Companies often merge with their competition in order to create economies of scale.  However, mergers are not always successful.  Why not?

 

First of all, there are challenges in blending the cultures of companies.   A company with a relaxed atmosphere and casual dress code might conflict with a company who wears formal suits.  Cultural styles can vary from patterns of speech, value systems, lifestyle, city attitudes of headquarters locations, and so on.

 

In addition, mergers may fail because the business model of one company is archaic or outdated.  If you were are farmer and you had a diseased sheep, would you mate that sheep with a healthy sheep?  No.  On the contrary, farmers "put down" diseased animals.  At the same time, some companies are acquired even though they should probably be "put down" and allowed to go away.  

 

Sure, many companies fail who were yesterday's corporate behemoths.  But success is not guaranteed in business, by any means.  Cash is king.  Customer service keeps customers happy.  Products which last become repeat purchases.  Companies who squander their cash, their products, and services or make poor decisions regarding how to grow their company often deserve to die.  

 

I was once employed by a company who acquired over 30 companies in 3 years.  Most of the companies were acquired for 50-60% of their worth.  The buying company lost 20% of the acquired companies customers due to fear and uncertainty.  Then, the buyer wrote off 20% of the debt as part of the accounting process in restructuring.  As long as the company could keep buying small companies, they could hide a myriad of their own poor business practices.  The only problem with that method of growth is that once you run out of companies to buy you have to stand on your own merits.  

 

Well, companies who grow through acquisition have long histories of laying off headquarters redundant personnel, laying off people as part of their restructuring, and losing customers.  This breeds complacency, narcissism, and cruelty and quite a bit of bad karma.  Most companies who grow by the sword, die by the sword.  All I can say about those types of mergers is if you can buy the assets (the people, the customers) without buying the bad/diseased thinking or systems of the company, then it might be worth considering.  Also, if you can justify your economies of scale without justifying away 20% of your "new companies" employees, then you're creating good business karma.  Otherwise, grow your company from the inside.

 

Another challenge with merging is the distraction a merger causes for employees, customers, and managers.  The distraction enables competitors to move more swiftly and capture significant business from BOTH companies who are attempting the merger.  

 

Hewlett Packard (HP) was recently embroiled in a fight between board members (sons of the founders, no less) and Ms. Carly Fiorina, CEO over whether or not to purchase Compaq Computer.   Mr. Walter Hewlett (board member) claimed that merging with Compaq's lower profit margins would dilute HP's imaging and printing business profitability and therefore devalue the stock.  Compaq was focused on a business segment (servers/personal computers) which has a lower profit margin than the imaging and printing business segments.  Ms. Fiorina, CEO of HP, claimed that a merged HP and Compaq would be stronger due to the ability to service more customers and would be #1 or #2 in over 5 markets where HP was only #5 or 6 currently.  She also claimed that the additional computer business would help feed more printing business.  She used the founder fathers' vision of "The HP Way" as her basis of supporting the merger, (although "The HP Way" never set out to buy companies and lay people off as a way of building a successful company, Ms. Fiorina was trying to embrace the vision that HP need to act aggressively or get left behind as a relic of the midrange computing days).  It will be a challenging merger, at best, to make a success, due to the factors you will read below which HP seemed to brush aside in the process of pushing the merger through.

 

Yes, HP will be larger and have economies of scale.  However, merging two behemoths with varying cultures, cross-competing business sales forces, and confused customers will result in distractions and loss of customer relationships.  HP/Compaq competitors (Dell, Sun, IBM) are licking their chops at the mess the merger creates - and at the opportunity to steal away customers.  The merger may add value for HP in terms of expanding services.  The merger may increase market share, temporarily.  But, the merger of HP and Compaq certainly does not address the challenge Dell presents -- selling direct versus through a reseller channel.  Would you prefer to work through a reseller who sells various brands, or buy direct from the source of one company?  So far, Dell is answering that question with "Buy Direct, Buy Dell" and increasing large corporate and personal computing market share.  IBM is growing their service and service outsourcing business, and Sun is winning the large-server sales.  Where will that leave HP when the dust clears?  Frankly, just like dysfunctional personal relationships, a poorly founded merger can cause more heartburn than happiness.   I have always been a fan of HP, so I hope they succeed. 

