicts that will ensue. Company A has a relationship with end customers. Acquired Company B is limited to relationships with distributors. Their distributors have relationship with end customers. Blending those two company’s customer relationships into a harmonious new status quo will not come easily, as neither company has experience with the new type of relationships required. Without conscientious attention to strategic relationship alignment, a rough road lies ahead.
Three Stages of Relationship Alignment
Few dealmakers look at relationship alignment in the pre-acquisition due diligence phase, or during the post-acquisition integration phase. And yet, unless three stages of relationship alignment are executed well, that M&A initiative is likely to join the 80 percent that fail. Here are the three stages:
1. Awareness of potential conflicts. Relationships take place between individuals, not logos. Strategic relationships have to be based on mutual exchange of value, and must transcend any single transaction. As transactions accumulate, relationships grow to truly transform both parties. As a party to a proposed merger or acquisition, are you truly aware of what potential relationship misalignments may result? How do you know?
2. Assessment of gaps. The goal of any gap analysis is to figure out what is needed to get from the currently state to the desired outcome. Gaps in strategic relationships must be identified, as well as weaknesses where organizational roadblocks, such as functional silos or strong personalities, might block the potential parties from success at achieving aligned relationships. Is the gap between current misalignments and the desired alignments bridgeable? Do you believe with a high degree of confidence that you can in fact, close the gaps?
3. Development of a viable execution plan. What will it take to resolve the conflicts, to close the gaps? Do you truly believe that you have an execution plan to achieve that goal? Creative thinking will not be enough. It takes analytical rigor and a consistent execution plan to reach the desired state of strategic relationship alignment.
Beat the Odds with Pre-Mortems
That 80 percent M&A failure rate could be substantially reduced, I believe, if all parties—including the advisory firms—focused more energy on a pre-mortem analysis of all that could go wrong with the integration of the organizations. The key players must find the intestinal fortitude to raise yellow flags of “I have a concern here,” as well as ultimately the red flags that say, “I assure you this is going to cause a problem.” Pre-mortem discussion focused on the strategic relationships affected by a potential M&A event can effectively prevent expensive failure down the line.
Imagine how the sad tale of Quaker’s purchase of Snapple could have been rewritten with some serious attention to pre-mortem exploration of potential relationship landmines.
Quaker Oats successfully acquired the popular sports drink Gatorade in 1983. A decade later, it thought it could repeat that success with the new consumer darling, Snapple. Frequently cited as “the worst acquisition in recent history,” Quaker Oats Company sold its Snapple drink business in 1997 for $300 million, $1.4 billion less than Quaker paid for it in 1994.
In part this memorable failure has been attributed to poor timing: Snapple had risen in value by pioneering the market niche of fruit and tea drinks, but that arc was slowing just as Quaker made its move. Hubris also had a role in the failure; Quaker underestimated the difference between making sugar water, and the very different process and infrastructure needed to produce healthful fruit juice tea blends.
But most significantly, Quaker fumbled relationships. Quaker was highly regarded for its skill in distribution to supermarkets, but that was irrelevant to the Snapple business, where more than half of sales were made via independent distributors to C-stores and gas stations. Quaker failed to build the new relationships it needed to stop the losses. Its book value sank $1.4 billion in just 27 months. That’s a loss of $2 million each day Quaker owned Snapple. They lost $57,000 dollars an hour!
Do you think a pre-mortem analysis of their “relationship bank,” might have helped bring these issues to light? Would there have been billions of dollars of corporate value preserved? I propose the answer is yes.
Culture and Compensation Must Change
To increase the odds of a successful merger or acquisition event, strategic relationships must be considered before, during, and after the event takes place. In my experience, relationships often receive only cursory attention in most M&A discussions. What is required in considering the relationship effect of any transaction is what I refer to as the three-legged stool: creative thinking, analytical rigor, and consistent execution. Relationships must be dead center on the radar. Investment bankers and M&A advisors must evolve their metrics and, candidly their compensation to a longer-term lens regarding strategic relationships. Unfortunately, today, many are paid on the transaction, not on the transformation of value. No one is currently questioned, measured, or paid for insuring that strategic relationship alignment is prioritized before, during or after the deal.
If we want to see the tremendous waste of value in contemporary mergers and acquisitions turned around, this culture must change. If we want to see 80 percent success rates instead of 80 percent failures, we must demand compensation that rewards participants for focusing on strategic relationship alignment in mergers and acquisitions.
- Recognize that there are three stages to relationship alignment that must be executed well to avoid M&A failures: Awareness of potential conflicts, assessment of gaps, and development of a viable execution plan.
- Use pre-mortem planning to identify concerns in time to address them or scuttle the deal if they cannot be resolved.
- We must change the compensation and culture of M&A deals to reward focus on relationships.