Mergers and acquisition are big business. In 2012, there were $2.7 trillion of announced transactions, yet the majority of M&A transactions fail. “One of the enduring paradoxes in management literature has been the propensity of corporations and executives to engage in mergers and acquisitions despite consistent evidence that post-merger performance of acquiring firms is disappointing” (Weber & Fried, 2011, p. 777).
The literature suggests that most times, the stakeholders of acquired firms tend to do very well from the deal. It's the acquirers, and the firm's post-acquisition performance that most frequently fail to live up to expectations. That's the case usually for one of two reasons: Either the buyer has simply overpaid, or, the other likely culprit for poor post-acquisition performance traces to the issue of integration, or the lack of it.
While the term post-acquisition integration suggests a process that only begins once the acquisition is complete, it is important to note that the seeds of post-acquisition integration are sown during negotiation, well before the closing. One critical component is trust.
Since trust involves both risk and interdependence, trust is a natural component of negotiations. Yet, the amount of trust for each party tends to clock in along a continuum from very little to almost none at all.
“Negotiation behaviors can be classified into two main categories: integrative and distributive behaviors” (Kong, Dirks, Ferrin, 2014). Integrative behaviors focus on creating value and increasing the size of the overall pie. Integrative behaviors require cooperation, transparency, relationship building and trust. Distributive behaviors focus on how the pie is sliced; on how much value each party will claim. Distributive behaviors include resistance to sharing of information, gamesmanship, and re-trading previous agreements.
The dominant negotiating behavior and style for each participant in a deal ties to each's willingness and capacity, both to trust and be trustworthy. “Individuals who lack trust . . . tend to focus their energy on protecting themselves. Consequently, a negotiator who has little trust in the counterpart is less willing to accept vulnerability toward the counterpart and will therefore opt for more distributive and fewer integrative behaviors than a negotiator who trusts a counterpart.” (Kong, Dirks, Ferrin, 2014).
It’s a classic prisoner’s dilemma.
In a prisoner’s dilemma there are bur four outcomes: win-win, win-lose, lose-win and lose-lose. Of these, three outcomes have at least one loser. My argument is very simple: it is hard to successfully integrate after an acquisition deal, when one or both of the parties believed they lost during the negotiation phase of the transaction.
My experience negotiating acquisitions in home building, both on the buy and sell side, is that both parties cling to a belief that our negotiation phase behavior and attitudes terminate at closing--that the relationship resets with brand new dynamics upon closing.
If things were only that simple; but they're not.
If either party felt as if they were "losers" during negotiations, it will impact post-acquisition integration. Since the success or failure of a transaction is the result of the success of the post-acquisition integration, anything that makes post-acquisition integration more difficult threatens the deal's ultimate success.
So, for which party--acquirer or acquired--creating trust and a win-win situation more important? I suggest the acquirer; but I suspect the majority of acquirers think very differently. From my experience, acquirers believe that they have a power advantage. There is also bit of egotism, not only naturally in our industry sector, but as a function of being in a position to acquire another company.
I believe this bias is negatively correlated with acquisition success.
Why do I suggest the acquirer should be more concerned with creating a win-win situation? Because the acquired gets the majority of their slice of the pie at closing, and has strong visibility on any slice of the pie subject to future earnings. As a result post-acquisition integration is far less important to the acquired.
From the perspective of the acquirer, their slice of the pie is recognized over time. Anything that threatens their slice of the pie is problematic. Ineffective post-acquisition integration significantly reduces the value of the assets purchased–their slice of the pie.
Finally, those being acquired, who hope they have found a long-term home post-acquisition, should realize that post-acquisition integration is as important to them as it is to the acquirer. Finding the ability to create a win-win situation by building trust will also be critically important.
Given all of the recent and historical acquisitions in our industry it would be great for those with personal experience would be willing to share their thoughts and comments with all of us. I invite you to add your comments.