 

Some mergers produce marginal results or sink companies.  For example, why was Compaq even on the selling block?  Well, it could be due to their own unsuccessful merger with Digital Equipment Corporation, also a struggling behemoth company, just 3 years prior to the HP merger with Compaq.  I remember turning down a job with Compaq just after they aqcuired DEC, because I thought they were crazy trying to merge with a company with such a different corporate culture.  As it turned out, there was a lot of turmoil for both the Compaq, Tandem, and DEC employees (Compaq acquired Tandem, too).  Rather than right the Compaq ship, Mr. Michael Capellas, Compaq's senior sales VP who was promoted to CEO just a year prior to the merger with HP, decided to approach HP about buying Compaq.  It could be argued that the writing was on the wall when (Compaq bought DEC) that Compaq's own internal stellar growth would be drastically stunted by trying to overcome vast cultural differences, cross-competing sales forces, and outdated business models and technology by trying to integrate Tandem, DEC, and Compaq into one successful company.   Compaq failed.  Will HP succeed?  We shall see.

 

(Note, since I published this article in 2002, the merger was declared a failure by many and HP fired the CEO who'd championed the merger. After replacing their CEO, HP refocused back upon their core business and is currently performing back at a higher level. The revenues of both Compaq and HP combined did not produce the desired result prior to the merger. Based upon this, I would say the merger was less than successful.) You might be asking, "Which mergers actually succeed?"

 

From my experience, mergers should exhibit the following five characteristics in order to be considered potentially viable candidates for a successful merger:

 

1.  Compatibility between company mission statements and direction.  What are you trying to do?  What are they trying to do?  If they relate closely, you have the first element.

 

2.  Beneficial economies of scale.  If you will be larger, will you truly be better?  Some larger companies cannot respond as quickly to market changes due to their size and the challenge coordinating new directions to employees.  Economies of scale are not always beneficial, so make sure you can quantify that having more of one direction is what you want.  

 

3.  Cultural synergy.  If one company's culture is jeans, foozball machines, cut-throat hiring/firing, and shoot-from-the-hip decision-making and your company requires process and forms for most activities, good communication and values employees highly (no layoff policy), you may have a big challenge on your hands.  

 

4.  Headquarters in same city/geography.  If your company is headquartered in the neurotically fast-paced, job-focused Silicon Valley and the other company is based in Atlanta, founded on values of southern comfort, you might have a big problem.  Two companies should be headquartered near each other to maximize the return on the investment and maximize the economies of scale.  Also, it is harder to communicate halfway across the country than it is to communicate someplace 10 miles away. 

 

5.  Demonstrable positive growth.  If buying a company will give your company the entry into a new market - where they have technology that would take far longer for your company to create than to buy, then it makes sense to buy.  Or, if their success in a market has consistently eroded your ability to be successful in multiple business segments, it might be beneficial to learn from them.  There are two ways to do that:  hire their people, or buy their company.

 

If you cannot see the positive effects from a merger, clearly, concisely, and where at least 90% of your employees will embrace the merger, then I recommend against it.  Far too many companies announced mergers in the past, proudly beating their chest how they would become the combined #1 in their market by combining the #2 and #4 companies, only to end up #3 or #4 when the dust cleared.  

 

If you're buying for the sake of "do anything" (do something, anything, just do something) management philosophy, then you may be doing something bad.  I believe in growing a company by hiring smart people, building a consensus for growth based upon integrity and honesty, and enabling people to create and innovate to the best of their power.  Will your merger enable your employees' strength and creativity, or will it distract them and stifle them from being highly successful in their core strengths?  The answer to this question is the answer to your merger.  

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Scott Andrews is CEO and Founder of AspireNow (www.AspireNow.com), a leading business productivity and personal development firm based in California. AspireNow recently spun our business solutions into ARRiiVE Business Solutions (www.ARRiiVE.com) through whom we help organizations launch new products and services, maximize sales, and innovatively change businesses through  semantic collaboration business models and processes. For more information, contact info@ARRiiVe.com.