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  • Writer's picturesarah krier

Closing the gaps: Aligning the acquisition business case and integration execution after a merger

Updated: Jun 27, 2023

A post-investment review of the challenges that prohibit

company acquisitions from realizing their expected financial success




Abstract

Companies are spending trillions on mergers and acquisitions every year – yet failure rates are widely reported to sit between 70% and 90%. Among the challenges responsible for these results, post-merger integration has been cited as one of the steps in the process fraught with the most challenge leading to acquisition failure. These challenges largely stem from combining distinct teams, cultures, products, priorities, and histories and its heavy reliance on team restructuring, collaboration, and the melding of intangible human psychological factors and behaviors. This research will explore the underlying challenges presented in the post-sale integration process and will present future research and practice opportunities to address these challenges with design thinking methodologies.


Author Introduction

Since earning bachelor’s degrees in Life Sciences Communication and Environmental Studies and certificates in Entrepreneurship and Digital Studies, I have worked primarily in market development roles, from leading digital marketing operations, analytics, and content to global product marketing, go-to-market strategy, and product development. These experiences have cultivated a unique perspective on how businesses create strategies, execute against them, and structure themselves for success. I have witnessed and have contributed to a variety of corporate growth strategies, all of which are driven by their own unique approach to decision making. These variances fascinate me, and drive me to ask deeper questions about how we make strategic choices as an individual, a team, a business, and beyond.


Now, as a Master of Design + Innovation student at UW-Madison, I am channeling that curiosity in my research, looking at how design thinking can disrupt traditional economic paradigms and augment decision-making in non-design environments. My goal with this ongoing inquiry is to position myself for independent consulting or internal innovation roles that allow me to build more interdisciplinary, regenerative, and enduring systems and corporate strategies that challenge and iterate on legacy norms in business, government, and beyond.


Underneath it all, I would like to use research and the design thinking process to ask critical questions and bring skepticism to the way business leaders have historically made decisions about the growth of their companies, where they invest their money, and who they choose to do business with. One area of interest for me is the dynamics at play when you combine two distinct entities to pursue a singular goal. This can manifest in a variety of ways, including venture capital investment, entrepreneurship, and, for the purposes of this research, mergers and acquisitions.

In my career, I have experienced two distinct working cultures: one at a small AI tech company in the supply chain industry; the other, a massive, publicly traded international data and B2B software company. Two entirely unique organizations that shared similar goals related to dramatic revenue growth, to improved EBITDA, and to expanding their global footprint via acquisition.


Growing a business unit by double, or even triple digits, is a monumental undertaking. The complexity of reviewing financial analyses, evaluating business cases, and organizational restructuring is significant and requires human capital from across the organization. In both of my acquisition experiences—one as the acquirer (making the purchase, often a larger entity), the other as the target (being acquired, often a smaller entity)—decision makers and operational teams were often familiar with the analytical aspects of decision making: financial analyses, operational data flows, and rigorous decision-making models. But despite having access to robust computational models and numerical inputs, every experience led to an unexpected outcome, turn of events, or impact that could not be predicted by forecasts or algorithms. They both experienced a clashing of two distinct worlds, and each had a unique approach to their work, team dynamics, and more.


These experiences make me wonder what other tools or inputs could augment the decision making and planning process during an acquisition? Is there a more strategic way to augment the more familiar analyses we lean on in executive boardrooms? How can we capture, analyze, and design for the human element lying beneath the numbers?


My hope as a designer is to be a steward of more inclusive and diversified empathetic research methods that foster co-creation in systemic problems affecting businesses, governments, education systems, and communities. Mergers and acquisitions being one example of a systemic wicked problem.


Mergers and Acquisitions Famously Fail

Corporations, governments, nonprofits, and communities today are almost unilaterally seeking a similar goal: to grow, either monetarily or in impact. Corporate strategy is an encompassing term that describes the means in which business leaders think about how their firm creates value by evaluating everything from their investment portfolio to organizational design and footprint to their resource allocation and product strategy (“Corporate Strategy”). The body of research surrounding corporate strategy, however, has identified that there are limitations in current some key corporate growth practices today.


One of the most confronting examples of this is the highly popular inorganic growth mechanism we know as company acquisition. By purchasing another fully-formed business, companies seek fast, and significant results, either strategically, monetarily, in intellectual property, or talent—but most commonly revenue growth.


But mergers and acquisitions have long demonstrated diminished results. Companies spend trillions on mergers and acquisitions every year–yet failure rates are widely and colloquially known to fall between 70% and 90%. Additionally, according to Gartner, large-scale organizational change incited by major restructuring initiatives, like those needed to usher in an acquisition, is expected multiply by over 75% in the next three years, even though half of those same change initiatives fail (Chiu and Salerno). For an acquisition scenario, failure is typically defined as the inability for the newly joined entity to live up to the revenue expectations identified in an acquisition case.


