Avoiding the most common M&A failure points: Part 2

| By: Paul Dippell
Why many acquisitions fail to produce benefits and how to avoid the pitfalls

Note: This is educational only. You must obtain professional advice when considering any M&A transaction.

Important mismatches

In Part 2 of Avoiding the Most Common Merger and Acquisition Failure Points, we’ll discuss certain potential mismatches that can occur, how to spot them in advance, and what to do when you do spot them.

Operational Maturity Level© mismatch

Knowing your Operational Maturity Level (OML©) and driving it upward is a way to replicate the performance of the best in class. Likewise, in M&A also, OML is a useful tool for mitigating risk and planning a successful integration.

The table below will help you judge the degree of alignment (or lack thereof) based on your OML and that of Seller. As a foundational guideline, you should not do acquisitions if your firm is lower than an OML of about 3.4. At this level, you’re unlikely to be stable enough to withstand the stresses without unwise levels of risk.

If Buyer Is…

And Seller Is…


To Mitigate

Higher OML

Lower OML

Seller’s people may not understand why you do what you do. They may find some things you do to be “obviously” wrong.

Explain your policies as an evolution of what they’re doing today. Especially point out how they’re a win/win/win for the company, customers, and employees. Highlight early adopters and successes, and counsel late adopters in private.

About the same OML

About the same OML

Remember you are both at low OML with regards to an M&A integration. You don’t know what you don’t know.

Plan in detail, and review and adjust plans as you go. Expect to get less revenue than you want. Expect to have more costs and attrition.

Lower OML

Higher OML

You probably should not do the deal. You likely will not effectively understand all the things that Seller is doing in running their company, and you will likely be unable to retain and extend these best practices.

The exception would be in the CEO, and much of the senior management of the acquired company will become the CEO and leadership of Buyer’s company.

Retail and community subscribers (such as HTG Peer Groups) to the Service Leadership Index® benchmark will broadly know their likely OML score by looking at the top right corner of their S-LI Quarterly Benchmark Report Book©. Subscribers to SLIQ© will know their OML score with greater granularity, precision, and utility.

Customer pricing mismatch

In any given market, pursuing any given customer segment, the solution providers in the top quartile of profitability charge nearly three times as much for their services than do those in the bottom quartile of profitability. These more profitable, higher-priced firms also tend to grow more quickly.

Sometimes, Sellers are motivated because they are not very profitable and/or are struggling for growth (with low profit being a contributing cause).

These factors can result in a mismatch in what the two companies charge their customers for substantially the same offerings, with the Seller being lower-priced.

In this case, the likelihood that Seller’s customers will accept Buyer’s higher pricing is low. This is for two reasons:

  • They likely cannot afford to pay more, which is one reason they chose Seller as their provider to begin with.
  • The argument that, “You’re going to like our service better,” will fail to be compelling. Seller is probably doing a reasonably good job working their heart out for customers.

Worse, Buyer can’t keep prices low for these customers because they’re not profitable prices, and even if they were, Buyer’s team would question why their own company was charging so much.

The only real alternative is for Buyer to only pay for the customers who are at Buyer’s current pricing, and who match Buyer’s current target customer profile. Buyer must still require Seller to shut down the company, because Seller can’t stay in the business even with “bad” customers.

Offerings mismatch

Here’s where you can kill two birds with one stone. Take five of your average customers and price them with Seller’s pricing methodology. Take five of Seller’s average customers and price them with your pricing methodology. Get detailed. Get real. Act as though you’re creating pricing you’re actually going to bid, honor, and deliver against.

One bird this will help you kill is the customer pricing mismatch analysis mentioned above.

The other bird? As you whiteboard out each of the ten customers and you discuss what you’re selling, how you’re selling it, and how you’re delivering it, you’ll learn a lot about what each of you is really offering.

Your degree of alignment will quickly become apparent, but only if you act as though you’re really bidding something real.

Culture mismatch

There’s a third bird here to be conveniently killed. As you whiteboard out each of the ten customers, talk about how you sell, how you negotiate a deal with a new customer, and how you position things like price increases, scope increases, and change orders. Talk about when, why, and how you have terminated customers.

