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No space for “wishful thinking” in the business world By Paul Siegenthaler
Depending on what constitutes a ‘failure’, business analysts and the top accounting firms concur that 50-80% of all mergers and acquisitions experience some degree of failure in their efforts to reach their initial target of seamless integration.
Despite this, business leaders across the globe continue to forge ahead in blissful ignorance, assuming that the outcome of their own mergers will be positive, without a thought for challenges they will face when making two complex businesses operate as one.
In a perfect world, the instinctive scepticism and risk-aversion of shareholders should suffice to prevent their company from embarking on a journey into the unknown which is likely to fail; yet in reality they seem to believe in their Board’s depiction of a brilliant future, and expect their company to succeed where most others have failed without really wondering what will be done differently to ensure that unlikely success.
There are three main reasons for such over-optimism:
Depending on what constitutes a ‘failure’, business analysts and the top accounting firms concur that 50-80% of all mergers and acquisitions experience some degree of failure in their efforts to reach their initial target of seamless integration.
Despite this, business leaders across the globe continue to forge ahead in blissful ignorance, assuming that the outcome of their own mergers will be positive, without a thought for challenges they will face when making two complex businesses operate as one.
In a perfect world, the instinctive scepticism and risk-aversion of shareholders should suffice to prevent their company from embarking on a journey into the unknown which is likely to fail; yet in reality they seem to believe in their Board’s depiction of a brilliant future, and expect their company to succeed where most others have failed without really wondering what will be done differently to ensure that unlikely success.
There are three main reasons for such over-optimism:
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Uninformed optimism
– many executives and shareholders alike believe
that if everyone makes an effort, two companies
can seamlessly blend into one over time. This
belief stems from lack of experience of such
situations: the majority of senior executives
and managers have never been exposed to the
complexities of post-acquisition business
integrations. The journey ahead feels exciting,
rather than treacherous. The prospect a big
acquisition or merger can generate, deep down in
our psyche, is of feelings of conquest, power,
market domination, and savouring the demise of
one’s competitors. In history, those same
sentiments have driven emperors and kings to
engage their forces into battles which resulted
in debacle and the destruction of their army or
fleet. But what remains in our collective memory
are the victories, immortalized by monuments,
statues, paintings and epic stories. And so it
seems that when shareholders are asked to vote
on the proposed merger or acquisition, a number
of them will be convinced by the rhetoric, hope
for the best, and give their consent.
Great plan – poor execution. Shareholders approving a merger or acquisition proposal can only base their opinion on the quality of the concept and plan. Does the company’s overall M&A strategy appear to be coherent, is the proposed deal well aligned with that strategy, does the valuation of the target company feel sound, is the proposed financing of the deal fair for the shareholders, has the company negotiated the best possible deal? If the answer to the above questions is “yes”, even sceptical shareholders attempting to remain rational and not give in to wishful thinking will most likely vote in favour of the deal, because the proposal is robust. And yet, many things can still go seriously wrong during the execution of that perfect plan.
Companies do not trust their ‘trusted advisors’! Upon completion of the due diligence process which concludes that a company is worth acquiring, the consultants or auditors who conducted the due diligence may well warn their Client of the need for additional experienced resources and back- fills in their organisation to allow for an orderly and successful integration, but this is in many cases ignored by the Client who considers the advisor’s recommendation as an attempt to roll-out a large team of consultants and charge exorbitant fees. Having dismissed the advice of those whose experience and knowledge could help secure a high quality implementation, many companies embark on their integration journey propelled by their strong motivation and optimism, but ill- prepared, under-resourced, and unaware of the signals that would allow them to diagnose critical issues before it is too late to address them.
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Great plan – poor execution. Shareholders approving a merger or acquisition proposal can only base their opinion on the quality of the concept and plan. Does the company’s overall M&A strategy appear to be coherent, is the proposed deal well aligned with that strategy, does the valuation of the target company feel sound, is the proposed financing of the deal fair for the shareholders, has the company negotiated the best possible deal? If the answer to the above questions is “yes”, even sceptical shareholders attempting to remain rational and not give in to wishful thinking will most likely vote in favour of the deal, because the proposal is robust. And yet, many things can still go seriously wrong during the execution of that perfect plan.
Companies do not trust their ‘trusted advisors’! Upon completion of the due diligence process which concludes that a company is worth acquiring, the consultants or auditors who conducted the due diligence may well warn their Client of the need for additional experienced resources and back- fills in their organisation to allow for an orderly and successful integration, but this is in many cases ignored by the Client who considers the advisor’s recommendation as an attempt to roll-out a large team of consultants and charge exorbitant fees. Having dismissed the advice of those whose experience and knowledge could help secure a high quality implementation, many companies embark on their integration journey propelled by their strong motivation and optimism, but ill- prepared, under-resourced, and unaware of the signals that would allow them to diagnose critical issues before it is too late to address them.
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