Acquisitions: The Process Can Be a Problem

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Although we’re seeing more acquisitions on a larger scale more often than ever before, many studies show that these deals (especially those taking companies beyond their base businesses) do not live up to their advocates’ expectations.1 Clearly, there is a difference between making acquisitions and making them work. And clearly, we must look beyond conventional advice on making acquisitions to understand how to manage them better.

Most analysts stress one of two ways to make acquisitions work.2 The first emphasizes the strategic fit between the acquirer and its target and the importance of ensuring that the proposed subsidiary can contribute to the parent’s strategy. The second approach stresses the need to achieve an organizational fit between the two companies by matching administrative systems, corporate cultures, or demographic characteristics. Sufficient degrees of strategic and organizational fit ought to guarantee an acquisition’s success.

Why, then, have even friendly acquisitions that apparently satisfy this advice failed to work out so often? We believe that managers can gain insight into this question by looking beyond strategic or organizational fit to the acquisition process itself. Indeed, our research identifies three factors inherent in the process that can affect the result.

1. The involvement of specialists and analysts with particular expertise and independent goals often results in multiple, fragmented views of the agreement. General managers may find it difficult to integrate these perspectives.

2. Increasing momentum to close the deal can force premature closure and limit consideration of integration issues.

3. Both buyer and seller are often unable to resolve important areas of ambiguity before they complete the agreement.

These factors may crop up in the planning for an acquisition, which may be over a protracted period, or during negotiations, which are likely to be rushed. (See the “Research Method” sidebar.)

Of course, the principal parties to an acquisition cannot always control the negotiating process or its timing. Intermediaries and third parties have their own agendas, while a quick—even a hasty—decision to go ahead with an acquisition may be unavoidable. Recognizing these limitations, in this article we offer managers an approach to understanding barriers in the acquisition process as well as practical advice to deal with them.

Fragmented Perspectives

Managers and analysts with specialized skills often dominate the process of making an acquisition. Because of the technical complexity of the required analyses, the number of tasks to be accomplished, and the lack of expertise among in-house managers, it is difficult for one manager or a group of managers to maintain a generalist’s grasp of the transaction. Although most top executives recognize that an acquisition strategy requires such a perspective, the problem of integrating a variety of overspecialized and fragmented views on the deal is quite common. As one CEO told us, “During the negotiations, there were so many different people involved, it was hard to tell who was doing what, let alone how all their efforts would tie together.”

Another CEO described how within 30 hours he assembled a team of more than 150 specialists, including investment bankers, management consultants, attorneys, accountants, as well as staff people from his company to analyze a prospective acquisition. Only a few of these people had worked together before, and the entire process lasted only six days. This example, while extreme, highlights the problems generated when large teams of specialists with a narrow focus are thrown together to analyze a deal under intense time pressures. Under such conditions, people who have not worked closely together before or who do not share a common expertise and jargon can communicate only the most standardized information quickly and effectively.

Within a given specialty, people tend to gather similar data and produce comparable analyses. As larger groups of people with different specialties get involved, decision makers have more difficulty comparing and integrating analyses. Although specialization is an inherent part of decision making in many organizational settings, the resulting isolation of specialists in acquisitions leads to a lack of integration in their analyses. As a result, top managers often focus their attention on more easily and quickly communicated issues of strategic fit rather than the more subtle and qualitative concerns of organizational fit.

This dynamic occurs for several reasons. First, strategic fit issues directly reflect the espoused purpose of the acquisition. Second, these issues often lend themselves to standardized analytical approaches that investment banks and consulting firms use to assess markets, products, industries, or technologies. In contrast, issues of organizational fit are less clear cut. For example, consultants and investment bankers cannot develop a model of organizational analysis for an acquisition candidate that they can apply from client to client as easily as they can develop a model of financial valuation of a company’s securities or the strategic attractiveness of a particular product-market niche. Third, few channels of communication to exchange information exist among the various groups of analysts who perform their work in different time periods.

