Why Acquisitions Fail

"The patchwork that follows acquisitions to make all the products compatible with your products creates a lot of bugs. We, [however], use the same architectural framework." - Sridhar Vembu

While the above statement was made in the context of software applications and how well they work with each other, the sentiment holds true for organizations too. Mergers and acquisitions between renowned companies make huge headlines all the time. But are they actually worth the hype? While some companies manage to maximize value for stakeholders through such deals, many companies end up finding out the hard way that it was no match made in heaven. There's no hiding the fact that the vast majority of acquisitions fail - in fact, 70-90% of them. In this article, let's explore some of the factors that make M&As difficult or unsuccessful. 

Exaggerated expectations 

Acquisitions are based on projections and estimates about how things might play out in the future. But unfortunately, reality is far more complex than the rosy picture that stakeholders would like to believe. It's hard to discern exactly what transformations a deal will bring, and whether the changes will be for the good or the bad. Expectations are often shown to be grossly inflated and the unflattering truth emerges over time.

Acquisitions are naturally expensive affairs. So when a company acquires another, and realizes that despite all conditions being favorable, the ROI is still lower than projections, it can cause discontent. If the acquired company is then being pushed to deliver better results or work harder, it might cause added resentment. This is not to add that that the cost of such expensive deals are often borne out by the customers themselves as it becomes a part of the price they pay.

Often an acquisition deal is committed to paper based on a variety of assumptions: that the leadership team on the other side thinks and feels the same, that they want the same things, that the two businesses understand each other and what makes them successful, and so on. But there needs to be proper dialogue between leadership teams to test these assumptions. Sure, the deal unlocks new markets for both parties, but what about the long-term visions of the two entities? Will the acquiring company adopt a colonizer mindset, or will it be willing to see the world through the eyes of the company being acquired in order to identify exactly what factors drive their success and what makes them tick? Authority and leadership might have been simple enough before the acquisition but within the new entity, how do powers to recruit, lay off, offer pay hikes, sign deals, and so on change? When these issues are not outlined clearly, it leads to festering misunderstandings later.

Culture misfit 

While it's easy to think about business purely in terms of the more concrete aspects such as intellectual property, physical assets, market dynamics and so on, people forget that the intangibles can also make or break a deal. Often, companies can acquire a company and realize that despite many synergies at play, they are incompatible in terms of culture. This impacts the organization's day-to-day operations.

People often underestimate culture fit as a key factor since culture is invisible to those who have spent a lot of time within an organization. On the other hand, people from outside the org immediately sense it and understand that these currents influence everything in the org in a critical and unique way. When you're steeped in it, it's difficult to envision a different way of doing things and how that may clash with your own way.

Let's take a hypothetical scenario. One set of employees belong to an organization where they are used to decentralized and inclusive decision-making processes, high risk tolerance and the daring for change and experimentation, a loose and informal collaboration atmosphere, and an emphasis on teamwork. Now imagine that they have been acquired by a far bigger and more conservative organization. Here, they find that the organization is more rigidly hierarchical, that decision-making is very top-down, that the leadership is risk-averse (they cannot risk displeasing their shareholders), and that employees have to approach work through more standardized and formal ways. It's easy to see that the lack of culture-fit permeates too many aspects of work. From unforeseen friction in day-to-day operations to misalignment in job satisfaction, work goals, and criteria for personal success, the new environment provides numerous opportunities for frustration. It's only natural that the employees will look for new opportunities, and unfortunately leaders and top talent are more mobile.

Political clash 

While organizations usually have their own complicated history of internal politics when it comes to ascending the rungs of the corporate ladder with various employees vying for plum roles, absorbing a new company throws the existing balance for a toss. It complicates the picture, and seemingly 'foreign' individuals end up grabbing titles that were expected to go to the 'homegrown' heroes. This works both ways, and leads to disgruntled employees on both sides. This leads to key executives jumping ship in search of better opportunities.

Technological misfit 

Software companies acquire other companies in order to expand their product line or to leverage certain synergies. Financial wizards and business leaders may sign off on the deal with zeal but the underlying technological systems may beg to differ with them. This kind of arranged marriage looks good on paper but tech incompatibility leads to unsavory outcomes such as data loss, and the outage of certain features or tools. Ineffective integrations (thanks to differences in architecture) mean that despite the company having an expanded range of products thanks to the acquisition, the products themselves do not work together well. Consumers will be understandably frustrated in these situations as they will expect products with the same branding to work seamlessly together. These scenarios erode trust in the brand. Moreover, a force-fit may reduce the potential for innovation and affect competitiveness for the products. Products with forced integrations can't match the nimbleness of ones that don't have these issues. While technological misfit is often seen among tech companies, it is not limited to the software domain. Incompatibility between products or assets can plague companies from a wide range of sectors.  

Acquisitions in the long run 

Unfortunately, the culture of rampant acquisitions is built on the back of bloated valuations and shareholder money. Companies often acquire because they can, not stopping to think whether they should. Whether such deals make long-term sense is a question that is left unanswered.