Is Your M&A Process Missing

This Critical Success Factor?

Up To 90% of Mergers and Acquisitions Fail to Deliver Forecasted Results

Most Merger and Acquisition due diligence processes focus on understanding synergies or market opportunities, identifying significant legal, environmental, and business risks, validating financial claims, and assessing talent—all very important due diligence aspects. Yet, according to a Harvard Business study, 70-90% of all mergers and acquisitions fail to deliver the forecasted results. In many instances, the transaction gets dissolved within a few years of closing.

M&A is an Emotionally Charged Endeavor

No matter how clinical and transactional the financial people attempt to make the process, M&A is a highly emotionally charged event. Ironically, this sword cuts both ways. Acquiring companies are feeling their oats. They are in growth mode and executing their strategy. Maybe they are taking out a competitor. Perhaps they are using M&A to enter an identified adjacent market or expand their presence in their current market. The very nature of the acquisition process creates a parent/child view of the world where the acquiring company is the parent. No matter how much humility the acquiring company attempts to portray, this view permeates all company levels. The due diligence process serves to validate how successful the acquisition will be.

I have experienced this phenomenon more often than I care to admit sitting in testosterone-filled conference rooms where words that will never be put in a presentation or spoken before general counsel are bantered about or implied with a wink. All the while, the numbers on the spreadsheet continue to grow. Cost reduction estimates. Revenues from new markets to be entered. And then there is the growth our name and presence will bring to bear.

On the other side of the table sits the company being acquired. They are attempting to select the best “partner” for their business. Maybe they are being driven by a desire to exit the market. Perhaps they are family owned and need a bigger partner to help fund their growth, or they are executing their succession/transition plan. Whatever the motivation, selling a company is a huge decision and requires a leap of faith.

As the above plays out at the senior levels, even more emotion plays out at the lower levels. Fear and positioning are beginning to emerge as people speculate on the changes the initiatives on the financial spreadsheet will bring. From “will our culture change?” to “will I have a job?” and everything in between are asked by people in both companies.

The Seven Losses People Experience

When a merger and acquisition is executed, people in both organizations speculate on what the new organization will look like. The phenomenon is called Anticipatory Grief  This speculation fuels the stages of grief to play out in the workplace. Denial, anger, bargaining, and depression are evident as people grapple with uncertainty. Make no mistake about it. Even the people in the acquiring company are going through these stages as they speculate on the transaction’s cost-cutting aspects.

Humans, and many animals, grieve anytime we experience a loss of any type. McKinsey published an article entitled “The Hidden Perils of Grief In the Workplace” in September 2020, describing the “losses” people experience during personal and organizational change.

I experienced this firsthand as the newly appointed president of an acquired company tasked with helping them integrate into our parent. It was a family-owned company that, although a PE firm had owned them before we acquired them, still had great pride in who they were, what they did, and the family that started the company some three generations earlier.

I quickly realized that before we could move forward, I had to help the organization deal with the emotions they were experiencing but afraid to express. At some level, all seven of the losses and the associated questions were present. The most prevalent being:

• The loss of identity-wondering if the parent company was going to change who they were (Who are we now?)
• The loss of territory-struggling with where do I belong? As they feared job combinations and reorganization (Where do I belong?)
• The loss of meaning-As they felt consumed by the new owner, who was a billion dollars larger (What is the point?)
• The loss of control-feeling overwhelmed as they absorbed all the new processes being imposed on them at great neck speed

The first three points consumed most of my time at the outset. It wasn’t until I had been the president for about six months when someone asked a question in our quarterly all-hands meeting that the emotions became apparent. I can’t recall the question, but my response was to ensure people that they were acquired because of who they were, what they did, and how they did it and that I was never going to forget that, nor would I let anyone else. Furthermore, we would comply with the home office, but we would not conform. We would not stop being who we were.   I can’t tell you how many people approached me after the meeting to express their relief. We went on to exceed the acquisition model expectations both in speed and deliverables.

M&A is a Change Management Event, Not Simply a Financial Transaction 

Once the emotional wheels start turning, which is very early in the process, both leadership teams lose sight of the fact that a merger or acquisition is actually an ENORMOUS CHANGE MANAGEMENT event that requires exceptional leadership to succeed.

Like mergers and acquisitions, change management initiatives fail at similar rates. According to a Harvard study, 75% of all change management initiatives fail at some level. McKinsey’s consulting group followed up that study with research indicating that “human and cultural issues” accounted for 70% of initiative failures. The unwillingness or inability to recognize, acknowledge, and address the enormous emotional component of a merger and acquisition transition dramatically increases the likelihood of failure.

Assessing The Emotional and Leadership Health of Both Organizations

The due diligence process needs to change to shift this mindset, and the HR and Change Management teams must take the lead. With all that is assessed during the due diligence phase, organizations fail to evaluate the Emotional and Leadership Health/Culture during the process. Knowing how people perceive the organization’s cultures in the following areas is a powerful antidote to prevent failure on both sides of the negotiating table.

• Respect For People Culture
• Emotionally/Psychologically Safe Environment
• Leadership Trust (at both the senior and frontline levels)
• Change Management Processes and shortcomings

Once these elements are understood, in both companies, the deal team and the integration team can assess the degree of fit between the two organizations and develop plans to navigate the emotional component of change that occurs in both companies.

You may be wondering why the acquiring company should also conduct an assessment. Here is why. In one company we helped with this process, we found that their people lacked trust in senior leadership and didn’t feel the company had a Respect For People culture. Additionally, their change management process was lacking in certain components. This would have been the acquiring company in the transaction. I am not sure the target company would sell to them if they had visibility into these cultural aspects. Nonetheless, if the integration team had this knowledge, they could ensure change management mitigation steps were in place to prevent a cultural class during the integration.

Here’s The Point

• Mergers and acquisitions are not simply financial transactions. They are emotional transactions that impact both organizations, and many of those emotions are negative.
• The emotions stem from people on both sides entering the stages of grief as they experience the sense of loss that comes from the impending changes.
• As a result, M&A should be viewed as a far-reaching and complex change management initiative, and that process should start with understanding both organizations’ Emotional and Leadership Health.
• Once understood, the change management process can be made more robust to help mitigate the risks and help leaders at all levels navigate the emotions of change (grief) both organizations will experience.
• Finally, the Change Management and the HR Teams must take the lead role to make the M&A process more effective.

Anthony Casablanca

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