Not All M&As Are Alike–and That Matters


We know surprisingly little about mergers and acquisitions, despite the buckets of ink spilled on the topic. In fact, our collective wisdom could be summed up in a few short sentences: acquirers usually pay too much. Friendly deals done using stock often perform well. CEOs fall in love with deals and don’t walk away when they should. Integration’s hard to pull off, but a few companies do it well consistently.

Given that we’re in the midst of the biggest merger boom of all time, that collective wisdom seems inadequate, to say the least. I recently headed up a year-long study of M&A activity sponsored by Harvard Business School. That study sought to examine questions of M&A strategy and execution with a new rigor. Our in-depth findings will emerge over the next year or two, in the form of various books, articles, and cases.

Our work has already revealed something intriguing, however. The thousands of deals that academics, consultants, and businesspeople lump together as mergers and acquisitions actually represent very different strategic activities. (See the table “M&A Strategies: Distinct Activities Mean Differing Challenges” for a breakdown of large acquisitions from the last three years.)

M&A Strategies: Distinct Activities Mean Differing Challenges

Acquisitions occur for five reasons:

  • to deal with overcapacity through consolidation in mature industries;
  • to roll-up competitors in geographically fragmented industries;
  • to extend into new products or markets;
  • as a substitute for R&D; and

  • to exploit eroding industry boundaries by inventing an industry.

Despite the massive number of books and articles published about mergers and acquisitions, no one has ever tried to link strategic intent to the implications for integration that result. It stands to reason that executives overseeing each of these activities face different challenges. If you acquire a company because your industry has excess capacity, you have to figure out quickly which plants to close and which people to lay off. If, on the other hand, you acquire a company because it is developing a hot technology, your challenge is to hold on to the acquisition’s best engineers. These two scenarios require the acquiring company to engage in nearly opposite managerial behaviors.

I will turn now to the problems that arise in different types of acquisitions, which I will examine using the resources-processes-values framework. Resources refer to tangible and intangible assets, processes deal with activities that turn resources into goods and services, and values underpin decisions employees make and how they make them. (See the sidebar “Some Order in the Chaos” for more on these terms.)

Scenario 1: The Overcapacity M&A

A great many mergers and acquisitions occur in industries that have substantial overcapacity; these tend to be older, capital-intensive sectors. Overcapacity accounts for 37% of the M&A deals in our breakdown. (See the exhibit “Rationales for M&A Activity.”) Industries in this category include automotive, steel, and petrochemical. From the acquiring company’s point of view, the rationale for acquisition is the old law of the jungle: eat or be eaten. This kind of deal makes strategic sense, when it can be pulled off. The acquirer closes the less competitive facilities, eliminates the less effective managers, and rationalizes administrative processes. In the end, the acquiring company has greater market share, a more efficient operation, better managers, more clout, and the industry as a whole has less excess capacity. What’s not to like? (Unless you overpaid.) Thousands of deals are undertaken with these objectives in mind. However, few of these deals have been judged successful after the fact. Why?

Rationales for M&A Activity The data for this analysis are from Securities Data Company. Target companies and acquirers were identified by a four-digit SIC code. When the acquisition was made by a division of a multibusiness company, the division’s SIC code identified the acquirer. Where the SIC code of an acquiring division was not identified, the deal was dropped. The sample contained 1,036 deals. The deals were sorted by strength-of-business similarity measured by comparing the companies’ SIC codes. Deals in which all four SIC code digits matched were most alike, followed by three-digit matches, then two-digit matches, and so on.

Decades of experience show us that it’s extraordinarily difficult to merge well-established, large companies that have deeply entrenched processes and values. This, of course, describes most companies in mature industries. These are usually win-lose games: the acquiring company keeps open more of its own facilities, retains more of its own employees, and imposes its own processes and values. Employees of the acquired company don’t have much to gain. As with any win-lose scenario, the loser doesn’t make it easy for the winner. And because these are often megamergers, they tend to be onetime events, so the acquirer doesn’t learn from experience.

For those reasons and more, excess-capacity deals require special attention, since just about anything that can go wrong with integration does. I’ll explain each element along the resources-processes-values spectrum.

