It was a lively discussion about the role of M&A in building a vibrant IT services company and we touched on some of the pitfalls in consummating a successful deal. I thought the topic was so important that this would be an opportune time to highlight just how and why M&A can go awry.
And awry they do go if the business literature is a guide, with between 50and 80 percent of all M&As failing to live up to their intended goals. The reason cited most often for why these deals stumble is the failure of planning for—and the inability to correctly implement— the post-merger assimilation of cultures, people, values, attitudes and styles. This is what we call the soft side of the equation.
It's an odd and intriguing twist of management fate that one of the most critical elements of a company's long-term growth strategy is governed upside down. Most of management's attention is focused on the upfront number-crunching, due diligence phase of the project, which evidence suggests is one of the least likely areas where M&A runs afoul. The back-end—the post-acquisition assimilation phase of M&A, where research suggests 65 percent of the failure occurs and management's experience and firm hand is most needed -- is what gets the short shrift.
Let's be fair and not put all the blame for these troublesome failure rates on post-acquisition blunders. There are other textbook culprits eager to contribute to this dilemma—and sadly we've seen them all and far too often.
Here are some of the most common pitfalls, in no particular order. Some of them are obvious, but their incidence of occurrence is so universal and frequent that they bear repeating:
- Flawed corporate strategy by one or both companies, buying or selling for the wrong reason, and doing so out of desperation or fear
- Executive hubris; thinking the buyer's or seller's key executive is bigger, more important and more powerful than the act
- False, rosy-eyed, wishful expectations of significant savings
- Too little focus and effort on building a relationship with the seller and understanding/empathizing with their position (and why they're selling). Remember, it's all about them, not you
- Flying solo; trying to manage a long, complex, time-demanding process that novices never believe is long, complex or time-demanding
- Relying too heavily on your lawyer who, in his role as counselor, will often discover demons that may not really be there in an effort to manage every risk
- Not vetting a deal carefully for strategic, cultural and financial fit(in that order, and only in that order)
- Getting cold feet, which is a natural reaction and completely understandable. It's all the more reason you have to undertake an M&A for the right reasons and stick to a proven process
- Surprises in the last three to five days before closing, when emotions are most fragile and a steady hand on the tiller is required to cross the finish line. This is the time to find the middle ground. It's not the time for a "my way or the highway" message
- Getting deal fever as the buyer—again, when emotions are high—or getting the deal done at any cost, will be deadly in the end
- Talking yourself into believing you can build it for what you would pay to buy it. This is simply not true
The consequence of failure for small-to-midsize IT services firms, without the financial reserves of their larger brethren who can withstand an M&A miss or two and emerge humbled and bleeding but not broken, can be devastating. The question for these executives should not be whether to embark on an M&A strategy, but how to do it right.
I’ll discuss that in my next post, but in the meantime you can read an article that appeared in Redmond Channel Partner magazine. Or, you can just call us if you have any questions on the topic of M&A.
Mike Harvath is the President and CEO of Revenue Rocket Consulting Group, a Minnesota-based IT services growth consultancy firm specializing in developing organic, acquisitive and partner expansion growth strategies. He can be reached at [email protected] or 952-835-2333.