In one study that analyzed post-merger performance across more than 200,000 businesses involved in a merger or acquisition, researchers found that acquisitions did not lead to improved financial performance for the acquiring firm (Ullrich, 10). They also found that “the only (!) significant financial returns from M&As are obtained on the day of an announcement and are particularly strong for the share prices of target organizations,”—and those initial gains quickly inversed across a myriad of performance indicators shortly after a sale was announced (Ullrich, 10).


With the magnitude of corporate investment in company acquisition and the dismal results that have become commonplace, it is important to inquire into the root causes of these failures. This research will center on the barriers standing between an acquisition and its expected financial results as identified by research and industry experts and will identify future research and practice opportunities to alleviate those challenges.


The Key Challenges with Acquisitions Start After the Deal Closes

Across literature, industry expertise, and interviews, several key themes have been identified as the most likely challenges limiting an acquisition’s ability to realize its business case—and both have little to do with financial valuations, lists of IT tech stacks, or legal and compliance considerations that typically drive boardroom conversations. Research suggests that one of the most promising opportunities to change the course of an acquisition scenario lies in an phase called post-merger integration (Jemison and Sitkin, 148). Post-merger integration is the series of planning events and operational milestones that bring the teams, products, and activities of the target and the acquirer together after the completion of a sale (Pritchett, LP).


Whereas the valuation and negotiation phase may present opportunities to identify more well-fit acquirer-target relationships from a financial or strategic level, post-merger integration phases have the potential to benefit from co-creation activities that stem from democratized leadership, design thinking principles, and strong, collaborative communication approaches that are less prominent topics of conversation in the pre-sale due diligence phase. In some circles, the argument that the degree to which companies are integrable culturally and from a social identity perspective should be considered when identifying whether to pursue an acquisition target in the first place, however this is not common today (Duvall-Dickson, 21).


In this opportunity space, operations and teams shift—sometimes rapidly—to start working towards the revenue goals identified in the acquisition case. The challenges identified in this review include:

  • Significant gaps exist between the executive decision-makers involved in the highly confidential valuation and negotiation process, and expertise and enthusiasm of operational teams that are responsible for bringing change to life.

  • People, their behaviors, and experiences are often hard to predict and lack cohesion at the outset. During acquisitions, it is well documented that newly formed teams lack collaboration and a willingness to learn, which can stall even the most well-thought-out post-merger integration plans.

  • Lack of shared mental models, ways of working, and collective identity stall newly formed teams’ ability to work together effectively.

An execution gap exists between decision makers and practitioners on the ground

One major challenge that is contributing to failure rates in acquisitions and their post-merger integration strategy is that the right voices are not represented during the due diligence process where company readiness, working styles, and strategies are initially assessed. Early acquisition conversations are highly confidential and are isolated to a small subset of executives and leaders (Jemison and Sitkin, 155). These leaders have high-level domain expertise and executive leadership experience but tend to lack knowledge of the day-to-day activities and inner workings of the business. This can lead to a gap between those creating the integration plan, and the needs, motivations, and experiences of the people who must execute against it.


Research does, however, advocate for the inclusion of “operating managers and key staff people” throughout the process to cultivate greater enrollment in the post-merger integration plan and that appropriate subject-matter expertise is represented in the initial analysis (Jemison and Sitkin, 147).


Additionally, research supports the need for equitable representation of the individuals who will be impacted by changes in the co-creation process (Costanza-Chock, 69, 81) and even goes so far as to suggest that continuity of stakeholders in pre-planning activities and execution phases can lead to more favorable results (Ullrich, 11).



The execution gap is exacerbated by the methods that many organization use to validate key human capital assumptions being made during due diligence. When an executive’s assumptions or instincts are used to identify and confirm the invisibles—culture, working norms, etc.—it becomes a risk that there is variability between the executive’s perception, their descriptive language used to convey it, and the behaviors and actions of the team on the ground.


This active participation in both the planning process and the realization of the plan over time is critical because research indicates acquisition success is correlated to strong cohesion with unified goals and sharing intergroup behavior norms across teams (Dao et al. 199-200).


Quantitative measures being used struggle to predict human attitudes and behavior

Acquisitions today tend to have a strong bias toward directly quantifiable analyses because they are almost solely monetarily motivated. The capital gains and investment realization need to be sound to justify any sort of team or process reorganization. These quantitative analyses manifest when identifying well-fit targets, executing legal and compliance due diligence, negotiating sale price and documenting capital—human, technology, intellectual, and operational capital.


When it comes to the post-merger integration process that sets these plans and identifications in motion, the quantifiable pre-sale metrics fail to accurately describe the complexity and nuance associated with the humans behind the tasks and processes being integrated.


Cultural and people-oriented factors were unilaterally identified as the hardest variables to solve for, based on a wide range of research and interviews conducted for this paper. One study identified the emotional impact of mergers and acquisitions as almost always negative after the sale goes public—also known as “merger syndrome” (Dorling, 941). These rapid shifts in attitude across both acquirer and target employees can lead to distrust in the organization, difficulty collaborating, lack of interest in executing against the acquisition case, and other limiting behaviors that lead to failed acquisitions.


