Why Mergers Fail
from Summer 2000
by Julia Kirby
Mergers grab a lot of headlines, but the aftermaths often don`t. Many board members have found out the hard way that corporate marriages are far easier to map out on paper than to make work in practice. In fact, the majority fail, says Roy L. Manns, who has been involved in 14 mergers over the years, as a senior executive, founder, or board member. In a letter to the Financial Times earlier this year, Manns argued that a merger is, in fact, almost always an acquisition-and that acquirers assume that "because they were the ones with the money, they know better how to run a company."
Whose fault is that? The board`s, says Manns, 63, who serves as a "leader" of the PolyPops Development Foundation, a Florida group that he co-founded to support innovation in engineering and chemistry. "Directors need to spend more time directing a company and taking the calculated risks they are paid to take," he says. Intrigued, we caught up with him during a recent visit he made to Boston.
Can you give an example of how a particular merger you were involved in went wrong, and why?
In the late 1980s, Polyfiltronics, a company I had helped set up to make various materials used in life science laboratories, merged with Alcan Aluminum. I use the word "merged" very loosely.
At the wisdom of its board, Alcan had decided to diversify into fields other than aluminum. It decided to go into biomedical filtration and separation and started acquiring minority interests of up to 20% in a dozen companies. The idea was to nurture them, grow them, merge them, and then have a $500 million division in a new business area.
That sounds like a good business plan.
It was, on paper. The acquisitions went through the system quite well, and things looked promising. They set aside x number of managers, x amount of money. They even went to the trouble of setting this up as a separate operation in Cambridge, Massachusetts, well away from their substantial Montreal or Cleveland operations. But once the acquisitions were made, Alcan made what I would call a misstep. The first thing they did was to send in the bean counters to convert the acquired company`s accounting systems. Keep in mind that, while Alcan`s hope was to grow these into half-billion-dollar companies, most of the outfits they had acquired had sales from as little as $1 million to a maximum of $10 million. Now, suddenly, those companies were burdened with a very big accounting system that reported into the Alcan hierarchy, which was used to dealing with hundreds of millions, even billions, of dollars. They simply did not have the experience to deal with small entities.
This task alone took anywhere from six to 12 months, during which the newly acquired companies, including mine, had to spend so much time with the Alcan people that they didn`t spend as much time dealing with their customers or the products they were developing. Our company, for example, had to operate as though it was a multibillion-dollar concern, having regular board meetings and so on, and we only had a staff of about seven people. Needless to say, the companies weren`t producing the expected results. And by the end of the second year, Alcan had to start divesting, selling some of the companies back to the people they bought them from, and giving some away to a venture fund. Finally, they got out of it completely and pretty much wrote off their investment.
What happened to Polyfiltronics?
I got a new board of directors, bought out Alcan, and basically restarted it in 1990. We did well with it.
How typical is that story of other failed mergers and acquisitions?
I`ve often seen mergers go off the rails because the new company has to adopt the system of the parent company. And the classic examples come mainly from the accounting side, the bean counters. Here`s another way I`ve seen it happen. Many companies automatically check the credit of each and every new order coming in, even if it`s an existing customer. And what I`ve seen happen is that customers` orders are delayed because the new company`s accountants don`t have credit reports on all of them. Honestly, I`ve seen instances where the bean counters religiously applied and asked for credit reports from companies as large as Pfizer and institutions as established as Stanford University. Imagine you were at Pfizer and you`d been buying from a supplier for years. Suddenly it gets acquired, and now your order isn`t being processed, your credit is being checked ...
That can`t be great for morale among your salespeople.
Well, that`s exactly why your own people start leaving. If you have a V.P. of marketing who has built up relationships with customers and suddenly he is in the embarrassing position of saying, "Look, I know you`re a $20 billion company, but my new masters insist I have your credit checked before I ship the product."
But what`s the practical alternative? Surely achieving synergy demands that back-office operations be standardized?
Not necessarily. Look at Sepracor [a specialty pharmaceutical company in Marlborough, Massachusetts]. They`ve done some acquisitions, but instead of merging the technology they acquire, they`ve set up a separate corporation. They hold 40% to 60% of the stock, but still take the companies public. They are always there in the background but don`t meddle on a day-to-day basis. As a result, the new entity enjoys the protection of the large company without the interference. They`ve done three such deals and all three have been great successes.
How do corporate cultures fare in a merger?
