Research indicates that up to 70% of mergers and acquisitions fail to meet stated objectives, and of those 50% will destroy shareholder value. Those are daunting statistics. Yet acquisitions remain a top means for growth in companies in the U.S. and around the world. So a key question for any organization looking at M&A as a growth strategy is how to mitigate the risk associated with acquiring a new company and marrying their employees to yours?
Key Drivers of M&A Failure and a New Focus Area
While 2014 has seen increased M&A activity, the reason that many deals fail isn’t due to the hard financial data. A deal’s success absolutely hinges on the human factor—otherwise known as the “soft skills.”
Some observers considering “soft skills” focus primarily on workplace culture as the driving factor for reducing M&A risk. While culture clearly is important, I believe the foundational issue in M&A failure is leadership (or lack thereof). I say this because the competitive advantages that companies may possess in areas such as manufacturing, R&D, or marketing are squandered if a best-in-class leadership is not in place to leverage these capabilities for increased growth and financial prosperity.
The Research – Leadership Skills Needed for M&A Success
This perspective that leadership is a foundational component of M&A success is not just a hunch. I recently quantified the impact of leadership on M&A success in my doctoral research at the University of Pennsylvania in a unique joint program between the Wharton business school and the Graduate School of Education. My research identified the specific leadership skills needed for successful mergers and acquisitions. The outcomes of this work were highlighted in the article “The Leaders That Make M&A Work” in the September 2014 issue of Harvard Business Review.
My goal was to understand the role of the collective leadership capabilities of acquirer and target companies as a predictor of M&A success. Mergers and acquisitions represent major change events for both the acquirer and the target, and successful change efforts are driven by the leadership of both organizations. With this understanding as a foundation, I addressed two critical questions:
- What leadership skills predict M&A success for acquirer and target companies?
- Do senior executives or middle management have a greater effect on M&A success?
My research revealed a new understanding that specific leadership skills predict M&A success for the acquirer and target. And while there are similarities between the two M&A leadership frameworks, there is variation as noted in the table below.
Acquirer/Target Leadership Skills that Predict M&A Success
Finding the Right People
The second question I hoped to answer, about whether senior executives or middle managers have a greater effect on M&A success, offered intriguing results. As expected, senior executives have a greater impact on M&A success for acquirers. However, I was most surprised to learn that for targets, the greater effect comes from middle managers. These findings suggest acquirers may want to focus their attention on middle managers in addition to senior executives when considering who to keep within the new organization post-deal.
Impact of Leadership Capability on Growth
With respect to growth, companies that possessed the correct M&A leadership capabilities as either the acquirer or target achieved significantly greater growth two years after the deal finalization than those without the profile.
What does this mean for you? Simply put, focusing on leadership capabilities will greatly contribute to the success of your acquisition. Take a look at your own company as well as the target company and identify the right leaders with the right leadership skills. This will give you a proven competitive advantage in your acquisition and will prevent you from being part of the 70% failure rate.
It’s that simple.
*This post was written by Dr. J. Keith Dunbar, Founder & CEO of Potentious.
About the Author
Dr. J. Keith Dunbar established Potentious to provide a forward-thinking consulting service to senior executives and corporate M&A teams to minimize the risk of and maximize the probability of successful decisions that meet financial outcomes. Leveraging groundbreaking research on the role of collective leadership capability in successful M&As, his unique method transforms due diligence, by providing a means to mitigate the risks that otherwise limit or cancel out the potential to meet financial growth targets associated with the M&A.
Dr. Dunbar serves as Director of Talent Management at Leidos, supporting more than 23,000 employees. Prior to this role, he was Director of the Leadership Academy and Global Learning Solutions Group with the Defense Intelligence Agency. Dr. Dunbar retired from the U.S. Navy in 2006 after a celebrated 21-year career in naval intelligence. He received his Doctorate of Education from the University of Pennsylvania in 2013.
Potentious® is a boutique mergers & acquisitions consulting firm specializing in the identification of the leadership capabilities in companies that lead to successful M&As. The Potentious M&A Leadership Risk Profile™ methodology evaluates the collective leadership capability of the acquirer and target companies to quantify the level of risk in a particular M&A. To learn more, visit www.potentious.com.