Although operating considerations are important in assessing the value of a target company, line managers do not normally participate in preacquisition analyses. Moreover, few of the specialists who are involved possess operating experience in the companies’ industries. The skills necessary to negotiate an acquisition differ from those required to run things afterwards. Consequently, specialists in negotiation and number crunching may think that operating matters are outside their competence and may confine themselves to more familiar and easily analyzed financial issues. Specialists also tend to view issues of organizational fit as postponable and less prestigious: one does not work with CEOs to assess organizational fit; one deals with operating managers. Since resolution of these issues is not essential to completing the acquisition, they are postponed for others to handle.

Questions of organizational fit are also more ambiguous, more subjective, and therefore more open to challenge. For example, investment bankers must certify the appropriateness of the offering price in a “fairness opinion” to the purchaser’s and seller’s management and shareholders. Although they acknowledge the importance of qualitative organizational issues in acquisition outcomes, the investment bankers we interviewed told us that they rely chiefly on calculations based on purely quantitative criteria that can be more easily defended if challenged legally.

Integrating Perspectives

Top executives can overcome the problem of fragmented perspectives by taking an active role in the acquisition process. They need to search for ways to structure a balance among different groups and interests to ensure an integrated set of analyses. Achieving such harmony increases the likelihood that the company will realize its broader strategic goals in the acquisition. One executive told us, “Until I stood back and realized that it was my company and they [the investment bankers] were working for me, I accepted their suggestions at face value, primarily because of my own inexperience. But on reflection, I was able to see that they only had one piece of the puzzle.”

Biases are not restricted to outside advisers; everyone on the management team (including the CEO) has them. As one CEO we spoke with said, “In our first couple of acquisitions, I found myself only looking at the capacity aspects of the deal because we were trying to expand capacity and move down the experience curve. Then as problems began to arise, I realized that my overemphasis on one issue set the direction for everyone else, and a great many equally important factors were swept under the rug.”

Another way to address the problem of integrating perspectives is to include operating managers on the negotiating team. This step can provide more focus on issues of organizational fit, balance financial and operational considerations, and ensure managerial continuity if the agreement goes through.

For example, Sam Ginn, vice chairman of the Pacific Telesis Group, involves in negotiations the operating manager who would be responsible for the new subsidiary. At PacTel, the arguments justifying the acquisition form the basis of the plan on which the target company will be run and against which the manager will subsequently be evaluated. This practice is intended to bring more operating realism to the analysis of the potential subsidiary. It also focuses valuation of the acquisition candidate as an ongoing business of the parent rather than on its historical performance as an independent entity.

If time or other factors prevent placing operating managers on the negotiating team, a company may use other methods to ensure consideration of organizational fit. Our research uncovered two interesting approaches in which companies encouraged different sets of advisers to work together.

One company sent teams of outside consultants into both their own company and the candidate (with the CEO’s permission) to work on a related problem. The consulting teams were not told that an acquisition was under consideration until after they had analyzed the two organizations independently and presented initial reports. The prospective buyer then brought the consulting teams together to explore the feasibility of integrating the two companies via acquisition. Another corporation established two in-house analytical teams, one supporting the acquisition and the other opposing it. The groups helped ensure that the company gave enough time and attention to critical discussion of the acquisition.

Many companies overlook the valuable role that an integrator can play in the acquisition process. Formalizing such a role can be an important step to counteract the effects of fragmented perspectives. One approach is to identify a gadfly who can watch out for process-related problems. If such a person lacks decision-making authority, however, his or her effectiveness may be limited, and other managers may dismiss him or her as the house nay sayer.

Another, more promising approach is to make sure key decision makers can remain as detached evaluators of the process while becoming involved at key junctures to assure integration of information and balance of perspectives. A third solution is to have two influential company officials adopt complementary roles, one heading the acquisition effort and the other focusing on process or integration problems. We make these suggestions to emphasize the importance of ensuring high-level advocacy for integrating the two businesses. (See the sidebar entitled “How One Company Does It” for the Loral Corporation’s approach to making acquisitions.)