What I have experienced is that the culture is changed very rapidly. But it`s the bureaucracy of the acquirer that sets in-so much so, in fact, it stifles the acquired company, and the very innovation and market leadership that was meant to be acquired is lost. I read a consulting study on mergers and acquisitions that made a good point: that the goal should be to bring the culture of the acquired company into the parent company, rather than the other way around. Actually, I believe the culture must be taken from both-because there`s obviously good on both sides.
Can you give an example of where you have seen an acquired company`s culture wiped out?
I would say that happened to Costar, a company where I worked as director of research. One of Corning`s big divisions, the life sciences division, had lost ground in the life sciences market, whereas Costar, in less than 10 years, had become the leader in the laboratory disposables market. Unable to beat it in the marketplace, Corning used its clout to acquire it. Corning saw it as a very strategic acquisition and paid a lot.
They did manage to treat it as a true merger for a year, even combining the name as Corning Costar. Even so, it became all too obvious that, gradually and surely, they were "Corning-izing" the company. By the third year, the Costar name-which was still very valuable in the life sciences market-disappeared. Certainly that was Corning`s prerogative, but the fact is they lost a lot of the people who would have developed the company, and they lost a lot of the innovation and new products that the company had been able to produce.
Why would a British acquirer make a difference?
Americans seem to have more of a ... how to put this nicely.... Well, U.S. companies spend a lot more time and energy planting their name on whatever they are acquiring. In Europe, with a lot of acquisitions you find very little name change. In fact, many companies in Europe still operate under their old names and you wouldn`t know they had a new owner. A classic success story is Britain`s Hanson PLC, which acquired something like 120 companies. I`ve met many of their presidents and have been surprised because, until they told me, I didn`t realize they headed Hanson companies. Hanson completely let them do what they were good at. All the new owners asked for was a two-page report on the first Monday of the month.
There are, of course, some good U.S. companies that have done acquisitions on a similar basis, but mostly in Europe you find there isn`t that ego problem of having to put one`s own name on the front door.
If you were on the board of a company today considering a merger or acquisition, what would you say to the other directors about how it should be approached?
The first thing I would say is that we need to recognize what we are acquiring and why. If we`re buying a company, we`re not just buying the name or the balance sheet of the company, but its reputation, the products it has developed, and its relationships with the customers. That`s what has made the company successful. And future success is a matter of blending that in with what the existing company already has, and then leveraging the whole to grow the company. We also need to realize that the customers, employees, and suppliers are the three groups of people that make a company grow. They matter more than what`s on the balance sheet and are what the acquirer must preserve above all else.
Then I would urge my colleagues to maintain some humility rather than assuming that, because we have more money in the bank, we must be smarter. We should accept that they know some things better than we do and should adopt some of their methods, as foreign as they may be to us. Even though we may be a larger company and have a higher stock valuation, the fact is, we weren`t able to do what the other company was able to do, and that`s why we are merging with or acquiring them.
Finally, I would stress the need for us to keep an eye on overhead. Another problem with acquisitions that we haven`t talked about is that overhead costs increase substantially …
That sounds crazy. One of the key justifications for a merger, after all, is economy of scale.
And yet it is a very common thing, because they put in place more front-office people than back-office people. I`ve seen it happen in at least three or four cases. And then, not only do costs go up, but people begin behaving differently, just to make sure they keep their jobs. They lose incentive and their productivity goes down. So the company gets the double whammy of low productivity and high overhead.
Anything else you`d like to tell corporate board members?
I would warn them to consider mergers and acquisitions judiciously, with the full awareness that this activity is a huge distraction for the board and senior managers of the company. A lot of things can come to a standstill in the three to six months prior to, and the six to nine months after, the combination. No one`s sure which projects to move forward on and which to put on hold. Inevitably, something is going to suffer-possibly a manager for one of the key products that was due to be launched does not get access to the CEO to authorize the funds to carry on ... that kind of thing.
In recent years, with more and more mergers occurring, there`s almost an invisible Berlin Wall that`s been erected between the board and senior managers on one hand and the customers on the other. The higher-ups are spending so much time on mergers and acquisitions that they leave it to lower-level staff to take care of ongoing business. Top manage-ment needs to remember that it`s the customers` buying their widgets or using their services that are bringing in the profits. And they have to keep their eye on the task of keeping them happy.
Three years ago, you sold Polyfiltronics again. How have the new owners done with that?
I`m still holding my breath. I sold it to a British firm, which may bode well. On the other hand, the success of the acquisition is up against very sizable odds for all the reasons I`ve mentioned.
