Many large organizations that are facing volatile and stagnant markets in their existing businesses decide to acquire another organization to augment their strategy or compete more successfully. This is a major decision and a critical inflection point that needs to be navigated through with a lot of thought. Unfortunately, data suggests that many companies that acquire other companies do not succeed in capturing the value that they had hoped to in closing the deal. Why is this true?

Typically, the company that acquires fills the acquired company's board with its own executives in an oversight capacity. Media communications happen with a lot of fanfare and employee town hall meetings are conducted to reassure the staff of the acquired entity that all will be well. Transition managers check in and start integrating the systems and processes between both sides. However there are potential derailers that can negatively affect integration.

Post acquisition, the new management is typically bedeviled by five fundamental issues:

• Poor alignment between the entities
• Mindset of "We know best; remember, we acquired you!"
• Changing the natural rhythm of the acquired entity
• Losing sight of the acquired talent pool
• Not having the right management mix for the new entity

Let us take a close look at each of these issues.

Poor Alignment Between the Entities

Once the deal is signed and the reality of day-to-day operations creeps in, the acquired entity begins to feel resistance from its employees for most of the directives of the parent company. If left unattended over time, chaos and deep distrust ensue, leading to a complete breakdown. This could even cause bitter lawsuits. Instead of capturing additional value, the parent organizations face potential loss of value. In fact, this is exactly what happened when New York Central and Pacific railroads merged in 1968. Poor work alignment between the two organizations led to the merged entity filing for bankruptcy protection less than two years later.

Mindset of "We Know Best"

The parent company representatives, being the ones in power, have a deep sense of what has worked for them in the past and what has got them to where they find themselves. In a nutshell, this means a deep sense of entitlement. Consequently, standards from a different context are applied mindlessly to the acquired entity, creating a recipe for failure. In 1994, Quaker Oats, which owned the Gatorade brand, thought it could manage other brands and bought Snapple for US $1.7 billion, despite advice from experts against the idea. The result was that in just 27 months, Snapple had to be sold for a price of $300 million; a loss of $1.4 billion.

Changing the Natural Rhythm of the Acquired Business

The acquired entity has a certain rhythm that made it an attractive acquisition target. Once acquired, the new management team attempts to enforce a pace that aligns to the parent organization's strategic goals, typically at an ambitious pace. In doing so, there is a tradeoff where short-term interests of the parent organization take precedence over longer-term anchors of the acquired entity. Mandates blindly applied upset the dynamic that made the target company valuable to begin with, leading to the bleeding away of value. The Snapple acquisition was also negatively affected because the management of Quaker Oats tried to position Snapple into segments outside its existing areas without deep understanding. This misalignment of the marketing effort permitted rivals such as Coca-Cola to eat away at Snapple's market share.

Losing Sight of the Talent Pool in the Acquired Entity

People are the fundamental building blocks that make an organization succeed. Whenever there is an acquisition, there is a heightened need to work even closer with the acquired entity's employees. The bonds of trust that anchor employees to the older management need to be replaced with trust with the new powers that be. This is a journey of care and concern with each employee. For example, commitments made by the older management need to be honored wherever possible and if not very valid, reasons need to be provided for not doing so. In 2005, Sprint acquired Nextel for a price of $35 billion. But Sprint's management, which had a reputation for being bureaucratic, did not even attempt to connect to Nextel executives who were used to an entrepreneurial style of functioning. Within months of the acquisition, there was an exodus of senior and midlevel Nextel executives sharply impacting the likelihood of success of the acquisition.

Not Having the Right Management Mix at the Helm of the New Entity

Ineffective leadership in a far more demanding business context is the surest way to derail the acquisition. The challenge typically is that while a lot of analysis has gone into arriving at a target to acquire and the financial terms of the merger, very little due diligence is put into thinking through what are the skill sets that leaders who form the core team need to have. Leaders at the helm are more likely to be chosen for being favorably aligned to the powers that be in the parent company.

Obviously, this list of factors is not exhaustive; they are only indicative. Even more should be done. But the guiding principle behind every factor is really the willingness to carry as many stakeholders of both the organizations on board. This requires deep commitment and sensitivity to the fundamental principle of business: trust.

How Do We Deal with These Potential Derailers and Create a Successful Merger?

• Align business goals keeping customers in mind. The new management needs to pay attention to detail and ensure that ongoing projects and customer assignments are supported and executed with rigor. Communication between leadership and workers of the entity is ultra-critical. It is also important to make sure that customers don't see a drop in commitment and responsiveness from the staff of the new entity. No customer likes to hear responses like, "We just got acquired and are figuring out who is responsible to attend to your projects. As soon as our confusion is sorted, we will attend to your work." Align the goals of both sides in such a way that execution of ongoing projects and contracts is strengthened by the combined capacity. That way you ensure value is added to the customer relationships.
   
• Train Leaders to demonstrate humility. Leaders deployed from the parent organization to run and manage the acquired entity need to practice a deep sense of humility and understanding in order to win the confidence and support of people. This comes by being grounded and making people extremely comfortable to interact with new leaders. People should not feel rushed to accept the change at gun point. Leaders who interact with acquired entity have to be trained to be sensitive to the emotional needs of people.
   
• Keep the rhythm. Transition managers who oversee the integration process have to understand the periodic events in the acquired entity such as performance appraisals, employee training schedules, progression cycles, and so on, and make sure that the rhythm is not disrupted lest employees see it as a threat and lose trust. It is a common practice to run town-hall meetings with employees of the acquired entity and communicate the roadmap and address concerns. However, transition managers in partnership with HR need to go beyond rhetoric statements and proactively make sure that people processes are smoothly integrated into the new system.
   
• Keep people and talent in the center of all activities. When a company is acquired by another company, it is essentially an acquisition of people and their talent. It is more about the intellectual capital than about the hardware, real estate, and material. Therefore, for the combined entity to function at its fullest (new) potential, people and their talents have to be comprehensively integrated. This requires meticulously taking stock of the available talent pool along with technical and soft skills and mapping it to the larger canvas of the new organization. This has a positive spiral effect of opening up new possibilities (deepens engagement) for employees on both sides of the acquisition.
   
• Getting the right mix at the helm. For the combined engine to fire at full potential and create higher value, it is important to have the appropriate mix of leaders from both the entities willing to take the tough calls fairly in the interests of making the acquisition successful. People from the acquired entity look to their leaders for comfort, assurance, and protection. They also expect to see the new leaders demonstrating thought leadership and walking the talk on collaboration and working together.

In conclusion, organizations have a huge potential to emerge stronger, fitter, and, of course, bigger after mergers. They can achieve this by integrating processes together and making people and customers part of the story. Dilip Shanghwi, founder of Sun Pharma put it aptly: "Whenever you look at any potential merger or acquisition, you look at the potential to create value for your shareholders."

The new sum can certainly deliver more than its parts can individually.

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