Posted by - 2016-06-21 09:01:00

Thanks to The Frantics for this week's title (audio NSFW even though there's no dirty words or images).


Takeover. Acquisition. Consolidation. Whatever you call them, mergers big business and represent one of the most difficult and painful changes two organizations can attempt. Their popularity isn't hampered by an estimated 80% failure rate, so they must have some seductive appeal. What makes organizations think that they will make the successful merger when so many fail? Why do they fail so often? Is it a case of achieving failure by actively pursuing an impossible agenda? Or avoiding success by not taking necessary steps?

In a paper from 1998 called, "If Most Mergers Fail Why are They so Popular?" [1] the authors ask why more and more mergers were happening, and why they were considered such a good strategic option. It boils down to three key ideas:

  1. Increasing shareholder wealth is one motivation for managers, but not the only or most important motive.
  2. The optimism bias (though they didn't call it that in 1998). [2]
  3. Existing studies were wrong for various reasons, including asking the wrong questions, using poor methods, and lying with statistics.

The Urge to Merge

Broadly, we see a few categories of mergers, each with a different set of purposes, perils, and possibilities. Broadly, these are attempts to get a bigger market share, add new business capabilities, kill off competition, or to consume subject matter expertise.

Type I: Getting Bigger

Many mergers are attempts to grow by consolidating the market. Comcast and Time Warner are a recent example, and one fraught with problems. When two big companies merger - Type 1A mergers - the justification for the merger is often in the form of "job synergies." Everyone knows this is code for people who can be kicked off the combined workforce and products that can be killed off to save money.

It is rare that shareholders see any real benefits from Type 1A mergers, especially in the short term. The people pushing for a merger may be well intentioned, but shareholder wealth increases can play second fiddle to taking on a new professional challenge and personal financial windfalls. That optimism bias is a big problem here too: "I know 80% of mergers fail, but we're not those other people. We're better than them."

When the company being purchased is a lot smaller than the company doing the buying (Type 1B) the motivation is often to buy the customers or the territory. Cisco has a good track record in this kind of merger.

Type II: A More Capable Business

A merger like Microsoft and LinkedIn is not intended to result in a unified leaner organization. If the CEOs' aspirations are realized the organizations will remain largely independent while offering a tightly integrated set of services that cross all aspects of a person's professional life. Microsoft gains access to an entirely new dimension of people's professional lives, while LinkedIn gains access to provide professional services to everyone using Microsoft products and services.

In this kind of merger the companies are not trying to expand their existing markets, as much as they are trying to create an entirely new kind of market or capability. For another example, consider why Facebook bought Oculus Rift, a virtual reality hardware company. They've started off with a consumer product aimed at gamers, but that is not their end game. One way Google could try to compete against what the new "Microslinkedinoft" will be able to do in the next decade would be to something similar with a company like Atlassian. Google already has a social network and a (mediocre) office productivity suite. What they don't have are workflows, wikis, and project management products. (Note that we are talking about Google here, and not Alphabet.)

In this kind of scenario cost cutting and rationalization of business functions should usually be a distant second consideration when compared to corporate culture. Functions that appear redundant and identical on paper - HR for example - may play significantly different roles in the internal value network of each organization. Attempts to integrate operations are much more likely to fail when they clash with the corporate culture, because the corporate culture determines what infrastructure is used and how it is used.

Type III: Steamroll the Competition

Microsoft was once infamous for buying up potentially threatening startups and killing their products.

From a consumer point of view this type of merger can look a lot like Type 1B and Type IV mergers, but but don't be fooled. Competing products are almost certainly going to be killed off, but you're not likely to see any migration path or serious attempt at customer retention.

If you're being bought out this way go do something fun until the non-compete runs out, and then use the money to fund your next startup (if you're into that sort of thing).

Type IV: Acquire the Experts

Silicon Valley has pioneered a different take on Type III mergers in recent years - different enough to get their own type. Known as an acquihire, the little company is bought out as a way to rapidly develop or enhance business capabilities in a specific domain. You keep the people and the IP, but use them to improve your existing offers or to develop new products. Microsoft did this with Sunrise Calendar (a great calendar app for phones) with the intent to take the skills of the little competitor and bring them in house.

Considering Google again, they might look to extend their office productivity suite by Type IV acquisition of companies like Trello and Slack. If Facebook wants to get into this domain they would want to buy up a bunch of productivity apps as well.

Type V: Stripmining

We'd like to say this kind of merger is the stuff of urban legend, but the reality is that some companies take caveat emptor to heart. Some acquisitions are made solely to suck the life out of the purchased company, screw over the customer base and then abandon everything that made the company or product useful. This is a ruthless, unscrupulous, and predatory practice as far as we're concerned. It can also be profitable in the short term.

If this is your preferred type of merger, we're sorry you've sunk so low.

There Is Hope.

Consider what Microslinkinoft have said about their merger: the companies will remain largely independent, while working together to develop a new kind of offer to consumers - a Type II Merger by our reckoning. While we expect to see some consolidation at some levels, we also expect both companies to be very selective about where they integrate and where they remain aloof. In a traditional merger view HR departments are an obvious target for consolidation, so let's consider it in this case. Should the new organization even consider consolidating these redundant functions?

The way the organizations hire, promote, discipline, incentivize, and cut ties with employees is a reflection of the overall culture of each organization. Just because they have the same 'function' on paper doesn't mean they play the same role or provide the same value within each organization's value system. It could make sense to temporarily transplanting a significant number of mid-level leaders from one company to the other to cross pollinate. Once that's underway and working both organizations should start to discover ways to integrate their infrastructure to support new and better practices across both organizations. If the culture across those business units is compatible enough they might merge and consolidate over time. Alternately, they might discover that the HR function in each company performs a radically different service to the local culture, and remain separate beyond some basics, like contributing to a unified database of employee information.

About the Show

Each week Kevin Brennan and Julian Sammy talk about organizational change failures and failures to change. They explore doomed attempts to adapt to our changing world, what was messed up, and how disaster could have been avoided. They connect ideas that don't seem related at first glance, reframe the problems, and consider strategies and mindsets that you can apply in your organization.

Production Notes

This episode ran about 15 minutes longer than we intended, as we kept looking for a relatively simple takeaway for solving wicked problems. We didn't find one because, well, wicked problems don't work like that.

Thanks to the SGU folks and others who have given us feedback on the content and production so far. both have been helpful.

Links and References

We reviewed a lot of articles preparing for this show. Some are directly referenced above; others are discussed in the show directly, or informed the discussion,


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If you want to reach us individually, we are on witter @BAKevin and @SCI_BA, and on email at Kevin@Change.FAIL and Julian@Change.FAIL.

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