First, consider resources. It’s far from easy to make good on the goal of rationalization. Inevitably, irrational factors intervene, in the form of interorganizational power dynamics, legal issues, or plain old human nature. These issues complicate what might initially seem to be clear priorities.

Let’s start at the top, with the senior managers from both companies. Especially in a merger of equals, this piece is always messy, time-consuming, and political. Management teams focus their energies on the battle to maintain their positions, and the business suffers. This pattern is repeated all the way down the ranks. Problems exist even in acquisitions where one company is much larger. The best people from the new company are likely to leave. When mixed teams remain, employees must reconcile company cultures. Years after such mergers, it is common for managers from acquirer Alpha to describe an employee from the acquired company as a Beta company guy.

Deciding which physical facilities to eliminate is not necessarily simpler or cleaner than deciding which people to cut. Facilities vary by location, product mix, accounting costs, environmental problems, degree of governmental oversight, and staffing. Companies inevitably argue about the relative quality of their resources. The surviving business will usually assert that its resources are superior, but that is not always the case. And acquired managers, asked to decide which facilities or product lines to cut, are almost never able to design a good exit strategy; they’re just too invested in the status quo.

Al Dunlap claimed that these cuts can be made quickly and with blunt tools. However, case studies of Scott Paper, where Dunlap (as CEO) succeeded, and Sunbeam, where Dunlap (as chairman and CEO) didn’t, reveal something else. At Scott Paper, operating managers had an extensive understanding of the need for rationalization and how it could be accomplished; at Sunbeam, they did not. Dunlap’s top-down approach—and his bluster—masked the important work of lower-level Scott Paper managers.

Business processes are no easier to integrate than employees. Large companies have elaborate systems for measuring performance, developing products, and allocating resources, which are absolutely central to how they do business. Simply imposing a set of new systems takes time, and it may take years for managers to use them effectively. When Daimler-Benz and Chrysler merged, the questions multiplied by the day, and they ranged from the trivial to the profound.

Daimler-Chrysler started as a merger of equals in an industry the two companies’ analysis revealed to have staggering overcapacity. The top management of both companies recognized the particular assets and qualities that made the other a perfect fit. But startling differences in their management approaches soon disrupted their working relationships.

German management–board members had executive assistants who prepared detailed position papers on any number of issues. The Americans didn’t have assigned aides; they formulated their decisions by talking directly to engineers or other specialists. A German decision worked its way through the bureaucracy for final approval at the top. Then it was set in stone. The Americans allowed midlevel employees to proceed on their own initiative, sometimes without waiting for executive-level approval. The Germans smoked, drank wine with lunch, and worked late hours, sending out for pizza and beer. The old Chrysler banned smoking and alcohol in its facilities. The Americans worked around the clock on deadlines but didn’t stay late as a routine.1

Not surprisingly, these cultural and process differences were exacerbated, not improved, when tensions between the people at the very top intensified. When Thomas Stallkamp, Daimler-Chrysler president, created an in-house advisory staff to support the Chrysler members of the Daimler-Chrysler board, Jürgen Schrempp, Daimler’s CEO, accused him of block voting. When Stallkamp raised questions about working style, Schrempp chastised him for whining.

Finally comes the issue of differing company values. These are somewhat harder to pin down than processes, but they’re just as important. Values include shared assumptions about what the company owes its employees and vice versa, which kinds of behaviors are rewarded, and what the company stands for. It’s common for companies that merge in mature, oligopolistic industries to have similar values. For example, when Chemical Bank acquired Manufacturers Hanover and, later, Chase, these New York banks had similar cultures led by professional bankers, and their integrations were successful.

But when participants in a megamerger don’t share values—as in the case of Daimler and Chrysler—serious problems can arise. As I’ve noted, these companies’ working styles and assumptions were extremely different from the start. And their differences ran even broader and deeper than they first appeared to. Daimler was an engineering-centered company; Chrysler was more sales and marketing focused. Daimler executives had more perks, but Chrysler executives were paid much more. Schrempp, Daimler’s dynamic leader, thought he had acquired a lean, innovative automobile company. For him, the entire experience was frustrating. Having moved into the ex-president’s office at Chrysler, in Auburn Hills, Michigan, he turned off the sprinkler system so that he could smoke cigars, and he installed a bar for his red wine. He could do that.

