“We did an acquisition about 15 years ago. It did not go well…I guess you could say we are still ‘recovering,’ the CEO of a family-owned business recently shared with me during a meeting.

She went on to explain there were a number of integration issues and other challenges that cropped up post-closing that the company was not prepared to handle. From payroll issues to disgruntled employees to operational challenges – the experience was “traumatic,” for the organization according to the CEO.

Fortunately, the company is in a better place today and is ready to explore new ways to grow. While leadership recognizes the potential of a strategic acquisition, because of their previous experience, they are, understandably, hesitant.

It’s not uncommon to have this reaction. But just because an acquisition didn’t work in the past, it doesn’t mean you have to abandon M&A as a tool for growth. You can learn from what went wrong last time and be successful when executing future deals.

There are many reasons deals fail from culture clashes, hidden liabilities, poor planning, or simply inadequate of expertise, but these issues point to one overarching reason for acquisition failure – lack of strategy. Alarmingly, many companies take on a reactive approach to acquisitions, buying whatever company comes their way without first developing a strategic plan. Not having a plan is a surefire way to fail.

In the case of our family-owned business, they decided to take on a strategic approach to M&A this time around. Unlike last time, where they adopted a “plan as you” approach to M&A, they dedicated serious resources to establishing a strategic plan for acquisition prior to even looking at companies. This included identifying potential integration challenges and developing a 100-day post-closing plan long before the deal closed to avoid the same issues as last time. With a firm foundation the company was able to identify the right opportunities for growth and execute a successful transaction.

If you are still suffering from the results of a failed acquisition, I encourage you to adopt a strategic approach right now. Gather your team together to review your growth options in light of your overall strategic vision. Then, you can determine your next steps whether its organic growth, external growth, minimizing costs, exiting a business, or doing nothing. With a strategy in place, you will avoid many pitfalls and maximize your chances for success.

Remember that just because a deal is announced, it doesn’t mean it will go through. A record number of M&A transactions announced in 2015 have been cancelled bringing the total deal value down from $4.374 trillion to $78 billion. Unfortunately cancelled deals mean a lot of time, resources and effort were wasted putting together these transactions.

Why Do Deal Fall Apart?

Typically when you first read about a deal in the news, especially with large publicly traded transactions, the transaction has not been completed and the two companies have only agreed to a letter of intent (LOI). After signing the LOI, the two companies can iron out all the details of the final agreement and wait for regulatory approval if necessary. During this period between LOI and close, the deal may break up for a number of reasons.

1. Regulatory Hurdles

Anti-trust issues and regulatory hurdles create delays for many large, publicly traded transactions. Regulatory scrutiny doesn’t necessarily mean a transaction will be called off, but it can be a contributing factor. Pfizer planned to acquire Allergan for $160 billion and relocate its headquarters to Ireland in order to lower its tax bill. However, due to new U.S. Treasury rules aimed at curbing these types of transactions, called tax inversions, Pfizer and Allergan called off the deal earlier this year.

2. Disagreement over Deal Terms

Other acquisitions fall apart because the two companies can’t agree on deal terms. The massive $35 billion “merger of equals” between Publicis Groupe and Omnicom Group faced a number of challenges: personality clashes, cultural differences, and disagreement on deal structure and senior positions. The deal was expected to close in six months when it was first announced, but nine months later the two companies mutually agreed to disagree and went their separate ways.

3. Cold Feet

In the world of privately-held not-for-sale acquisitions, it’s not uncommon for an owner to be anxious about selling their business. Typically by the time you’ve signed an LOI, you have overcome many of these fears by ensuring that the acquisition is the right strategic fit and gaining an understanding the owner’s perspective and motivations. However, the owner could still change their mind and decide not to sell.

On the other hand, circumstances could change that make you back out of the deal. Something uncovered during due diligence or a surprising turn of events may prevent you from going through with the deal. We once had to walk away from a deal because we didn’t share the same ethical values as the prospect company; the owner had two sets of books.

In my next post I’ll go over strategies for moving your deal forward after signing the LOI.

Pfizer and Allergan have announced that they are abandoning their $160 billion merger.

This resulted from a political storm around tax inversions, a technique whereby US companies relocate abroad to avoid the high US corporate tax rates. The Treasury department took action to insert new rules that effectively killed the financial benefits of the deal.

According to their agreement with Allergan, Pfizer will pay a breakup fee of $150 million.

Politics aside, this is just a small reminder of why acquisitions that are not carefully planned can prove to be costly errors. Could Pfizer have anticipated the government’s intervention? That’s hard to know, but in principle buyers need to be looking ahead at potential roadblocks that could jeopardize a deal.

Transactions unfold in stages, and each stage can present its own challenged. In particular, a signed letter of agreement (LOI), although an important milestone, does not ensure that the deal is done. There’s a lot of that can happen between LOI signing and the final acquisition agreement. It’s essential to make your plans with that in mind.

Assuming yours is a middle market company, you may not experience the same type of regulatory scrutiny that publicly traded companies do. However, there’s no shortage of other issues that may show up, such as owner hesitancy, problems uncovered by due diligence, cultural collisions and many more.

And the story doesn’t end when you finally ink the acquisition contract. You may “successfully” acquire a company only to see things fall apart during integration.

With every M&A transaction, there are many moving parts. It’s the task of your acquisition team, including both your own staff and your outside advisors, to consider them all. To name a few, you must consider regulations, taxes, legal challenges, due diligence, valuation, cultural integration and—never to be forgotten—your overall strategic purpose.

With any business initiative worth taking, it’s impossible to eliminate risk—but you can and should minimize it. In M&A, the best way to do this is to follow a system that’s been proven in prior acquisitions. I call this the “Roadmap to Acquisitions” and I consider it the single most decisive factor in M&A success. Take a holistic view of the acquisition process from the start to finish, and be both proactive and strategic. In other words, know your end result as best you can, and anticipate all the hurdles you may have to overcome to reach it.

Photo Credit: Montgomery County Planning Commission via Flickr cc

Capstone CEO David Braun’s Analysis in the Memphis Business Journal

Verso Paper, after acquiring NewPage Holdings for $1.4 billion in January 2014, has filed for Chapter 11 bankruptcy. Verso, which manufactures coated paper used in products like magazines, is struggling in a declining market. With its new acquisition, the company failed to realize desired economies of scale needed to compete in a world of rising digital media.

What happened? David Braun analyzes what went wrong and what Verso might do to survive in his interview in the Memphis Business Journal. Read the full article here: “Analysis: What might Verso look like after Chapter 11?

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:


  1. What leadership skills predict M&A success for acquirer and target companies?
  2. 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.

M&A Leadership Risk Profile

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.


About Potentious

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.

Acquisitions fail for reasons that range from lack of compelling strategic rationale to inadequate due diligence to conflicting cultures. I think many would say acquisitions fail because too much was paid for them. While overpaying is certainly a reason for failure, I would not say it is the top reason.

In my experience, I have found you can overpay for the right company and recover; it may just take you longer. However, you can “underpay” for the wrong company and never recover. Just keep in mind it’s not just about the money but about finding the right fit.

One top reason for acquisition failure is integrating too slowly. That often occurs when integration planning begins only after the transaction is completed.

I have had conversations on integration with countless corporate executives. Those who have been involved in integration have told me by the time they get involved, the deal’s already done. They are “parachuting” into the acquisition ─ certainly a tough position to be in.

The good news is we can change that by planning for integration early in the acquisition process and including those involved in executing the integration. Planning before the deal closes will allow you to move quickly and effectively.