High Tech Mergers: How To Make Them Succeed

Mergers are difficult to make work.  Many large mergers have failed to meet expectations for a variety of reasons. What can companies do to make high tech mergers work?

Jon Schwarz, a member of the Executive Board of SAP with extensive merger and acquisition experience, addressed this question at a recent Wharton Club of Northern California event.

The Risks Associated With Mergers

Mr. Schwarz pointed out several reasons why high tech mergers fail. Three types of merger risk drive the chances of merger success.

1. Strategy risk

Strategy risk includes the pre-deal analysis of the competitive landscape, potential buyers and sellers, strategic fit, and cultural fit. Mr. Schwarz focused on the importance of identifying the right targets in light of these factors.

2. Deal risk

Deal risk involves the mechanics of the transaction.  This includes the premium offered; the mix of stock, cash, and debt financing; and the legal structures used to effect the deal.

3. Implementation risk

Mr. Schwarz argued that implementation is the biggest risk associated with mergers. Post-merger issues, especially operational and cultural integration of the two companies, present the biggest challenge.

Improving The Prospects For Merger Success

Mr. Schwarz emphasized several points regarding how to address implementation challenges.

1. "Culture eats strategy for breakfast."

It does not matter how much planning has gone into implementation mechanics. The key is to align and motivate people from both organizations to make the marriage work. Having been involved with the Symantec/Veritas merger, Mr. Schwarz concluded that that deal did not succeed because there was little emotional commitment to the deal from both companies. After consummating the deal in December 2004, Symantec's stock price immediately declined and never regained its value.

In the SAP/Business Objects situation, SAP gave Business Objects a large amount of independence and brand protection post-merger. That helped align and motivate people from both SAP and Business Objects.

2.  Immediately make the two organizations one.

Cisco is successful with its deals because its quickly integrates the people, cultures, and  structures of the organizations. Symantec COO Enrique Salem noted that failing to do this was one problem with the Veritas acquisition.

3. Get the sales teams on the same page.

A big obstacle is that the two sales forces will have overlapping territories, and sales reps cling to their territories and customers because their livelihood depends on it. Put one company's sales team in charge of the biggest accounts, while allowing both teams to call on smaller accounts. That worked well with the SAP/Business Objects merger.

Commentary

In addition to the factors cited by Mr. Schwarz, good upfront diligence and matching can reduce implementation risk. It can provide comfort regarding the central post-merger integration issues and the chances of solving them.

I agree that culture eats strategy. While strategic fit can be assessed through several techniques, the more difficult question is how to assess cultural fit. Organizational culture is notoriously difficult to characterize. Disagreement over how to measure organizational culture persists. Among the two prominent approaches, one looks at how individuals feel while the other measures how things are in the organization (the article in the second link does both).

It is no surprise that merger participants tend to underestimate the importance of cultural conflict in merger failure. Instead, merger participants blame the other firm for merger failure.

What dimensions of culture matter the most? That varies from situation to situation.  What matters for high tech mergers (e.g., innovation productivity) will not matter as much for manufacturing mergers (e.g., incentives and efficiency).

One important point mentioned only in passing is who decides which deals to pursue. Mr. Schwarz's answer: the board. In future posts, I will consider the implications of this answer for corporate governance and strategy.

Douglas Y. Park
Twitter: @DougYPark

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