What he couldn’t do was hold on to the people he needed. The sources of Chrysler’s energy—the top leaders of Chrysler’s manufacturing, engineering, and public relations departments—left quickly as they learned that their fate was to subordinate themselves to the functional bureaucracies in Stuttgart. The perfect fit that seemed so obvious in the abstract was foundering on very real, fundamental differences in the way two groups of managers thought about themselves, their roles, and their companies.

Integrating companies and cultures is complex and idiosyncratic. No rule fits all situations, of course, but some general observations can be made about the merger and acquisition process, and a list of recommendations follows the discussion of each strategic activity. These guidelines discuss what works, what does not, and what to watch out for as you consider a merger or acquisition.


You can’t run the merged company until you’ve rationalized it, so figure out how to do that quickly and effectively. Don’t assume your resources are better than the acquired company’s resources. And don’t expect people to destroy something they’ve spent years creating.

Impose your own processes quickly. If the acquired company is as large as yours and its processes are dissimilar, expect trouble. Some key people will leave, making it harder to rationalize the merged entities. Voluntary agreement is best, but early agreement is necessary. Don’t try to eradicate differences associated with country, religion, ethnicity, or gender.

Remember that if a high premium is required, you’ll have even less time to get results.

But if what you’ve acquired is valuable precisely because of processes and values, then time is required. Conquests by executives who didn’t understand or appreciate those processes before the deal won’t work after the deal is done.

If you’re considering a megamerger and the two companies’ processes and values aren’t similar, back off and reconsider.

Scenario 2: The Geographic Roll-up M&A

Geographic roll-ups, which appear at first glance to resemble overcapacity acquisitions, differ substantially in part because they typically occur at an earlier stage in an industry’s life cycle. Many industries exist for a long time in a fragmented state: local businesses stay local, and no company becomes dominant regionally or nationally. Eventually, companies with successful strategies expand geographically by rolling up other companies in adjacent territories. Usually, the operating unit remains local if the relationship with local customers is important. What the acquiring company brings is some combination of lower operating costs and improved value for the customers.

Because both overcapacity acquisitions and geographic roll-ups consolidate businesses, they can be difficult to tell apart except on a case-by-case basis. However, they vary in some fundamental ways. For one thing, their strategic rationales differ. Roll-ups are designed to achieve economies of scale and scope and are associated with the building of industry giants. Overcapacity acquisitions are aimed at reducing capacity and duplication. They happen when the giants must be trimmed down to fit shrinking world markets.

Geographic roll-ups—unlike excess-capacity acquisitions—are often a win-win proposition, and, consequently, they’re easier to pull off. Being acquired by a larger company can help a smaller company solve a broad range of problems. These include succession; access to capital, national marketing, and modern technology; and competitive threats from larger rivals. For the acquirer, the deal solves problems of geographic entry and local management. The large accounting firms were assembled this way. So were the superregional banks, the large chains of funeral homes, many hotel chains, and the emerging, large Internet consulting companies.

Resources aren’t usually an issue in geographic roll-ups; the acquirer generally wants to keep the smaller company intact and very often retains local management. (I should add a caveat: resources aren’t a problem, unless it turns out you didn’t buy what you thought you did. Of course, any type of M&A deal can turn out to be a poor target-company choice and cost more than it was worth.) The challenges are largely about introducing the company to new processes and values.

While holding on to the target company’s resources (local managers, brands, and customers), the acquirer nearly always imposes its own processes (purchasing, IT, and so on). Quite often, the deal makes sense because of the acquirer’s processes: they turn the target company into a far more efficient business. But acquirers don’t need to rush this second step along; in fact, they should go easy in the beginning. Target-company managers often need time to familiarize themselves with the new processes.

