Companies merge for many reasons: Economies of scale, access to new markets, diversification, and so forth. However, few mergers actually achieve synergy because too often mergers are motivated not by synergy but by hubris. Mergers truly succeed only when they produce synergy, and synergy can’t happen when employees from two different cultures are demoralised and their jobs are threatened. Ultimately, they are the ones who must create the 3rd Alternative business that arises out of two businesses, says this extract from the book The 3rd Alternative.
Companies merge for many reasons: economies of scale, access to new markets, diversification, and so forth. I believe that forming a synergistic, complementary team is by far the most important reason to merge with or acquire another company. It’s a priceless opportunity to create a 3rd Alternative company, to make the whole greater than the sum of its parts.
However, few mergers actually achieve synergy. A landmark study by KPMG showed that “83 per cent of corporate mergers and acquisitions fail to enhance shareholder value.” More often than not — 60 per cent of the time — most so-called mega deals actually destroy shareholder value. “The false promise of strategic synergies,” says Jeffrey Rayport, the originator of viral marketing, “has created a trail of tears on Wall Street.”
Why is this so? Because too often mergers are motivated not by synergy but by hubris. Another major study found “CEO hubris positively associated with” the vast majority of mergers,” as reflected by media praise and compensation” — in other words, status and money for the top leaders. A classic example is the historic swelling of Saatchi & Saatchi, the legendary advertising company that in the 1980s tried to become “the world’s leading professional services firm.” This goal drove them to merge with scores of “businesses for which they possessed neither competence nor passion. ... As Maurice [Saatchi] used to say, ‘It’s not enough to succeed, others must fail.” But their merger fever led to the collapse of a once great company. Maurice Saatchi himself later confessed, “Hubris? That would be about right, yes.”
When mergers happen, leaders talk about the synergies to be gained; too often, though, it’s just talk — a cover for thinly veiled hubris. That’s why so many business people are allergic to the very word “synergy.” All the excitement about synergy seems disingenuous when everyone knows a merger can make executive leaders “truly, titanically, stupefyingly rich,”especially when most merged companies underperform “while executives benefit from these large, one-time payouts.” Mergers truly succeed only when they produce synergy, and synergy can’t happen when employees from two different cultures are demoralized and their jobs are threatened. Ultimately, they are the ones who must create the 3rd Alternative business that arises out of two businesses. The same KPMG study I cited earlier identified synergy as the first and hardest criterion to meet in deciding whether to merge. We should merge only when we can create a complementary team, when we can clearly see that our strengths are your opportunities and your stre ngths are our opportunities.
“Synergy is real,” Dr. Peter Corning assures us. “Its effects are measurable or quantifiable: e.g., economies of scale, increased efficiencies, reduced costs, higher yields.” As Jeffrey Rayport points out, “Synergy is a transformation strategy for business. It’s synergy that can create entirely new businesses and industries.”
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And so it does. Over a century ago, Henry Royce and the Honorable Charles Rolls met for the first time in the lobby of the Midland Hotel in Manchester, England. You cannot imagine two more different men. The grizzled, bearded Royce, the son of a miller, was a seasoned mechanic with a reputation for perfectionism in building steam cranes for the British Army. At six foot five, Rolls towered over Royce in status as well as height. Only twenty-seven, Rolls was the son of a baron, a privileged dandy and the first English university student to own his own car. In Edwardian England, a huge social gulf yawned between these two. But they both loved cars. In those days, the infant automobile was little more than an expensive — and highly unreliable — curiosity. For three years Royce had been fiddling in his shop with a French car and was sure he could make a better one. His philosophy was “Strive for perfection in everything you do. Take the best that exists and make it better. When it does not exist, design it.”
The resulting handmade car impressed Rolls, who had started a new kind of business: an automobile showroom in the fashionable West End of London. He too was dissatisfied with the French cars on his show floor. So the rich young promoter and the hardened old mechanic decided to launch the Rolls-Royce motorcar company.
This was a 3rd Alternative company, a marriage of high-quality craftsmanship and flashy business sense. While Royce went to work to build the best-engineered car on the planet, Rolls inspired a silver body design and a publicity campaign that would bring them all the business of the wealthy British upper class. In 1907 the first Silver Ghost, so called for its shine and its silent engine, drove out of the factory.
Rolls took a huge risk and invited the press to accompany a cross-country endurance trial for the new car. The reporters were stunned by its performance. “The motor beneath the bonnet might be a silent sewing machine,” one wrote. Day after day, over miles of English countryside, they waited for it to break down, but it never did. Finally, at nearly 15,000 miles, they called off the test and pronounced the Silver Ghost “the best car in the world.” The reputation of Rolls-Royce was made. It continues today as the premium marque in the auto industry.
Rolls-Royce, which has survived the rise and fall of more than two hundred other British car companies, still makes the Ghost. In February 2011 it introduced the first luxury electric car, the 102EX, which charges itself wirelessly. Insured at $57 million, the original 1907 Silver Ghost is the most valuable car on earth.
The merger of Rolls’s showy dealership and Royce’s grimy crane works was a new thing, a 3rd Alternative business. The two men grew to love and respect each other. When Rolls died in an airplane crash, Royce broke down emotionally and could never again face going to the factory. But their legacy persisted. It was a merger based on personal affection, deep respect for complementary strengths, and a shared vision of excellence.
No merger can truly succeed without these elements. No synergy can be expected. A merger is not just a matter of combining assets. When you propose a merger, you’re treading on sacred ground — on the livelihood, the identity, and the dreams of many people. Talking Stick communication is essential. If you respect those people, if you see them as more than just job descriptions and seek to understand their strengths, you will discover more treasure than you thought was there. You will discover synergies you did not imagine.
Reprinted with permission from Simon & Schuster India. Copyright 2011 FranklinCovey Co. All rights reserved.
THE 3RD ALTERNATIVE:
Solving Life’s Most Difficult Problems
AUTHOR: Stephen R Covey
PUBLISHER: Simon & Schuster
PRICE: Rs 799
ISBN: 9780857205131.