Mergers, Acquisitions, and the Growth Trap

I’m Andy Temte and welcome to the Saturday Morning Muse! Start to your weekend with me by exploring topics that span leadership, business management, education, and other musings designed to support your journey of personal and professional continuous improvement. Today is September 7, 2024.

Today we’re going to continue our exploration of the growth trap. I define the growth trap as seeking business growth for the sake of business growth with little regard for operational or cultural implications.

Last week, I talked about how a company’s annual budgeting process can be a growth trap when senior leaders dictate budget expectations from their ivory tower. If you haven’t listened to that episode, I recommend you do so now.

Now that you’re back, I ask again—is bigger always better? In business, the answer is nuanced and not always obvious. In addition to budgeting, a second way that the growth trap evidences itself is through mergers and acquisitions—commonly known as M&A.

I want to be careful here to not paint all mergers and acquisitions in a negative light. Some transactions create tremendous value for business stakeholders—leadership, employees, customers, and shareholders. Value creation through acquisitions is typically a result of careful consideration and integration of an M&A framework into the company’s long-term strategic plan. Here, lists of potential acquisition targets are meticulously curated and evaluated for financial, operational, and cultural fit. The customer is at the forefront of all internal merger discussions and the impact of a potential transaction on employee welfare and engagement is top of mind. A robust financial model is created as part of the development of the rationale for the transaction. In value-adding transactions, management has given considerable thought to the change management process that teams and individuals will need to go through, both for the acquiring company and the acquired.

When mergers are set up for success, management understands that the acquisition process by definition is accompanied by secrecy and backroom dealings that will take their teams and people by surprise. Management understands that merger integration—the physical process of bringing two entities together—takes time and is fraught with uncertainty. Brand transitions along with operational and technology integrations will take longer and cost more than anticipated.

However, like the budgeting process, c-suite magical thinking poses the biggest threat to value addition in M&A and can quickly turn what on the surface looks like a great idea and a big value-add into a transaction that ends up destroying corporate value. Here, magical thinking shows up in the following ways:

• Two vastly different corporate cultures—that of the buyer and the seller—will mesh together and not pose a threat to the combined business. Corporate culture is established through years of lived experience of the people and teams that make up a business. To expect that crashing two cultures together will be easy or quick is foolhardy.

• Teams and individuals will quickly and efficiently navigate through their respective change management curves. The individuals who have been working on the transaction have already dealt with their own feelings about the merger and what it means for them personally and forget that everyone else has to go through the same process.

• Operational systems, processes, and technologies will be easily integrated. Since most businesses customize operational tools and technologies to serve the customer, the integration of two custom solutions is never easy.

• Acquisition integration will occur on top of everyone’s current responsibilities. In most cases, there’s no operational slack at either company—the acquired or acquirer. Yes, there may be redundancy in teams and processes, but those redundancies are typically calculated as benefits in the financial model and redundancies are quickly eliminated post-transaction, which leads to limited operational slack. There is no such thing as operating at 110%. In the short term, you either have capacity or you don’t.

• The customer is going to love the combined company in the same way it loved the acquirer or acquired firm. The chaos of the acquisition integration, the loss of connection to a familiar brand and brand promise, and changes customer/client service processes are just a few of the reasons that customers look for alternatives post-transaction.

• The financial model that underlies the rationale for the transaction isn’t flawed, creating a rosy picture of the acquisition, the integration process, and the market power of the combined entity. Since the vast majority of transactions are kept secret until the big reveal, it is nearly always the case that input from the people who are closest to the work is not considered. This lack of strong data and connection to the actual work means that most acquisition models will indeed contain flaws. Tension escalates when senior leadership expects that a flawed acquisition model will guide the actual integration and post-transaction results. This behavior creates the same angst that’s generated when a “thou shalt” top-down budget, is forced upon teams.

So we’ll leave our exploration of the growth trap here for now. We’ve discussed budgeting and M&A. The growth trap can also show up in large brand transitions/refreshes and technical transformations. Do we want companies to grow? Absolutely. Growth is a key driver to our global capitalistic system, supporting equity and debt valuations around the world. Should leaders always be driving for growth? The answer is maybe and to what extent? Growth for the sake of growth should be minimized. Growth as part of a carefully designed strategic plan that considers the needs of all stakeholders should be encouraged.