If you have ever been part of a merger or acquisition you will have experienced the ups and downs of the process.
There is the initial excitement of new opportunities or the fear of unwanted changes. This is usually followed by a period of waiting, and waiting, for the second shoe to drop.
“What will the new structure look like?”
“What new processes, products and people will I be working with?”
“Will I keep my job?”
As time drags out we begin to wonder if the people running the show have a plan to make it all work. There seems to be so much effort put into closing the deal, that once the deal is done it seems no one has thought about the next phase. Actually making it work!
To answer the FAQ on how to make mergers and acquisitions work, we need to look at the different scenarios. There are four general types of mergers and acquisitions which can be depicted as the merger or acquisition of;
· Two Elephants
· An Elephant and a Whale
· An Elephant and a Chimpanzee
· Two Chimpanzees
In this FAQ we are going to assume that there is always one party that ends up on top, even in mergers, usually it is whichever organization’s CEO because the new combined CEO.
To explain how to make these four merger or acquisition scenarios work we will be using the Integral Organization Model. For a primer on this model please see, “What is a Perfect Organization?”
The Two Elephants scenario is when two established organizations who operate in the same markets with similar offerings come together. When this happens the main value creation is based on creating internal synergies, also known as laying off people.
The honeymoon of this type of merger or acquisition is short lived. The two organizations are typically operating on the left hand side of the Integral Organizational Model. They have well entrenched processes, vertical functional silos and people who have been working there for years. The experience of how to play internal politics and turf wars is well established and after a quick get to know each other the positioning dance begins.
Everyone is focused internally, worried about their job and trying to come out a winner as the deck chairs are re-arranged. In this scenario the focus is internal, the WHY of the combined organizations is completely lost and even the WHAT takes a back seat while people realign the pecking order. [The WHY and WHAT refers to Simon Sinek’s Golden Circles of WHY, HOW & WHAT.]
This merger and acquisition scenario will achieve mediocre success as the combined entities use market power to hold on to their position in the market. There isn’t much to do here but to let the large bodies push their way through the corporate jungle. Trying to change their course risks being trampled under their feet.
If by some miracle the new combined CEO is operating from the All Different, All Needed level of development there is hope that they can re-direct the new organization on more than just a cost reduction path. One that creates something larger than 1 + 1 getting close to being 2. Here the CEO needs to follow the advice of Chip and Dan Heath in their book, Switch, which also uses the Elephant analogy in their model of, Rider, Elephant and Path. More information on this is covered in Where to Start.
But because of the same reasons as to why we hire the wrong leaders, the new CEO will more liking follow the path of My Way and entrench the operating style that comes from the left hand side of the Integral Organization Model.
If each of the two elephants were ripe for disruption before the merger or acquisition, the increased internal focus, consolidation of vertical silos, turf wars and politics has just taken the disruption danger up several notches.
An Elephant and A Whale
The Elephant and a Whale scenario is when two established organizations in different markets or the same market but with different offerings come together.
An example of this occurring is when a product manufacturer decides to expand its offerings by going into the services business. These are two very different business models. One is based on capital investments which are sold as volume products with the constant pressure to reduce cost such as labor, that is, people. The other is people intensive, where it is about maximizing the utilization rates of the people at the highest possible $/hour.
Many of the technology hardware companies have gone in to the services business, often at the expense of their product manufacturing operations. IBM ended up selling off their PC, Network and Storage divisions. Today these have become three growth areas albeit having morphed into smart devices, the Internet and cloud services. Telecommunication companies have made repeated attempts to shift into a service orientated business with little success. The competing business models keep getting in the way.
We saw this with the acquisition of EDS by HP to form HP Enterprise Services. Mashed together were the two different business models of people services through consulting, IT outsourcing, business process outsourcing alongside the realm of product manufacturing of printers and personal computers.
The splitting of these two business models into separate companies in 2015 was the right strategy to allow each to operate in their own environment.
While Elephants and Whales may both be mammals that’s where the similarities end. The combination of these two types of organizations only makes sense if they report to a holding company and are left to operate in their own separate business models.