Increasing Momentum

Researchers and financial analysts usually describe acquisitions as calculated strategic acts. In sharp contrast, people directly involved in the acquisition process often point to powerful forces beyond managerial control that accelerate the speed of the transaction. Pressure to close a deal quickly can prevent managers from considering strategic and organizational fit issues completely and dispassionately and can lead to premature conclusions. As Warren Buffett, chairman of Berkshire Hathaway, observed in explaining the recent wave of acquisitions, “Managerial intellect wilted in competition with managerial adrenaline. The thrill of the chase blinded pursuers to the consequences of the catch.”3

Various forces increase momentum in the acquisition process. First, decision makers need secrecy and intense concentration. Once the possibility of a deal becomes known in a company, business as usual virtually ceases, and a period of uncertainty sets in for shareholders, employees, suppliers, customers, and competitors. In such situations, the time given to analyzing data and considering a wide range of options tends to dwindle as people try to consummate the arrangements before news is leaked that could cause disruptions internally or in the financial markets.

The personal and organizational stakes involved in an acquisition are greater and more uncertain than those most managers face in their day-to-day work. As a result, managers involved in the process tend to isolate themselves from other company activities, a reaction that heightens feelings of tension and uncertainty. The strain everyone feels tends to worsen the effects of already intense time pressures, which augments still further the desire to wrap things up. “It’s torrid,” said one investment banker. “We’re at the limits of our physical and mental capacities.”4

Second, acquisition analyses and negotiations frequently require a substantial, uninterrupted time commitment from participants. This investment of time can make the acquisition seem more important than it is and reduce executives’ willingness to walk away from it. The more managers identify with an acquisition, the less likely that they will be able to consider it objectively and accept criticism that could slow it down. Feeling that they have put their reputation for sound, decisive judgment on the line by initiating the process, senior executives may hurry to complete the deal, in part to justify their earlier decision to pursue the target.

Third, each major player in the acquisition process has distinctive interests that tend to increase momentum to finish things up. These players include senior executives in the acquiring and target companies, staff and operating managers in both organizations, and outside advisers.

For managers in the acquiring company, the target may be a stepping-stone to personal rewards and advancement as well as a device to enhance their own reputations. A corporation’s approach to acquisition analysis and its reward system often unintentionally encourage completing the deal at all costs. In many companies, for example, after the board authorizes the CEO to begin an acquisition search, a task force or committee is established. This committee then develops a list of criteria and screens a variety of possibilities, often with the help of an investment banker. This group may think it has failed if it finds no candidate. Moreover, task force members may see brighter career opportunities for themselves as a result of negotiating an acquisition successfully.

Managers can never fully reduce (nor should they ever eliminate) the uncertainty or opportunities associated with performance and career expectations. But senior executives should recognize the impact this factor has on their companies and ensure that, whenever possible, career opportunities and rewards are based on performance that extends beyond any single acquisition.

Individual career aspirations can also indirectly affect the buyer’s core business operations. For example, an aging electronics company made a series of acquisitions to gain access to new and different technologies. Because some managers viewed these new subsidiaries as the only path for growth in the company, they arranged transfers to the recent acquisitions and took with them important operating people from their old divisions. As a result, the base business foundered just when executives had expected it to provide the stability and resources for the company’s new strategic thrust.

Other players whose interests are at stake include outside advisers, especially investment bankers. Because they are compensated on a transaction basis, their fee does not vary dramatically if a deal takes three weeks or nine months to close. It is in their interest, therefore, to conclude the process quickly—in part because, within investment banks themselves, merger and acquisition activity involves no risk capital. Indeed, merger and acquisition work offers a more certain path to profitability than do traditional corporate finance or security sales and trading aspects of the investment banking business.

This situation may create a serious problem: companies use these outside experts to provide objective, professional advice, yet these advisers face a conflict between representing their own interests and those of their clients. As Felix Rohatyn of Lazard Freres puts it, “Fees are sometimes ten times as large when a deal closes as when it doesn’t, so you’d about have to be a saint not to be affected by the numbers involved.” Indeed, he concludes that “the level of fees has reached a point that …invites the suspicion that there’s too much incentive to do a deal.”5

Of course, there are some restraints on increasing momentum to make deals. Prevailing laws and most corporate bylaws require the board of directors to approve acquisitions. Yet the extent to which the board approval process will slow a deal’s momentum depends on the board’s independence from management, its experience with acquisitions, the diversity of the directors, and the depth of their understanding of the corporate strategy. When board members lack acquisition experience, their deliberations may focus on the review of financial or market information that the company’s managers or investment bankers make available instead of encouraging management to initiate more operationally oriented analyses, which are important for predicting postacquisition success.