Then, do the same with five typical examples of employees who are in roles comparable to each other. How much do each of you pay them? How do each of you incorporate incentives? How do each of you measure performance? How do you handle promotions and increases? Counseling, demotions, and terminations? Training plans? How do you find and qualify candidates during the interview process? How do you pitch the qualified ones on joining your companies? How do you onboard them?

As you discuss these topics, just as with offering mismatches above, your degree of alignment in how your respective cultures treat customers and employees will quickly become apparent.

In all cases, it’s critical to use real examples, such as real customers and employees, even if you leave the names off. If you use hypothetical examples, or the discussion moves too quickly, too much subjectivity can seep into the discussion and the alignment will likely seem better than it is.

Poor integration

The breadth of integration responsibilities is wide. The systems, policies, and practices which operate Finance, Human Resources, Sales, and Service departments must all be transitioned to Buyer’s methods. This means both teams have to be willing and capable of judging timing across a multitude of intersecting demands. Employees, customers, partners, and vendors must continue to be served by Payroll, Accounts Receivable, and Accounts Payable.

The list of integration items is too long to include here, but a typical integration project plan:

  • Has payroll and benefits transition activities that start about a month before the actual close of the deal
  • Typically runs from 75 to 200 checklist items
  • Incorporates virtually all departments in both companies
  • Can run for months after the close

However, it’s imperative to note that speed is also important. In contrast, when we’re advising management teams on making transformational changes within their company, we’ll often say, “Relentlessness is more important than speed (unless you’re losing money).” In acquisition integration, both relentless and speed are equally important.

This is because your company cannot afford to operate two methods of doing business, even for a short period of time. The operating transition must substantially occur within weeks, or at most a few months, with any remaining pockets of unintegrated operations under the firm supervision of whomever on your team–usually the finance executive—has iron control over how the unintegrated process functions. This is to make sure it doesn’t spread and that it’s making relentless—if slower—progress towards being assimilated.

Slow integration isn’t just expensive and duplicative, it also tends to unintentionally encourage resistance and even inadvertently enable backsliding in areas already thought to be integrated. This can be damaging and even fatal for the acquirer.

Plan it like a project: beginning, middle, end. Manage it like a project: executive sponsorship, regular status reviews, actual vs. plan, and adjust and drive to the planned end date.

Poor expectation management

Closely related to this is expectation management. As you probably have discerned from the poor integration section above, a successful M&A is all about “tough love.”

As Buyer CEO, you don’t want to make the following statement—tempting and natural as it may seem: “We’re buying you because you have great people, great customers, and great methods. We want to take the best of your company and combine it with the best of ours to come out with the best of both worlds. No doubt you know best practices we can learn from.”

As logical and welcoming as that sounds, don’t say it. If you do, you’ll inadvertently set both teams up to compete to see who can win the “our best practice is better than your best practice” contest. Progress will be slow, contention will be high, and constant senior peacemaking will be required.

Instead, say this: “We’re buying you because you have great people and great customers. I’m confident you’ll be great contributors from day one, and in a year or two as you learn how we do things, you’ll bring great new ideas to the table too.”

Likewise, you need to counsel your own team, behind closed doors, that “tough love” means not dominating, but implementing your current policies, systems, and practices in a win/win fashion. The new people must see that the way you do things is a win for all—or at least most—employees, customers, and vendors alike. Your people must highlight the successes produced by early adopters from the acquired company. They must take the new people as their own. Good news in public, bad news in private, as always.

One last comment on expectation management—regardless of whether you are Buyer or Seller—is to make sure your team knows the acquisition deal might not go through, and that’s ok. “It just might not be the right deal for us or our customers,” is a good way to frame it.

Whether you’re Buyer or Seller, acquisitions are often perceived as a big, exciting, scary, and life-changing thing. Your employees may put more emotion and self-worth into the deal than you expect. It’s important for your people to understand that if it doesn’t go through, it isn’t because you’re not a great company and a great team with great customers. Oddly, even many Buyers have to avoid this feeling of let-down.

Keep your people focused and busy on an independent future. Provide occasional, yet not very detailed, updates while you and your senior team focus on the deal. Even if the deal doesn’t close, you still have a bright and happy future!