Fixing Broken Companies
We are encountering a new phase of M&A activity which, if the outcome of previous occurrences of the same activity is to be relied upon as predictive, will result in a subsequent chapter of corporate distress.
There have been many studies of the effectiveness of acquisition as the driver of corporate growth and the creation of economic value. Most conclude that, at best, the evidence in favour is weak and, at worst, that the majority of acquisitions have a negative impact on shareholder wealth.
Management can attribute many reasons to excuse the failure of their plans but, if we are to be brutally honest, we know that, in most cases, the underlying reasons are a combination;
• Over ambitious initial plans that exaggerate both the scale of synergies and the ease with which they can be attained both of which justify the payment of too high a premium for the acquired asset.
• The ‘victor principle’ by which the acquiring company asserts that their management and systems are superior to those of the ‘defeated’ company and hence the operational framework that underpinned the acquired company must, in the short term, be replaced by those of the buyer. Interestingly private equity deals tend not to be exposed to this as there is often no merger element.
• The belief that the buying management has the skills, experience and time to manage the integration of the acquired business and, most importantly, to deal effectively with the crises of underachievement that may follow.
• Finding that the reality of the position and performance of the acquired business is less attractive than they appeared during negotiations.
So what happens after a significant deal is done?
Unless the management team that is charged with the task of integration has no other line responsibilities they will find that their workload increases by several hundred percent usually to the detriment of the integration process and the stability of the acquiring business.
Of course there is a honeymoon period during which the adrenalin of ‘victory’ obscures reality but after a relatively short interlude any fundamental ‘off plan’ developments emerge.
Usually it is insufficient to address these by calling for greater application because those holding the responsibility are already stretched and hiring in additional arms & legs requires new plans, briefing and supervision. Moreover more man hours will not make an unsatisfactory initial appraisal of the benefits adequate nor will they transform performance of the team if its leaders are inexperienced and have a significant emotional investment in the original, but now devalued, plan.
So acquirers should maybe consider having dispassionate involvement in the formulation of their pre acquisition appraisal and the use of experience external executives to lead the integration process. Accountants and management consultants provide a useful resource for both these activities but they are, too often, constrained by the nature of their relationship with their client. With one eye focussed on their future fees they must be reluctant to inform their client that the proposed deal is a bad idea because the acquiring management is either too inexperienced or simply not good enough. Such comment would either be regarded as insulting or as an unsubtle pitch for additional work to compensate for the claimed weaknesses.
A happy client, at this stage, is one who receives independent broad validation of his ambitions although, for good order, expectations may be moderated at the margin.
Surely the more reassuring route is to employ people with experience who are not exposed to the above commercial pressure and, most importantly, have sufficient independence and gravitas to expose the inadequacy or over ambition of plans.
Doing so would reduce both the planning and integration management risk associated with failed acquisitions.
What should management do when it is clear that their plans for the completed ‘big deal’ that was going to propel them forward are misplaced and they are going backwards?
The simply answer is; don’t try to fix it yourself.
Turn the problem over to someone with experience of dealing with this kind of problem before it becomes a crisis.
There is a recognisable pattern of managerial behaviour associated with these kinds of problem. It runs as follows;
• The hubris of victory
• Denial of problems
• Concealment of significant issues
• Cooperation – attempts to gain help and spread accountability when concealment is no longer possible.
• Re negotiation when the problems appear intractable and begin to cause collateral problems.
• Confrontation – the adoption of aggressive positions of threat and exaggerated formality both internally and externally when negotiations do not produce the desired outcome.
• Accusation/escape – when none of the above has produced relief and the crises approaches collapse management resorts to seeking scapegoats and planning how to commandeer a lifeboat for their exclusive use.
This process occurs so often that most executives will recognise it from their own experience if they are honest. But many will still belief that it will not happen to them with the project that is currently on their desk.
What causes this decent into crisis and how can the enlightened board avoid it happening to their company?
In the majority of cases the cause lies with management’s arrogant belief that the abilities that have brought them to the current position are sufficient to enable them to handle the appraisal and integration of an acquisition or to remedy a crisis. These are perceived as general management tasks that should be within the capability of any competent manager. Furthermore nobody wants to have to acknowledge publicly that one is incapable of climbing out of the hole that one has dug.
So, too often, a board of directors is able to reach the collective conclusion that their problems are not the consequence of the misapplication of general management skills to a problem they will have encountered only rarely and that requires specialist, experienced skills but, rather, result from bad luck and that all will be made right given more time, greater application and additional resources.
If the solution were to be as straight forward as this problems would only rarely become crises and failure would arise very much more rarely than it does. You cannot rely on amateur first aid to deal with a trauma that is life threatening.
How does the board avoid this kind of thing happening to their company?
NXD’s have an important role to play here in that they have a responsibility to recognise and moderate the application of managerial hubris that may lead to the company risking its stability on the altar of unjustifiable expectations or over ambition.
The more important point is for board members to recognise when they have embarked on the behavioural process described above and to understand the stage that they have reached. Early intervention to prevent the inexorable movement from problem to crisis is critically important if stability is to be preserved.
Stakeholders are not interested in excuses when management is seen not to have recognised the early stages of this behavioural pattern or has chosen to deal with it in an inadequate way that has resulted in a crisis that may have been avoidable.