As the chief financial officer of one company we studied said, “The speed with which things took place was mind-boggling. If we had done that sort of quickie analysis for a capital expenditure decision, the board’s audit committee would have been down around our ears in a minute!” In addition, if the board has advocated acquisitions as a way to reshape corporate strategy, it may tend to focus on results (for example, was a company acquired or not) and avoid questions that deal with how the expected integration of the acquisition will take place. Perhaps board members assume that management has already evaluated these issues adequately.

Most companies do not make acquisitions sequentially with several acquisitions coming close together. As a result, few companies have opportunities to learn over time. When a company has experience in integrating acquisitions successfully, this familiarity may serve to slow momentum. One manager, for example, told us, “We did not want to rush into an acquisition program…primarily because we had all been burned before at previous companies by acting too hastily.”

Of course, it is not always possible or desirable to slow down the acquisition process. Once a potential candidate is identified, managers are faced with the very real threat that another company could buy it. Indeed, moving quickly to acquire another company is appropriate in many cases. For example, if a management group sees only one candidate that meets its strategic requirements, or if imminent environmental changes could close off an opportunity, then quick action may be the best choice.

Managing the Rush to Close

For each acquisition, managers should consider what factors are accelerating the process and distinguish openly between corporate strategy and such factors as the interests of special groups or individual career and ego issues. These considerations are, of course, intertwined in most situations. But addressing each one separately in a forthright manner can help the participants challenge easy or convenient explanations for making the deal rapidly. The CEO of a large service business reported, “In my previous company we had made quite a few acquisitions quickly because we truly believed that if we didn’t snap them up, somebody else would. After several years, we had indigestion so badly that we wished somebody else had acquired them. Our haste in putting the deals together didn’t allow us to consider fully the implications of what we were doing.”

Experienced acquirers we interviewed consistently emphasized that it is better to let a deal go than to let momentum sweep a company into a partnership that it has doubts about. This caution is reflected by General Electric’s director of planning, Michael Carpenter, who surveyed acquisitions over the last decade and concluded that 95% exhibited poor results.6

A more concrete set of actions to mitigate momentum involves adjusting the incentives to do the deal that the various parties are experiencing. The CEO and board should address the ways that such motives can escalate pressure to consummate an acquisition. We already mentioned how investment bankers’ fee structures give them an incentive to close every agreement as rapidly as possible. Because acquiring company managers can exercise the most control over internal rewards, we will focus on those incentives here.

These rewards can take many forms. Career enhancements and ego satisfaction are two we have already highlighted. Acquisitions can help managers’ careers by enabling them to move from staff to line positions, or to gain visibility by becoming involved with a key strategic move, or to receive promotions or bonuses for closing a deal. For example, one large, diversified corporation uses a person’s success in identifying and negotiating acquisitions as a criterion for advancement. Another practice that some companies adopt is to appoint key acquisition analysts to top management roles in the newly acquired subsidiary.

These procedures may encourage managers to think about taking the business into new areas, may foster managerial continuity throughout the acquisition process, and may help integrate preacquisition analysis into postacquisition operations. But these methods also reward the pursuit of inappropriate acquistion candidates and can compound the problem of increasing momentum. An alternative that seems to address both sets of problems is the early and prominent involvement of line managers in the acquisition process. Their experience can help the acquisition team remain focused on potential operating problems that analysts who lack an operating orientation might miss.

When CEOs or other managers believe that the outcome of a proposed acquisition could affect their reputations, pressure to consummate the deal builds. People’s commitment also appears to escalate as they become increasingly involved in the process. It would be naive to recommend that managers simply attempt to maintain a sense of distance and perspective—as though that were easy to do. But one technique that can help is a formal check-and-balance system that keeps those responsible for dispassionate review out of the process. The CEO or the board can play such a role.