Geoffrey Moore explained in his HBR December 2005 article, Strategy and Your Stronger Hand how these two models clash. The two diagrams below clearly show how the services organization, Complex Systems Model, just doesn’t go together with the product organization, Volume Operations Model.
An Elephant and A Chimpanzee
The Elephant and a Chimpanzee scenario is where the established organization acquires a start-up or growing challenger.
This scenario has a much longer honeymoon period because the Elephant is worried about squashing the Chimpanzee. This delay however makes the people in the Chimpanzee organization worried about what is going to happen.
Eventually, having paid a reasonable amount for the Chimpanzee, the Elephant starts to want to see a return on their investment. This is the danger time.
The Elephant bought the Chimpanzee, for one of two reasons, either it was to complement their current offerings or it was because the Chimpanzee was cannibalizing their offerings.
If it was because the offerings were complimentary then integrating the two organizations is the right thing to do. But if the Elephant organization is operating on the left hand side of the Integral Organization Model this integration will pull the Chimpanzee apart. As explained in “What makes a start-up successful?” everyone in the start-up is working together, and the WHY and WHAT of the organization are aligned. The leadership thinking may not be where it needs to be to scale up, but for now that doesn’t matter.
When the Elephant steps in to integrate the Chimpanzee organization the Horizontal Flow of the start-up is divided into vertical functional silos, development, sales, support, etc. This kills the start-up’s customer centric, outcome focused, collaborative working environment.
The start-up becomes a niche product inside a large organization and can only approach customers if they first gain approval from the Account Directors or the Product Marketing team. The start-up’s offering becomes another product line item in a laundry list of other products. Account Directors go catalogue selling, “hello, we have one of everything, what do you want, and we will give you a discount if you buy more than one product?”.
To maximize the value of a Chimpanzee that has a complementary offering the Elephant has to talk about how the combined offering enhances the total customers’ outcomes. This is the right hand side of the alignment diagram. When an Account Director talks to customers from the customer’s point of view, about how the combined offering delivers better outcomes for them, the acquisition makes sense.
However, if the Chimpanzee organization is cannibalizing the Elephant’s offerings then the Elephant needs to let themselves be eaten. This is not as dire as it sounds. If the Chimpanzee’s offerings are disrupting the existing market, then the Elephant needs to get behind them to not only disrupt themselves but also their competition.
This is not as easy as it seems. As explained in “What makes a start-up successful?” the Chimpanzee’s offering is cutting across the vertical functional and product silos of the Elephant’s organizations. The established organization’s key performance indicators are deteriorating in front of their eyes. This is because they now have the wrong key performance indicators.
The balancing act is how to maximize the revenue from the legacy offering while the cannibalizing offering is slowly building up the replacement revenue. The usual strategy is to over protect the legacy revenue. This leads to a bigger dip in the total revenue during the transition.
During the transition we need clear outcome measurements aligned with our mission statement. These are the new key performance indicators. We need to be measuring the number of customers gained and market penetration instead of total revenue. If we over focus on revenue, we will keep trying to sell the old products.
Therefore, as explained in “What is a Perfect Organization?” we have to operate the organization from a systems thinking and heuristics (goals with feedback loops) model. If we operate from the left hand sided fixed rules and internal measurements, we will not be able to make the constant adjustments required as we go through the transition. Adjustments like accommodating, on a day to day basis, the necessary changes to a departments KPIs as they see faster cannibalization than originally forecasted. This is good as long as our customer share and market penetration numbers are also up. It is a constant, ever changing, balancing act and unless we have ownership as described in “What is the missing ingredient for employee engagement?” we will fall off the trapeze.
The Two Chimpanzee scenario is hard to predict what will happen. The main governing factor will be egos. The egos of the CEOs and also of the research and development teams. The biggest danger is that the merger or acquisition descends into an arm wrestle over who is smarter.
Critical to making this scenario successful will be the alignment of the mission statements and how well they are entrenched in both organizations. The CEOs need to over-communicate that the reason for the merger or acquisition is that together they can be more successful in achieving their mission.
If either one of the Chimpanzee organizations is focused on the wonderment of the technology they have developed, and not what it does for their customers, then trouble is sure to follow.