Can Better Leadership Make More Acquisitions Work?

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With annual merger and acquisition activity in the United States averaging about 1.5 trillion dollars, that may seem to be uninformed strange question. Yet according to a number of recent academic studies, between 55 percent and 83 percent of mergers and acquisitions fail to add value to the acquirers.

Companies look to mergers and acquisitions for a number of sound business reasons. Among them are:

• To gain market share.
• To realize economies of scale especially in declining or stagnant markets.
• To gain access to products or services.
• To expand geographically.
• To facilitate a faster growth rate than through pure organic growth.

If the reasoning behind the acquisition is sound why is the success rate so low?

• A KPMG survey found that “83 percent of mergers were unsuccessful in producing any business benefits regarding shareholder value” (KPMG 1999).
• A study of 150 major deals led Business Week to conclude that ”out of 150 deals valued at $500 million or more about half actually destroyed shareholder value” (Feldman & Pratt 1999).
• A major McKinsey & Company study found that 61 percent of all acquisition programs were failures because the acquisition strategies did not earn a sufficient return on the funds invested.
• In the first four to eight months following a deal, productivity may be reduced by up to 50 percent (Huang & Kleiner, 2004).

It is not just large companies that fail at the acquisition game, small companies often witness similar results. Despite the reported failures, business combinations often do make sound business sense. It isn’t the deal itself that causes the failure rate to be so high; it is the outdated implementation strategies that companies continue to use.

Vast amounts of time and money are spent on an acquisition, nearly all of it in financial and legal due diligence efforts. Typically far less time and effort is invested in pre-deal implementation planning and strategy. Key people issues such as communications, strategic planning review and functional organization are treated as afterthoughts. Most feel “those things will fall into place when we close the deal.”

A merger of two companies is very much like any other partnership, just larger and more complex. There are cultures, values, work habits and attitudes that may be long standing and important to both parties. Failure to consider dealing with personnel issues effectively and early in the deal almost guarantees problems with retention of key people, productivity issues and, in worst cases, gridlock in the organization.

Companies that don’t have a clearly articulated strategic plan and clearly defined goals, communicated to all levels of the organization, with understanding and accountability at all levels, have severely reduced their chance of success.

These integration issues are compounded exponentially if everyone in the acquiring company is not “singing from the same song sheet.” They may well find over time that the acquired company’s team isn’t even in the same book.

In this situation, employees spend their time with rumors and fear of “waiting for the other shoe to fall.” Management then is forced into a reactive “firefighting” mode, rather than a planned and proactive goal oriented mode of implementation.

Frequently, management’s goals for the acquisition and its integration strategy (assuming that they exist) are not communicated below the top executive level, for reasons of secrecy. After the deal closes, the strategic direction and integration plans still are treated as closely guarded secrets with little if any communications directed at the department levels for a period of weeks or even months. No news is not seen as “good news,” and productivity and employee satisfaction is reduced.

The corollary to reduced employee satisfaction is, of course, reduced customer satisfaction. If you fail to clearly describe the reasons for the acquisition and its expected impacts to your customers, your competitors will certainly do so for you. And the picture painted by your competitors will not be pretty.

In-depth planning and communications throughout involving both the acquirer and the acquire is key. If communications must be restricted prior to the deal closing–as may be the case with a public company transaction–a planned communications strategy must be put in place prior to closing the deal, and must be implemented immediate following closure.

Pre-deal due diligence must include cultural and value studies as well as financial and legal. A strategy must be in place before closing to insure that a strategic partnership of cultures and values is formed and that everyone understands the reasons for the transaction, the impact of their contributions and their roles going forward.

In many business combinations, some employees with be laid off or given new assignments. Bad news delivered quickly and effectively can be more beneficial than good news delivered late and ineffectively. It’s all about establishing trust and credibility.

