The Merger Mindset In Action

The business news is filled with stories of failed mergers or acquisitions, yet they remain appealing, not because leaders are unaware of the risks but because they don’t believe their deal will fail. The estimates of rate of failure (failure to deliver the value described in the investment thesis) vary from 50 to 90 percent. This is no secret. So why do some companies seem so eager to do deals?           

• Growth through organic means is hard.
• The lure of a deal can be tough to resist.
• Challenges are distant and easy to ignore or minimize.
• Top leaders may be pressured to pursue a deal.

The first reason is one endorsed by many leaders, successful and unsuccessful alike. The second, third, and forth are all more personal involving perception, cognition and emotion, all of which are commonly and resoundingly rejected by many leaders (except in private). At the extreme, leaders completely ignore the difficulties, though it risks driving the corporate bus into a ditch.

SunTrust and BB&T – Now Truist

The recently completed merger of SunTrust and BB&T will be observed and studied for some time to come. Andrew Hill, writing in The Financial Times, calls it a bromance and not without evidence. Deals may begin in a way that strongly resembles courtship. Mutual flattery, meetings over dinner, and conversations that avoid obvious challenges (other than legal and regulatory). It can be heady stuff, not easily interrupted by unvarnished truths about what lies beneath the surface.

One might wonder if the decision to keep all board members, of both SunTrust and BB&T (other than four who opted for retirement) was a decision or represents an unwillingness to make a decision. An article in The Atlanta Business Chronicle quoted the chairman and chief executive officer of the newly formed bank,  “We had four of our 15 who chose to retire, so we could make it even,” said Kelly King, who referred to the new bank as a true merger of equals. A twenty-two member board is both unusual and very likely, unwieldy.

Good decisions require the right criteria

Sometimes in deals billed as “mergers of equals” there is too much emphasis on keeping things equal and too little on what constitutes strategic risk. James Lam, recognized expert in risk and risk management, conducted research on 76 companies that lost 30 percent or more value in a one-month period. His analysis concluded that the cause of the losses for 61 percent of the companies was strategic risk (consumer demand, M&A, competitive threats).  To manage strategic risk, according to Lam, leaders need to examine the assumptions they used to create their business plan, or in the case of Truist, the deal thesis.

They also should create monitoring systems and accountabilities for monitoring and then identify trigger points for the most critical metrics. These are “Pre-defined positive, expected, and negative trigger points.”

Lam’s recommendations for managing strategic risk is especially critical in M&A as the baseline risk is very high. Establishing the criteria, measures, and trigger points enables leaders to use meaningful objective indicators as well as those that are qualitative.

Great leaders, at all levels, are non-stop learners

You may be asking how it could be true that smart, successful, rational people can allow optimism and over-confidence to overtake their judgment. It happens because even smart leaders and experienced board members are human and subject to the human processes of perception, judgment, and emotion. What helps leaders use these human processes and not be fooled by them? Learning about their own styles and habits of taking in information, evaluating it, and making decisions. Learning isn’t just about what is outside ourselves it is about us which may be the most important thing to understand.

Board members have a special responsibility to understand their own thinking and decision-making and to challenge it routinely. The board is what Lam calls the “third line of defense” but is effective in the role only when they are properly engaged rather than delegating too much to auditors and a single committee of the board. Leaders in management have a similar challenge in that teams of people, both internal and external, may be too focused on technical details to see the big picture the way a board or top management team can and should.

Leaders can steer clear of some of the traps in M&A by thinking about the aspects of a deal that most ignore. These questions can get anyone, at any level, started, but especially top leaders who have the courage to look at themselves.

Five Questions for Disaster Avoidance    

1. Ask yourself what you know about the company you are considering buying or merging with. Write down what you believe you know for sure – objective information and your beliefs.
2. With reference to #1, how do you know these things? Where did this information come from? Who did it come from?
3. What do you know about your M&A partner’s customers, suppliers, employees, creditors?
4. What assumptions are you making? Challenge them, all of them.
5. Are your strategic risks articulated? Do you have the right indicators, monitoring processes and trigger points clearly laid out?

The difference between failure and stunning success is not solely related to the quality of your financial analysis. It lies in your ability to manage yourself through the decision-making process and the transition period. It takes the right mindset which any leader can decide to adopt at any time, preferably before it is an emergency.

The Merger Mindset: How to get it right in the high-stakes world of mergers, acquisitions, and divestitures, makes the case that the aspect of deals that many ignore are not only vital to success but are learnable.