HomeBusiness DigestWhen the games change, players should change

Make-or-break Disposal for CAG

Mergers and acquisitions are not always successful. The business world has witnessed many organisations that merged and disappeared into oblivion. On our own soil, after a number of banks were forced into curatorship some eight years ago, an amalgamation of these banks was formed. To date that outfit is still to be stable, causing the regulators headaches similar to its historical constituent entities.

We will discuss a number of systemic issues that cause merged entities to collapse.

The leadership competencies required to run organisations tends to increase with the correlating increase in size and complexity. Let us look at two entities X and Y that are merged to form Z. The leadership team of either X or Y was hired to run the business of their original companies. Their competencies would have been assessed as appropriate and adequate to run the business of either X or Y. It is important to note that these two entities would have been going concerns prior to the merger or acquisition. Each team of executives would have been accustomed to the operations of their own entity.

The new entity Z would be bringing the two organisations into a single entity. It is common knowledge that the cultures of the organisations would not be congruent. It is the duty of the new entity’s leadership to blend the two separate cultures into one. The complexity of the task at hand increases with situations in which the cultures are not only dis-similar but are overtly incompatible.

 

The first mistake that the new organisation makes is about the leadership team. The old leadership from the two merging entities is mixed and matched to form a new team. Duplicated roles are rationalised, resulting in casualties of either some former leaders being asked to pursue their careers elsewhere or being demoted and subordinated to their peers from the other organisation. We noted that the leadership of the original X and Y organizations were hired for their competencies to operate within the complexity context of their original organizations.

 

It would be a rare situation to get any of the leaders having been hired to operate in complexities much higher than their original roles, equivalent to that which will manifest in the merged entity. The question that organisational owners need to answer is why then these individuals should be entrusted with managing the much more complex merged entity Z. In the event of an acquisition, the leadership of the acquiring organization usually escapes the axe, taking over as the leadership team at the expense of the unfortunate leadership of the acquired entity who are shown the way home, never to return.

 

This would happen irrespective of the possibility of pursuing a reasoned outcome of a function–on-function comparison of the competencies of the executive teams of the two entities, which could weigh against some souls in the acquiring organisation. Even if such comparison were carried out, it would be like fishing in your own fish tank; you will catch only the few fish you have – whilst the dams and lakes are thriving with different breeds.

Many merged companies fail to realise that their old leadership team may not be up to the job of leading a larger and more complex organisation. It is important to reiterate that a large company needs more effective leadership than a smaller one. It is surprising that when confronted by change or contemplating an acquisition, few companies would bother to check and measure whether the leadership capacity of their top teams will suffice in the bigger entity.

Systemically, it is true that the increase in size, scale and complexity of a firm increases with a merger, hence the skills of the senior executives need to change. Can an organisation argue against the merits of a leadership-development  programme for the current leadership? Such efforts could work if the pace of the change is slow and relaxed; but we know that it is rarely so in business. The other systemic complication is that the leadership could have too many cosy relationships in the team, with colleagues that they have traditionally managed within the context of the old order.

 

In the new order, it becomes difficult for the old leadership team to up the tempo and increase the heat on their former colleagues to get performance out of the organisation. The other dimension of the embryonic complexity is that the merged organisation usually comes up with a culture of its own, which may be elevated to a social culture level if the merger is across national borders. Leading in a multi-cultural environment is a skill that the old leadership may not have acquired, which may dictate their failure.

Organisations contemplating a merger/ acquisition or already in the mess of a poorly-planned transaction should take considered steps towards building an effective executive team that can realize the entity’s potential. Firstly, it is paramount to assess the prospective leadership team members’ leadership skills. Increasingly, companies are doing the assessments by retaining third party experts to do comprehensive interview-based executive assessments. In the mix of the candidate pool, it would be prudent to assess not only the fish in the tank but rather open the race by courting external candidates with the right experience and skills sets.

The leadership assessment should be well-structured, covering three key issues. The competence of the potential leaders should be assessed against benchmarks of successful leadership in the industry as a first step action point. Taking cognisance of the fact that leaders are hired to execute a business strategy, the second step of appropriate action would be to assess the potential leaders’ degree of alignment with the intended strategy. An organisation that pursues a merger or acquisition would ordinarily be intending on aggressive non-organic growth; getting into brown fields in most instances. Acquired entities are usually limping and need leadership bravery that will turn them around.

 

The competencies for achieving a turnaround may not be present in the old leadership, hence the assertion that the leadership team should be assessed. A proper assessment would surface the third important dimension of organisational misfit, thus checking for dysfunctional elements in prospective teams. Remember that a structured leadership assessment ahead of a merger or other major strategic change is not a panacea that will rescue a conceptually flawed transaction. However, it can reduce the risk of organisational and cultural chaos that can derive from subjective biases that will manifest in the new organisation’s discourse and operations.

The acquiring company in an acquisition or the stronger party in a merger would usually make the mistake of considering itself as having a monopoly of wisdom and senior management talent and therefore populate the leadership team of the new entity with its own executives. This will certainly dent the new entity’s morale if the transaction was accompanied by political rhetoric that purports to present the new entity as a merger of equals.

 

The other mistake is that of using kindergarten arithmetic of applying a simplistic rule of thumb to apportion senior management positions using measures such as relative sizes discerned from the revenues of the two entities. This seemingly good mathematics may create an on-the-surface notion of justice. However, it will mostly result in a systemically flawed team composition that is derived more through corporate political correctness rather than individual and collaborative ability.

Should the organisation appoint part or all of the old leadership in the new entity, the next problem point would be the board of directors. Care should be taken to guard against headstrong individuals previously in charge of functions in the original companies, who though they possess strong leadership skills, will often find it difficult to collaborate on an equal footing with new peers, with the task at hand being to absorb new philosophies or cultures.

 

The team dynamics will start to creep in. The older team members now in the new team should be made aware of the fact that they are back in the storming stage of forming a new group. New teams need proper systemic direction, which we will discuss in coming instalments.

A deficit of leadership would certainly ensure corporate failure of a merged entity from the first day. The fish rots from the head; what then if the top of the organisation is stuffed with rotten fish?

 

Sam Hlabati specialises in Systems Thinking and Reward Management. You can contact him on samhlabati@gmail.com

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