Need Examples of Subversive Behavior in M&A

8 October 2009 at 4:25 pm 2 comments

| Russ Coff |

I just finished teaching a simulation exercise to BBA students on the politics of post-acquisition integration. I was surprised that students had a great deal of trouble believing that managers would be subversive even in that kind of setting. If there are specific examples of such subversive behavior that you know about, I’d appreciate it if you would post here or email them to me.

Here are some details about the exercise (and a Dilbert cartoon) in case anyone is interested.

My simulation began with the HBS Cadbury Schweppes case (by David Collis and Toby Stuart) which offers incredibly detailed information about their 2002 acquisition of  Adams (makers of Trident/Dentyne, etc.). The B case lists 70 separate synergies and estimates of their dollar values. A few of them are discussed in more detail including brief action plans. You get a good sense that when a buyer anticipates synergies, they need to do a lot more than hand waving to estimate the associated cash flows.

For the simulation, we focused on specific synergies in the Canada region and I had them assume the roles of specific stakeholders on each side (Mkting, Mfg, R&D, TMT). Their task was to figure out: 1) which changes they were most concerned about, and 2)  how to hinder the changes they didn’t want.

What was disappointing was that they had a very hard time imagining that employees would be very subversive in that setting (e.g., What can the Adams Mktng team do to make the Cadbury Mktng team look bad? How can Cadbury Mfg retain their suppliers and avoid switching to Adams’ suppliers?).

Perhaps you have a specific story of how managers acted in this context? If so, please share.

ACQstressSm

Entry filed under: Corporate Governance, Former Guest Bloggers, Strategic Management, Syllabus Exchange, Teaching. Tags: .

Nobel Stuff The Fate of Famous Economists

2 Comments Add your own

  • 1. Lukas  |  8 October 2009 at 5:07 pm

    Counterproductive work behaviours flourish during mergers when it is not clear how departments will be merged.

    At one company I interviewed, I was told about how two departments both thought they would remain intact and fold the other company’s department into their own.

    When it became clear that it hadn’t been entirely decided who would swallow whom, both sides developed a very strong fixed-pie perception: Any failure of their counterparts’ department was the same as a success for their own department.

    You can imagine the result in terms of collaboration and cooperation.

  • 2. Warren Miller  |  11 October 2009 at 8:44 am

    Russ, I have some tales to tell from first-hand experience, but the best mass mutiny example I know of is quite well-known. It occurred when AOL acquired Time Warner. The TW employees rose up en masse and refused to use AOL e-mail. They derisively (and publicly) referred to it as “America Off-Line,” the moniker that AOL acquired when its network had capacity lockups when it went to flat-rate monthly pricing for internet access. No amount of pleading, cajoling, or threats from top management could bring the T-W employees around. That was the leading indicator of one of the most pea-brained shareholder emasculations ever. A year or two later, one of the biggest Goodwill write-offs in American business history occurred.

    Remember, the ONLY way that companies get Goodwill on their balance sheets is to pay more than the total net fair value of the tangible and intangible assets. The obvious reason that over 3/4 of acquisitions fail to earn back their cost of capital is that acquirers overpay. That’s not rocket science. What is more to the point, I think, is that, at least in my experience, projected “synergies” are often a pipedream. I have seen cases–and am in the early stages of seeing one now with an acquisitive NYSE client of ours–where the alleged synergies were cooked up AFTER the deal was priced and an LOI had been signed. That is the Jeopardy! approach to valuation: price the deal first and then try to create a rationale for its economics. That is why we call the components of such rationales s-i-n-e-r-g-i-e-s.

    The only even halfway decent economic justifications we’ve seen for such assumptions are in headcount reductions. The rest are just numbers grabbed out of thin air; the underlying assumptions are seldom disclosed and, even when they are, are not questioned.

    And if people on the target side figure their jobs are toast anyway, why NOT fight like hell to subvert the post-deal integration? What on earth do they have to lose? As the recent ‘Town Hall meetings’ amply demonstrate, angry people tend to be a lot more motivated to action than content or neutral folks. Post-merger integration is as much about politics and culture as it is about economics. Only companies such as Cisco really get that and have workable processes in place to integrate. The rest of the time, it’s bean-counters and i-bankers running fiction in spreadsheets. It reminds me of the dog chasing the bus, barking like crazy. The bus stops. What does the dog do? Why, he lifts his leg, of course.

    Buy-side managers do the same thing, except on a much bigger scale: they excel at destroying value. That’s why P-E firms recapitalize most of their acquisitions, pay themselves big dividends, and bulk up on debt – they want to minimize the shareholder value that can be destroyed. They understand human nature. Like any other hooker, eat-what-they-kill i-bankers do, too. That’s why they’re there only for the transaction. Then they’re off to find other johns. What amazes me is that the same johns continue to overpay for repeat services.

    Those johns–most TMTs, if you will–don’t get it and never will. Their egos trump their vision. Most of these jokers need warehouses of Windex to keep their glass navels clear so they can see where they’re going. It would be hilarious if it weren’t so pathetic.

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