Banc One had a remarkably successful history of rolling up local and regional banks during the 1980s and early 1990s. It was particularly attentive to process issues. Under the rubric of “The Uncommon Partnership,” Banc One’s managers moved quickly to install their more straightforward processes for handling banking mechanics. But they allowed managers of acquired banks to learn how to meet new economic objectives much more gradually, using extensive mentoring and training as well as creative compensation incentives.

Many roll-ups involve the purchase of small, sometimes family-owned, businesses. If these small companies have strong, distinctive values, acquirers that force them to change quickly may lose the baby with the bathwater. This happened when Cap Gemini Sogeti bought the MAC Group and alienated the consultants, prompting an exodus of MAC talent. Cap Gemini’s executives worked mostly on large systems projects, and they didn’t know how to handle the MAC Group’s highly paid strategic problem solvers.


Acquired companies often welcome more streamlined, efficient processes. But if you encounter substantial resistance, you can afford to ease the target company’s employees into new processes. In geographic roll-ups, it’s more important to hold on to key employees—and customers—than to realize efficiencies quickly.

If a strong culture is in place, introduce different values subtly and gradually. Carrots work better than sticks—especially with high-priced, hard-to-replace employees.

Scenario 3: The Product or Market Extension M&A

The third category is the M&A deal created to extend a company’s product line or international reach. Sometimes these are similar to geographic roll-ups; sometimes they involve deals between big companies. They also involve a bigger stretch—into a different country, not just into an adjacent city or a state.

The likelihood of success depends in part on the companies’ relative sizes. If near equals merge, the problems that crop up in overcapacity deals are in play: difficulties imposing new processes and values on a large, well-established business. If, on the other hand, a large player (think GE) is making its nth acquisition of a small company, chances for success go way up.

Although extension deals have much in common with roll-ups, the challenges of introducing new processes, let alone values, are greater. When Quaker Oats acquired Snapple, for instance, it found that its advertising and distribution processes were wholly unsuited to the target company’s product line. Similarly, British retailer Marks & Spencer found that its famed distribution systems couldn’t cope with Canadian geography when it acquired Peoples Department Stores.

GE, by contrast, has enjoyed great success with exactly this type of acquisition. Under Jack Welch’s leadership, the giant company has learned to be extremely careful about the kinds of symmetry it imposes on its businesses. Executives identify and pay attention to the important distinctions between GE central and valued acquisitions.

Take Nuovo Pignone, the Italian engine producer GE acquired in 1992 from ENI. It would be hard to imagine two companies—one in Turin, Italy, and the other in Schenectady, New York—that differ more from each other culturally. Both enjoy technical excellence, but the Italians had operated in the stultifying culture of a state-owned and subsidized conglomerate run with substantially political objectives—hardly Jack Welch’s GE. Still, Paolo Fresco, then GE vice chairman responsible for international operations, wanted to prevent the “colonization” of Nuovo Pignone. As a result, he introduced a president whose explicit task was to “keep the bureaucrats away.” GE systems would be introduced in time, but far more critical was getting NP’s managers to use GE’s resources to grow their business.


Know what you’re buying. The farther you get from your home base, the harder it is to be confident of that knowledge.

Be aware that processes you consider core may turn out to be very different from those used by the target company. Cultural differences and governmental regulation often interfere with the implementation of core processes.

Take the time to figure out how the target company achieved the success that led you to buy it. If it’s brilliant at product development and you’re not…well, you figure it out.

Keep in mind that the bigger you are relative to your target company, the better your chances for success.

Scenario 4: The M&A as R&D

The next-to-last category, acquisitions as a substitute for in-house R&D, is related to product and market extensions, but I’ll treat it separately because it’s so new and untested. An assortment of high-tech and biotech companies use acquisition instead of R&D to build market position quickly in response to shortening product life cycles. As John Chambers, Cisco’s president and CEO, says, “If you don’t have the resources to develop a component or product within six months, you must buy what you need or miss the opportunity.” Since 1996, Cisco has acquired 62 companies, as it races to dominate the Internet server and communication equipment fields. From the target company’s point of view, an acquisition is often desirable, since it takes a massive amount of money to build a sustainable company in technical markets. And potential acquirers (such as Microsoft) can easily crush you if you compete with them directly.

