What
happens when two rival companies, each with a strong culture and intense
dislike for each other, merge – with one company acquiring the other? This was
the case with two regional travel companies based in the Asia Pacific region. As
one employee described it, “The rivalry between the two was comparable to a
university rivalry, each of its loyal employees bleeding either green or yellow
(note that names and other identifying information have been altered for
anonymity). Nearly all internal reports would benchmark performance against the
other, and sales pitches were designed to compete directly against each other.”
When
the acquisition was announced, employees of both companies were in shock. This
was like sleeping with the enemy. Furthermore, there was very little
communication from senior management of both companies (and in fact, there
seemed to be a lack of agreement even within the management ranks of each
company on the benefits of the merger).
Not
long after the acquisition was announced, the merged company sent an e-mail to
all employees declaring that it was going to use its annual year-end
celebration as an opportunity to have the two workforces get together. The
party was held in a hotel with tables seating ten each. Not surprisingly, the
employees of each company sat with another. Only at the VIP table was there a
mixing together of the two companies, with the two incumbent Managing Directors
of each company sitting together, along with a few executive managers from both
companies. One year later, the integration still had not been completed. There
were still two Managing Directors, two sets of functional heads, and duplicate
activities. Many managers were still in the dark on the future of the company,
and as a result, a number of talented employees left the company.
Despite
the research showing that over 60% of mergers and acquisitions destroy
shareholder value (remember AOL-Time Warner or Daimler-Chrysler?), we continue
to see the thirst for merging and acquiring continuing unabated. One of the
biggest recently is Disney’s $71 billion deal to acquire Fox. The biggest
momentum seems to be among grocers, especially after Amazon acquired Whole
Foods in 2017. Global food retailing is a huge business and only 3% is done
online. The New York Times (August 22, 2018) has reported the following recent
acquisitions in the grocery industry: Kroger with Ocado, an online grocery
company using robots to pack online orders; Target with Shipt, a start-up
offering same-day delivery services; Walmart with Parcel, another start-up with
same-day delivery; and Aeon (one of the largest retail chains in Japan) with
Boxed, a grocery e-commerce company.
Perhaps
because of the high failure rate of M&As, a more recent trend known as
“acqui-hiring” has been growing, especially among technology companies. In
acqui-hiring, a large company (such as Google, Amazon, Facebook, General
Motors, and Wal-Mart) acquires a smaller company (such as Lytro, Zappos,
Faciometrics, Cruise Automation, and Parcel respectively) primarily to obtain
ownership of that company’s talent, rather than its products and services.
Coyle
and Polsky (2013) were among the first to describe this trend, and they
interviewed key players in Silicon Valley to get a better understanding of the motivations
behind acqui-hiring. They started out by asking themselves why companies even
go to the trouble of doing this, when simply targeting selected employees would
be less costly (note that at least in California, where many technology
companies are headquartered, non-compete agreements are generally not enforced
tightly). In their analysis, such acqui-hire transactions are completed not for
the purpose of the larger company acquiring the smaller company’s assets but to
hire some or all of the smaller company’s employees. As they put it:
One
frequently cited rationale for acqui-hiring is that it allows a large
technology company to obtain the services of several talented engineers and entrepreneurs
in one fell swoop. It also allows the buyer to hire an existing,
well-functioning team of individuals who will often continue to work as a team
with expertise in a certain field, as opposed to trying to assemble such a team
from scratch.
An
acqui-hire also enables the buyer to utilize the talents of its new,
experienced employee team to enter into a new space quickly despite the buyer’s
inexperience in that space. This is especially useful in Silicon Valley, where
the pace of technological innovations creates a frenetic environment in which
time is frequently of the essence and business plans rapidly shift and pivot.
In one of their examples, Apple a
few years ago acqui-hired a team of engineers from Lala that had extensive
experience in streaming music online. That team stayed together at Apple to
work on its own cloud-based music service even after Apple terminated the Lala
service six months after the acquisition. Coyle
and Polsky’s explanation rests partly on what they consider the informal social
norms of Silicon Valley, which among other things suggest that software
engineers themselves prefer acqui-hiring rather than jumping to the competition
so as not to incur the possible wrath of colleagues and other companies. They suggest
that due to the “non-adversarial culture of Silicon Valley,” this is actually
an easier path for the buyers as well as the acquired firms.