Finally, a company’s career development and other reward systems should provide incentives to make appropriate—and not just any—acquisitions. It may still be difficult to slow the momentum, even with changes in reward structures. Some companies counter this problem by involving experienced board members and managers in acquisition activities. An experienced team is more likely to identify and probe into potential trouble spots and resist the urge to pursue poor choices. Our research indicates that the experience most lacking on acquisition teams is not that of staff or consultant specialists but of general managers who have been involved in all phases of an acquisition—including trying to make the partnership work.

Unresolved Expectations

During the acquisition process, both suitor and target enter into negotiations with certain expectations about the purposes of the acquisition, the benefits they expect, levels of future performance, and the timing of certain actions. To reduce the potential for disagreement during the negotiations and to facilitate closure, the parties often agree to disagree for the moment and postpone resolution of difficult issues. Such practices may help to provide maneuvering room in negotiations and opportunities to save face in public announcements. They may also help both parties find a common ground for agreement on seemingly intractable issues during the fast-paced negotiations.

The two sides, however, must eventually clarify those parts of the agreement that remain ambiguous. If, after the acquisition, the parties’ interpretation of these points is significantly different, relationships woven during the negotiating, including fragile bonds of trust, may begin to unravel. As trust breaks down, both parent and subsidiary managers may overreact and become involved in bitter disputes. The ambiguity that had helped to close the deal may become a source of difficulty and conflict once the agreement is finalized.

For example, senior managers in a consumer products company and in a prospective subsidiary generally agreed that the purpose of the acquisition was to provide entry into new markets for the parent’s existing products. But the two sides could not reach agreement on the responsibility for and on the timing of these actions. Instead, they left these decisions to other managers who had not been involved in the negotiations. The differences of opinion that subsequently arose led managers in the parent and the subsidiary to compete with each other rather than with outside competitors, which hurt overall corporate performance.

When their expectations for postacquisition performance are not met (often predictably), parent company managers may believe that their earlier doubts about weak or incompetent management in the subsidiary were correct. Managers in the two companies can enter a cycle of escalating conflict and distrust in which parent company executives intervene more directly in the new subsidiary’s affairs and impose more rigorous performance milestones. In response, managers in the subsidiary may vigorously defend their autonomy against all parent requests, thereby fueling the parent’s perceived need for increased control and intervention. As conflict builds, managers in the acquired company are likely to believe that their worst fears of a malevolent takeover have been confirmed.

In short, managers of acquisitions face an ironic situation: ambiguity is useful—if not essential—during negotiations. Yet the very ambiguity that aids negotiating sows the seeds of later postacquisition problems.

Agreeing on the Essentials

Managers should not seek to eliminate the ambiguity and uncertainty that are bound to be present. Instead, they should focus it. Participants on both sides need to examine important aspects of the deal and decide which outcomes or actions are essential to them.

Companies can resolve these ambiguities successfully by separating negotiating issues into two categories: inflexible requirements to which both parties must agree, and negotiable items that can either be resolved later or left ambiguous. Identifying and distinguishing between points of flexibility and inflexibility increases the chances that both parties will ultimately be satisfied with the agreement’s outcome because each has the opportunity to make clear what its nonnegotiable expectations are. The two sides should address these points explicitly and should be willing to cancel the deal if they cannot reach agreement.

Once they take this step, managers on both sides can then focus their attention on outcomes or actions they consider important but negotiable. A senior manager explains the point, “Each of our acquisitions represents a new entry into a different market that builds on our basic competence. We expect a certain return on our investment and have developed and refined a set of control systems that are an essential ingredient in our management approach. If the potential acquisition isn’t willing to accept these terms, then we simply don’t proceed any further.” The rule of thumb is: Don’t expect to get what you’re not willing to ask for.

Classifying and distinguishing sets of issues has other benefits too. Beyond helping managers understand what each company’s truly inflexible requirements are, the practice allows other issues to be left vague and flexible. Managers on both sides can develop an agenda for dealing with deferred issues in the immediate postacquisition period. In many cases, the operating managers, who must make the acquisition work after the deal, should handle these questions.

Although some changes must be left to the operating managers, guidance should be provided concerning the purpose of the acquisition and the performance requirements. If a common focus is lacking, mistrust between the parties will almost inevitably develop, forcing managers on both sides into defensive positions rather than an attitude of cooperation. Our research suggests that the common focus should be stated in qualitative terms wherever possible and reflect the acquisition’s strategic purpose.