Research identifies a variety of methods to influence employee behavior, most of which begins with “diagnosis” and ends with the active enrollment in the change making process (Engert, et. al). This can be achieved through surveys, roundtables, interviews, observations, and more, however conclusions from this type of research “are tremendously hard to express in quantitative language” making them less appetizing for existing business strategy audiences (Kolko).


Teams lack understanding and shared norms that enable them to collaborate

The value of blending both executive-level decision makers and mid- to lower-tier management during the full due diligence and post-merger integration planning process is due in large part to the cultivation of shared mental models.


Shared mental models describe the “common psychological representations” between the two teams (Dao et al., 197)—the intangible identifiers that help transfer ideas, knowledge, and drive behaviors and processes between the target and the acquirer. This can include factors like language, observations, ways of working, and collaboration (Dao et al., 200).

One study found that “knowledge relatedness” shared between an acquirer’s and target’s products, technology, and research and development was an indicator of post-merger performance—and early establishment is critical for success (Dao et al., 200).


Examples where shared mental models and knowledge-relatedness are critically important are when teams are blended across cultural factors. Everything from management styles to the way people dress and speak, express emotions at work, make decisions, and more can serve as “corporate rituals” that underlie the team’s work and bind people together through shared experience (Duvall-Dickson, 17). When factors as simple as a team’s motivation behind a project or what they call a processes are misaligned and a shared mental model does not exist, research suggests the likelihood of post-merger integration failure increases (Dao et al., 222).


These intangible processes and working norms are critical mechanisms that need to be in place with cohesion and clarity to ultimately enable revenue growth. Creating shared narratives and identities across teams allows employees to experience safety and identification in something greater, which makes collaboration more feasible and successful (Duvall-Dickson, 18). Ultimately, the most accurate financial projections and most robust, well-thought-out integration plan cannot be realized in the absence of sound group forming and norming.


Future Work: Exploring Design as an Integration Tool After a Merger or Acquisition

Although mergers and acquisitions have been a prevalent growth mechanism for businesses for several decades and research is prolific, there has been little innovation or deviation in the process across practitioners. Similar approaches and sequential steps are relied on with rigor, and most progress has focused on infusing communication and human resources best practices into the current state. To course correct the outcomes we see in mergers, acquisitions, and post-merger integration, businesses need to turn their eye towards the future and identify new frameworks and inputs that can fully redesign their process, rather than augment it (Whitney, 31).


Because incremental progress has been creeping into the industry over time, the most successful future study and practice will require a full overhaul in the tools, processes, and leaders ushering acquisition activity. Change will likely require a small cohort of champions and change agents—business leaders who not only acknowledge the high failure rates plaguing acquisition scenarios but are willing to take risks and try out new ideas to redesign the entire approach. Success will require a genuine desire to challenge preconceived rules about acquisition processes, and an interdisciplinary team of researchers and practitioners to reimagine the future of acquisition success.


In my research, experience, and current perspective as an emerging systemic designer, the next frontier of research in this arena will need to incorporate more qualitative, abductive, and creative mechanisms to not only inform and enhance the quantitative strategic decisions being made, but to position co-creation as a more central goal.


Design thinking has the potential to chart a vastly new path forward for the acquisition world because of its ability to flexibly solve problems while also having a successful track record of delivering hard-won business results. In a 2015 study by the Design Management Institute, companies who subscribed to design thinking practices outperformed the S&P by 211% over the prior 10 years (“The Value of Design”). Design thinking has become more widely accepted as a credible methodology to inform and create a wide array of solutions solving complex problems. Some underlying design principles may be occurring in pockets across the entire acquisition lifecycle, or may be present with specific leaders, like Rochelle Blease, but design has the most potential to drive real value when it is integral to the underlying problem-solving strategies at an organization (Stafford).


Design thinking’s focus on deep levels of empathy and understanding for end users and commitment to de-risking solutions prior to launch through rapid prototyping and iteration are suitable to the dynamic and interconnected challenges of an acquisition. For example, employees, teams, and customers become your end user, and team structures, processes, and products can be prototyped, tested, and iterated quickly. This lends itself well to creating more enduring and well-fit solutions beyond the scope of existing post-merger integration strategies.


In the words of renowned designer, Bruce Mau, from Massive Change Network, “Practically everything we do needs to change,” (Mau) and even widely known, trusted, and utilized business processes like mergers and acquisitions should follow suit. Design is an avenue that can help the business world address longstanding wicked problems, like mergers, acquisitions, and integrating employees in new, more visionary ways (Whitney, 34).


To conclude, my ongoing career pursuit and research anchors around this enduring question: if the challenges are so significant, and success is so elusive, why not create space for a new approach?




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