Here
are three pieces of advice for organizations, especially for those interested
in acqui-hiring. First, be clear on the objectives and rationale of the
acquisition, and conduct a thorough analysis and due diligence (Christensen et
al., 2011). Unfortunately, all too many executives are not clear on the
specific purpose of the acquisition and rush too quickly to get things done. According
to a McKinsey report, executives involved in M&As reported that due
diligence was inadequate in more than 40% of their deals (McKinsey, 2010). More
worrisome for an organizational psychologist like myself are those executives
with an “overconfidence bias” (alas, all too many of them do) who believe that
despite the statistics, they can beat the odds, as well as those who are well
aware that the acquisition might eventually fail but in the short-term will
drive shareholder value and make them very wealthy.
Second,
follow the basic principles of change management, especially around the
integration of cultures. McKinsey found that over 70% of the executives they
interviewed reported that too little effort was made on focusing on culture
during the integration. From my own experience, it seems to me that too many
executives assume that cultural challenges can be overcome easily as long as
both organizations see “what’s in it for them;” besides, they rationalize,
their organizations are really not that different. Here are four change principles
that I have found useful in my experience having been involved with several
change initiatives:
1.
Make
sure you create a change team (or, in Professor John Kotter’s words, a guiding
coalition), a group of engaged individuals and leaders who are totally behind
the change and will help you throughout the effort. These individuals do not
all have to be senior managers; some can come from lower down in the
organization, as long as they have the credibility and respect of their peers.
2.
Communicate
relentlessly especially around what will change and what will stay the same
(that is, what won’t change), and keep in mind that the most effective
communication is when there is face-to-face dialogue and feedback and not
simply sending out e-mails.
3.
Create
a compelling and exciting vision of the future. A senior manager I know was
tasked with reducing operating expenses in her division by 30%, a tall order
especially since she had already been reducing expenses aggressively for the
past two years. She framed this challenge to her team by describing how their
mission could help transform the company, contribute to its success, and at the
same time elevate their functional area to become world-class.
4.
Follow
through and have a change execution plan. Don’t declare victory too quickly; integration
often takes months if not years. In an acquisition effort I was involved with
several years ago with a Japanese company, integration teams from both
companies in different functional areas (e.g., Sales, Human Resources,
Operations) were created and met regularly over the next two years to execute
the overall plan.
The
case of the two regional companies I described earlier failed to follow these
four principles. There was no change team, communication was almost non-existent,
there was no sense of identification with the new organization, and no plan
especially for retaining key talent. Sometimes it makes sense to keep the two
companies separate, such as with Amazon and Zappos. For example, when GM
acquired Cruise Automation recently, it kept the acquired company separate to
make sure it continued to operate very much like a start-up.
Third,
perhaps most important when acqui-hiring, have a rigorous process in place for
determining the talent you will need in your organization. Many organizations
will focus on the technical skills of potential employees; as important,
perhaps even more so, are the soft skills and the cultural fit that will
determine whether the acqui-hires will be able to work effectively in their new
environment. As the Wall Street Journal has reported (April 25, 2017), some of
the more recent startups have begun to realize that getting the culture right
and hiring people for cultural fit is just as important as their technical
skills. It quotes CodeFights CEO Tigran Sloyan, who said: “Even with five to 10 people, if you don’t
get the right culture going early, it’s almost impossible to get it right later
… and quickly adding staff without building the right team can hurt, not help,
the bottom line of an early startup.”
Christensen et al. (2011). The Big
Idea: The New M&A Playbook. Harvard
Business Review, March.
Coyle, J. and Polsky, G. (2013). Acqui-hiring.
Duke Law Journal, 63 (2): 281-346.
McKinsey (2010). Perspectives on
Merger Integration. https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Organization/Our%20Insights/Merger%20Manager%20Compendium/A%20McKinsey%20perspective%20on%20the%20opportunities%20and%20challenges.ashx
