A week rarely seems to pass without the announcement of new corporate alliances involving leading players in major industries. However, as we all know, many of these relationships are destined not to live up to the expectations of those concerned. In fact, some experts claim that 70 percent of acquisitions actually erode shareholder value.
When companies in mature industries have extracted as much as they can from internal innovation and improvements, they seek to make a quantum leap ahead of the competition by reinventing the rules of competition within their industry through a dramatic redesign of their value chains.
Of course, acquisitions offer the greatest latitude for redesign and creation of new customer value, but is it possible to reduce the risks involved?
Based on my own experience relating to the Cable and Wireless acquisition of International Digital Communications Inc. (IDC), then a local telecom offering international telephone services, and more recently PSINet Japan, Exodus Communications, and Digital Island, I believe there are three factors that directly affect the outcome of an acquisition.
The first is cultural differences.
Employees are one of the most valuable assets involved in any takeover. Therefore, one of your first actions must be to protect these assets by removing the uncertainty and frustration that inevitably arise from combining two culturally different organizations. The best way to do this is through creation of common goals and initiatives that point employees in the same direction, irrespective of their origin.
The second factor is degree of customer focus.
The third factor affecting the outcome of an acquisition is quality of leadership/communication.
Strong leadership is required to remove the doubts of customers and employees toward a merger or acquisition. Not everyone is a skilled communicator, but leaders must be.
Acquisitions require a leader to create, communicate, and execute a vision powerful enough to move employees in the desired direction and persuade existing and potential customers that the organization is the one best able to fulfill their needs. The best way to do this is to give the organization and brand inertia by providing confidence-building experiences.
Setting certain goals at the outset of the merger that are easily understood by employees can be very effective in creating organizational inertia. Orchestrating some quick wins will instill employees with the confidence required to attain the long-term goals coincident with acquisition success. Similarly, brand inertia can be created by timing high-impact product launches/improvements or service-level changes with the integration of the two operations.
However, organizational and brand inertia are easily affected by leadership clashes or voids arising from top management not being equally committed to making the takeover a success. Therefore, all top management should be given stakes in the outcome of an acquisition. A fragmented boardroom is a certain recipe for failure.
Finally, I wish to place in context some of the recent events in the banking sector and their potential impact on acquisitions.
Some commentators seem to believe that the risk involved in systems integration will discourage or slow merger activity.
Admittedly, the growing importance of IT in business systems and processes means that top management must be prepared to devote more resources than they have in the past to systems integration.
However, if an acquisition makes good strategic sense and the costs and benefits of system integration are factored into the acquisition price, then systems integration risk is no different from any of the other uncertainties associated with takeovers.
What is really at issue here is that IT is an area that is often not represented at the top levels of management in Japanese companies. Thus there is clearly a need to train more IT professionals for top management responsibilities.
We live in very exciting times: we can sit in our offices and navigate freely around the Internet and global intranets, which continue to grow daily as businesses connect more and more of their operations to the Internet or private networks.
However, this growth in networks has not changed the ground rules for acquisitions: corporate marriages still require the support of employees, the support of customers, and strong leadership to make them succeed.
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