I spent almost sixteen years of my 40-plus career working for two of the “Big Four” accounting firms. In all those years I saw many of our clients acquiring companies, merging with other firms and making strategic alliances on the back of the due diligence we carried out for them. Usually, these were financial, business, or commercial investigations on the back of which our clients went ahead with their recommendations to their respective Boards who cleared the investment decisions.
2017 was the third year in a row with more than 50,000 M&A deals announced worldwide according to Thomson Reuters— a record run. Prior to this, only 2007-2008 saw these many annual deals, and before that the single-year peak of 2000 saw “just” over 40,000 deals. In the last eleven years, we have seen over 500,000 M&A deals – more than in any such period in recent history.
Non-delivery of deal promise
Investments are supposed to deliver on the deal promise and create shareholder value. Yet very few of the promised synergies do get translated into the story of the future that many Boards bought into. According to McKinsey, almost 70 percent of the mergers in their database failed to achieve the synergies expected.
Ever since deal making world-wide became an integral part of a strategy to deliver inorganic growth, we have seen more failures than success and yet, like marriages that have started failing more and more, we will not give up on the idea. The usual reasons for failure quoted are a cultural mismatch, finding out intangible risk factors that could never have been possible to surface in the due diligence, or simply the paucity of resources to digest the transaction.
One example is Google’s US$ 3.2 billion acquisition of Nest, the company that made great “smart home” devices. It was founded by ex-Apple employees and had a secretive, reserved culture where people didn’t talk or socialize much. Google encourages over-communication and wants employees to socialize as much as possible. Inevitably, managers at both companies had trouble seeing eye-to-eye. Now the founder of Nest has left, and it has bled an impressive number of employees. Nest’s obituary is being written already.
eBay acquired Skype and the rationale was that Skype would let buyers and sellers in auctions “talk for free.” The whole point of selling things on the Internet is that you don’t have to talk to annoying people or take phone calls. After paying $3.1 billion for Skype, eBay sold 65% of it four years later at a $2.8 billion valuation. However, as is often the case, they could still have salvaged greater value if not for the human element.
I am now keenly watching how some of the more recent mergers and acquisitions will pan out. ChemChina’s $43 billion acquisition of Syngenta, Amazon’s $13 billion acquisition of Whole Foods, Microsoft buying Linkedin, the $156B merger of Dow- Dupont, the $100B merger of Anheuser Busch and Miller, Bayer’s $66B plan to acquire Monsanto, etc
Dealing with leadership risk
In the last ten years I spent working with leaders, I realized that whilst there could always be many reasons for the unfortunate disappointment with results, we cannot ignore the fact that all deals naturally accelerate and amplify leadership risk. Hence the mitigation of leadership risk should be on top of the agenda on any investment deal. It is not enough to just run the numbers and do the usual financial and commercial due diligence.
Leadership due diligence with a strong bias towards strategy implementation and the assessment of critical competencies needed not only for today but to drive tomorrow’s business success is what will help deliver the promised results.
Effective leaders outperform ineffective leaders. One of the single greatest drivers of competitive advantage to enhance business performance is leadership effectiveness. It was Einstein who said that an organization cannot perform at a higher level than the collective consciousness of its leaders.
The consciousness of leaders associated with inner beliefs and assumptions which shape behaviors is the operating system of performance. Overcoming the adaptive challenges that businesses face requires the transformation of leaders that starts with a shift in their consciousness.
The consciousness of an organization is the sum total of the values and beliefs of the leaders that have a direct impact on what they do- the way they manage time, the decisions they make and the quality of their interpersonal communication. These leadership and culture-related issues have to be addressed before the deal and then the organization design, succession planning, and integration aspects immediately after.
Leadership effectiveness is key
Over the decade that I have spent coaching CEOs and their teams, I have realized that perhaps even more critical than strategy is the effectiveness of leaders which has a direct bearing on execution that is the bugbear of most organizations. Who are the effective leaders and who utilizes their full potential? Leadership effectiveness equates to organizational effectiveness. Bringing in fresh talent and helping them as well those in new roles with assessment and coaching support along with a coherent and well-articulated communication process to achieve maximum engagement at all levels is what will make the difference between success and failure.
Numbers don’t deliver numbers. People do. And it is the role of the leader to ensure that the team is fully engaged, motivated and takes ownership to perform to their fullest potential that delivers on the promise, the story that was sold. To get the most out of the story, don’t stop at the usual due diligence. Assess the leadership effectiveness of the people who have the responsibility to build winning leadership cultures and teams to help them deliver on their promise.
This article is written by Pratap Nambiar - Chairman, Thought Perfect Pte Ltd.