For example, a parent company might tell a new subsidiary, “We expect that your division will be an important outlet for the products of our ABC division within the next three or four years,” or “Within five years, we want to become a key player in the ephrastator business. We see your XYZ division as our entry into that business.” While the specifics in such cases are left vague, each statement contains an objective that can provide useful guidance to the operating executives. Such clarification helps both the negotiating and the operating managers to sort out the problems and issues that must be addressed. Equally important, clarification provides an external focus for their combined activities and reduces the possibilities of political infighting.

In contrast, overly precise statements of performance expectations can backfire and increase (rather than decrease) the ambiguity and uncertainty in the situation. Precise definitions of expected results are often based on financial calculations that outside analysts have prepared with neither a detailed operating knowledge of the companies or industry nor a stake in making it work. If detailed objectives become a straitjacket, they can have serious consequences as business conditions change. While qualitative statements are more ambiguous, postacquisition managers will have more room to maneuver if they have a general framework to guide them in the future.

Understanding the Process

According to our research, a generally unacknowledged factor—the process itself—affects the outcomes of many acquisitions. We are not suggesting that these barriers occur in every acquisition; their frequency varies with the circumstances. But we have found that hindrances do exist in the acquisition process, and they can have a significant impact on the ultimate success of the deal. Also, understanding how they might affect your particular situation can help minimize their detrimental effects. (See the sidebar entitled “Diagnostic Questions.”)

Some managers may decide that the impact of these barriers is an incidental cost of doing business and they can ignore them in their acquisition strategy. Other executives may take steps to reduce the costs of the barriers. We recognize that some of these problems may be insurmountable; sometimes institutionalized forces in the acquisition process are stronger than any of the recommendations we have made. Several of our suggestions ask managers to restructure their thinking and reappraise their company’s acquisition strategy. We have no illusions about how difficult this is to do.

Our suggestions are only the first step. Beyond that, it may be time for senior managers to rethink their expectations about acquisition activity in fundamental ways. A conservative reassessment by executives and board members in both buying and target companies as to the acquisition’s purpose and their ability to gain a long-term benefit from the proposed combination may expose other problems that each party should be aware of. Developing a better understanding of the subtle yet powerful role that the acquisition process plays in acquisition outcomes is an important part of that reassessment.


1. See, for example, Michael C. Jensen and Richard S. Ruback, “The Market for Corporate Control: The Scientific Evidence,” Journal of Financial Economics, vol. 2, 1983, p. 5; Michael C. Jensen, “Takeovers: Folklore and Fact,” HBR November–December 1984, p. 109; Peter Dodd and Richard S. Ruback, “Tender Offers and Stockholder Returns: An Empirical Anaylsis,” Journal of Financial Economics, vol. 5, 1977, p. 351; Geoffrey Meeks, Disappointing Marriage: A Study of the Gains from Merger (Cambridge, England: Cambridge University Press, 1977); and Dennis C. Mueller, ed., The Determinants and Effects of Mergers (Cambridge, England: Oelgeschlager, Gunn, and Hain, 1980).

2. See, for example, Malcom S. Salter and Wolf A. Weinhold, Diversification Through Acquisition (New York: Free Press, 1979), John Kitching, “Why do Mergers Miscarry?” HBR November–December 1967, p. 84; Charles M. Leighton and G. Robert Tod, “After the Acquisition: Continuing Challenge,” HBR March–April 1969, p. 90; and Myles L. Mace and George G. Montgomery, Jr., Management Problems of Corporate Acquisitions (Boston: Division of Research, Harvard Business School, 1962).

3. Annual report, 1982.

4. Kenneth H. Miller, Merrill Lynch director of mergers and acquisitions, quoted in the New York Times, July 3, 1984.

5. Quoted in Time, May 24, 1984.

6. Michael Carpenter, quoted in Thomas J. Lueck, “Why Jack Welch is Changing G.E.,” New York Times, May 5, 1985.

A version of this article appeared in the March 1986 issue of Harvard Business Review.



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