Thus the answer to the question posed at the beginning is: “Yes, if.” Yes acquisitions can be beneficial. But they will be only if:

• The acquirer has a clear strategic vision for the combined firm and a well considered integration plan;
• Both the vision and the plan are shared broadly in the acquiring as well as the acquired company; and
• Management rolls up its sleeves to actively lead the transition.

Martin Harshberger is President of Measurable Results LLC, Marty specializes in strategic planning, pre and post merger integration, as well as business process improvement. He can be reached at 662-844-9088 or marty@measurableresults.us.

Can the U.S. Furniture Industry Compete Globally?

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Here in North Mississippi that’s the question everyone seems to be asking.

My impression is that folks just don’t believe they can.

I witnessed the decline of the U.S. Steel Industry first hand. I also participated in the rapid market shifts in the computer and high-tech manufacturing industries.

There are many parallels with the furniture industry and those industries.

So to answer the question, can the U.S. Furniture Industry compete globally?

YES and NO!

If it’s to be business as usual the answer is no. We simply cannot do things the way they’ve been done the past fifty years and compete with the low cost imports from places like China.

Let’s face it, labor at an average of .69 cents an hour, no environmental or worker protection requirements, low overhead, add up to an insurmountable list of obstacles to address head-on and win.

I read recently that one Furniture Trade Organization plans to petition the government to put protective tariffs on imports from China. While action like this is certainly warranted to protect domestic manufacturers against “dumping”, that is selling their products below cost to gain market share, it is never a long term solution. The steel industry has secured government protection on several occasions and instead of using the time and money gained to revamp their operations, they did nothing different, and we all know the result.

So what’s the answer?

First it is to realize that foreign competitors succeed in our market because there is an opportunity to do so in the absence of differentiation.

They simply copy what we make, ship it here and sell it cheaper.

We then compete on that lower price point, and rather than differentiate, we chase them.

Just look at any furniture advertisement, is there anything other than low cost highlighted?

Delivery?
Warranty?
Customer service?
Quality?
Features?

All ignored, just cheap!

I read an article on this very subject a while ago, and the writer quoted the old comic character Pogo, “We have met the enemy and he is us”.

We need to level the playing field.

Start with understanding what we have that the off-shore producers don’t?

Location, geographic proximity
Design capabilities
Quality track record
Customer service
R & D
Higher productivity per worker
More and better automation

The Chinese have low production costs due solely to cheap labor.

Why do we allow them to drive us to compete on the one single advantage they have over us?

It’s time far a strategic renewal of the U.S. Furniture industry. We need to rethink the entire supply chain;

New business models
Supply channels
Manufacturing techniques
Innovation / information instead of inventory
Quick ship / build to order
Innovate or evaporate!

We need to move away from commodity products that are mass produced at lower and lower costs, and develop niche markets that will pay a premium for quick ship, some customization, and quality.

We need to develop strategic supplier agreements and take advantage of the furniture manufacturing clusters that exist around the country.

Simply put we need to develop a market that capitalizes on our strengths and exposes their weaknesses, not continue to try to compete head-on against their one strength.

The U.S. market for home furnishings is the largest in the world and it’s ours. We need to innovate and plan to drive that market, not follow others.

U.S. manufacturers need to take responsibility for their own destiny. We need to define the market, set the standards based on ours strengths and make off-shore manufacturers compete on our terms.

Will it work for the entire market? Of course not. There will always be buyers looking for “cookie cutter” product based solely on price.

But there also has to be a huge market looking for quality goods, with some level of personalization, delivered in a timely fashion. It exists for other products, look at the automotive industry. People buy cars to make a statement about themselves, do we think they wouldn’t furnish and decorate their homes with the same goal in mind?

We need to decide what market we’re in and strategically plan to dominate it.

Martin Harshberger, President of Measurable Results LLC, is a business consultant based in North Mississippi. He specializes in strategic planning, pre and post merger integration, as well as business process improvement. Before founding Measurable Results, Mr. Harshberger was CEO of two mid-sized private companies for nearly twenty years.

He can be reached at marty@measurableresults.us