The successes of Microsoft and Cisco, both of which aggressively substitute acquisitions for R&D, indicate that the strategy can work. But the results of long-term research with a large sample are not in yet. Some evidence suggests it’s a better strategy for IT than for biotech companies; many of the pharmaceuticals’ R&D acquisitions have yet to pay off. The difference may well relate to the modularity of IT design. According to Carliss Baldwin and Kim Clark in their book Design Rules, Volume 1, The Power of Modularity, many computer and chip designs are based on compatible independent components, and this makes it simpler to buy technology that can be readily integrated. In contrast, we can imagine that the organic nature of pharmaceutical products makes integration far more difficult.

It’s much too soon to attempt any definitive statements about the challenges facing R&D acquirers. But I can point out the obvious trouble spots, which spread pretty evenly across the resources-processes-values spectrum.

One huge challenge acquirers must face is holding on to key people. The expertise of these individuals is far more valuable than the technology they’ve developed. Generally, the acquisition won’t succeed if they leave. Yet in all likelihood, the acquisition itself made these people rich, so they can easily leave if they don’t like the ways in which the company is changing. And no matter how careful acquirers are about imposing new processes and values, the small, entrepreneurial company is going to feel a lot more constrained—even bureaucratic—than it used to. A regional banker who sold out to Banc One could enjoy the low-cost capital, broad product range, and marketing power of the bigger bank, while still holding on to the title “president”—and generally reckoned it a good deal. However, it takes considerably more skill and effort on the acquirer’s part to keep scientist-managers happy. I know one IT executive whose company’s organization was obsessively nonhierarchical and fluid. Imagine how he felt when he received this call from the acquirer’s head of HR. “We need the grade classifications for all your people,” she told him. “What’s a grade?” he replied.

This problem is complicated by the need for speed. Unlike with geographic roll-ups and traditional product or market extensions, the acquirer should waste no time linking the target company into its existing structure, because the terrain shifts so quickly.

A second challenge is making sure your own people don’t mess things up. The “not invented here” syndrome is alive and well in today’s technology giants, and it can easily foul a deal. In cases where the target company bet one way on a technical issue and the acquirer bet another, the in-house scientists will resent the outsiders. This has to be handled with great care. Cisco manages this tension extremely well; it is part of the company’s culture to assume an acquisition is sometimes superior.


Again, know what you’re buying. Netscape and a host of other high-tech companies bought second-rate technology again and again. This doesn’t lead to first-rate business results. Cisco, by contrast, has industrial-strength evaluation processes.

There is no time for slow assimilation when substituting acquisitions for R&D. The new people won’t work if the vision and values aren’t compatible. Cultural due diligence is especially important when bringing in people who are giving up the CEO title and have the wealth to walk away.

Put well-regarded, powerful executives in charge of acquisition integration. Divest them of all other responsibilities during an important integration. Make this into a core competency, and a high-visibility assignment.

Spend equal amounts of time keeping the new people happy and fitting the new product or technology into existing activities.

Scenario 5: The Industry Convergence M&A

The first four categories involve changing the relationships among a particular industry’s players. The final one involves a radically different kind of reconfiguration. It entails inventing an industry and a business model based on an unproven hypothesis: that major synergies can be achieved by culling resources from existing industries whose boundaries seem to be disappearing. The challenge to management is even bigger than in the other categories. Success depends not only on how well you buy and integrate but also, and more importantly, on how smart your bet about industry boundaries is.

As with M&A as R&D, this approach is hard to analyze rigorously. In this case, though, this difficulty is not because it’s a new kind of activity. (When William Durant formed the vertically integrated GM, he was creating an industry.) The problem here is that attempts to gain strategic leverage by assembling disparate companies are idiosyncratic. Despite the players’ sizes, this is entrepreneurial activity in progress, and success right now seems to depend as much on the entrepreneur’s skill and luck as on anything else.

AT&T’s recent history shows just how hard it is to make these bets and win. When AT&T acquired computer manufacturer NCR, it did so because AT&T (and many others) thought that computers and telecommunications were convergent industries. The combination never succeeded. By contrast, AT&T’s purchase of McCaw’s wireless telephone business has worked well. Whether the financial returns justify the price AT&T paid for McCaw is a different question. AT&T has recently made major purchases in the cable television industry, in particular TCI, cable baron John Malone’s geographic roll-up. Now we read that AT&T is separating itself into four units. At a minimum, one can conclude that AT&T’s strategy is evolving.

When AT&T acquired computer manufacturer NCR, it did so because AT&T (and many others) thought that computers and telecommunications were convergent industries. The combination never succeeded.

Several entertainment companies are evidently doing better with this approach. Viacom seems to be enjoying success as a “global-branded entertainment content provider.” It has a movie studio (Paramount), cable networks (MTV and Nickelodeon), and a video distributor (Blockbuster) that all run independently on a day-to-day basis. Viacom has used Paramount’s movie library to drive the international expansion of MTV and Nickelodeon and to fix the industry structure of video rentals. Nickelodeon’s branded cartoons, meanwhile, have helped Paramount control the cost of entertainment talent. Disney and Rupert Murdoch’s News Corporation are active in the same arena.

In other industries, it’s difficult to say why one convergence deal works and another fails. Sears, Roebuck thought that financial services was a natural extension of retailing but later chose to divest Discover and Dean Witter. American Express stumbled badly trying to add Shearson’s retail brokerage and casualty insurance to its IDS business activities. On the other hand, the marriage of investment bank Morgan Stanley and Dean Witter Discover seems to be thriving.

At this stage, I’d be hard-pressed to say what works and what doesn’t. But I will offer some tentative observations and recommendations.


Successful convergence deals seem to follow a sequence of steps. First, the acquirer’s accounting-and-control systems are installed at the target company. Next, the acquirer starts to rationalize the nonessential processes (but there seems to be no great rush). Finally, the portfolio is pruned of businesses that don’t fit the acquirer’s strategic objectives.

After those adjustments have been made, subsidiaries are allowed a high degree of freedom. Attempts to integrate the business are driven by specific opportunities to create value, rather than by any perception that symmetrical organizations and systems are important.

Top managers are integrally involved in deciding where to impose links; strategic integration is not a natural bottom-up activity. Intervention must be made with considerable diplomatic skill. (Successful despots do exist, but they are well-liked despots, and that is no accident.)

Varying Flavors, Differing Challenges

Rapid strategic change is a necessity for most companies in these days of globalization, hypercompetition, and accelerated technological change. Accomplishing change through acquisition appeals to a great many managers. What I have found by studying the record is that acquisitions come in several distinct flavors, and that each type presents managers with a different set of challenges.

In closing, it might be worth reporting a final challenge, what I call the “bluefish phenomenon.” Some readers of this article will have experienced the spectacle of a bluefish feeding frenzy. When a school of blues comes across a school of herring or similar small fish, the blues go wild, charging every which way in an effort to gorge themselves. If you happen to be fishing in the surf, one may well bite your leg.

When capital is extensively available and companies are busy doing deals, some executives start behaving like bluefish. Doing deals is exciting. Making one’s company bigger is thrilling. And the prospect of solving the problem of competing in a difficult industry by buying a competitor or diversifying into a related field can seem very appealing—a simple way out of an apparently hopeless industry situation. When the investment banker calls with a prospect, the executive bites. And having eaten once and enjoyed it, the executive will bite again.

Many deals fall into this category. They are justified with one of the strategies discussed, but the quality of thinking, preparation, and postmerger management is inferior. Once in a while, the result is a success. But the reason is luck combined with superior scrambling by the acquirer—not good strategy, careful preparation, and skilled execution. Often the costs are very high: the CEO’s job or the acquirer’s independence. As I write, Quaker Oats is in the last chapter of that story.

The recommendation here is simple. M&A is a means to an end. If the strategy is unclear, there is no reason for a company to go down one of the more difficult paths it can follow.

1. Bill Vlasic and Bradley A. Stertz, Taken for a Ride: How Daimler-Benz Drove off with Chrysler (Harper Collins, 2000).

A version of this article appeared in the March 2001 issue of Harvard Business Review.


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