Call this a tacky analogy, but often, like with new relationships, at the beginning of strategic partnerships or M&A events, it’s easy to get distracted by the fact that everything feels exciting and full of potential. You can’t help but start to form a vision of where things might go and what success will look like.
Let that be the North Star that guides your work together. But, be prepared for challenges along the way.
You assume, going into strategic partnerships and mergers and acquisitions that they’re going to be successful. It’s why companies sit down to negotiate in the first place. Businesses wouldn’t enter into these arrangements if they didn’t foresee agreements achieving their end goals.
The reality is, more often than not, strategic partnerships, mergers, and acquisitions all fail to achieve their desired outcomes. It’s essential that company leaders recognize this fact and anticipate where problems may arise when going into the deal-making process.
It’s Safe to Say it’s Serious
Strategic partnerships are a high-risk endeavor. The potential for wild success is counterbalanced by the significant potential for failure. As Geoffrey Moore writes in his popular book on marketing and selling high-tech products, Crossing the Chasm, strategic alliances often “do better in PowerPoint presentations than on the street” (pg 150).
He’s right. In a study conducted by The CMO Council in 2014, almost half of the 330 CEO respondents reported failure rates in strategic partnerships of 60 percent or more. A similar PwC survey conducted in 2014 for the Global Center for Digital Business Transformation puts the percentage at 65 percent.
When it comes to mergers and acquisitions, failure rates are even higher, with reports cited by the Harvard Business Review claiming rates between 70% and 90%.
So why do these partnerships and alliances fail at such a high rate? Below I’ve outlined five of the most common contributors to partnership breakdown.
1) Moving in Together: Clash of the Company Cultures
When dating, everyone’s putting their best foot forward. Often, it’s only when companies move in together that practical differences really start to manifest themselves in the nitty-gritty of day-to-day work.
Business partnering is about how two companies can combine resources or efforts in a way that is mutually beneficial. Specifically, a strategic partnership or alliance demarcates a formal arrangement expected to hold in the long-term, which is publicly announced and has actual commercial terms that are pre-determined.
When going into signing a strategic partnership or M&A contract, you assume it’s going to be the best thing for everybody involved– otherwise, no one would enter into these agreements.
There’s usually a good amount of initial synergy and, on paper, everything looks great. There’s a lot of hope and aspiration. But at the end of the day, partnership success is about the ability of individual people to work together– it’s about personalities, values, and styles of approaching problems.
Ultimately, differences in company culture end up being one of the most significant fracture points. It’s unfortunate, because it’s challenging to predict in advance of work starting how things will actually go. It’s one thing to want the same results, but quite another to synchronize how two companies think about and execute achieving results once integration begins.
As Moore posits in his caution to anyone looking at partnerships or M&As with industry titans as an exit strategy, “company cultures are normally too antithetical to cooperate with each other.” (Crossing the Chasm, 150).
2) Divvying Up Responsibilities: Failure to Integrate
When you move in with someone, you integrate your day-to-day functions. Integration is the groundwork for success (not to mention sanity)– it’s the organization of who’s doing what.
In business, integration Is an ugly word. It’s ugly because it’s loaded. Everyone knows when you talk about integration, you’re talking about people’s jobs and responsibilities. Integration is the real deal.
People always want to know three things.
- Who their boss is.
- How much they’re getting paid.
- What they’re supposed to do– what their responsibilities are.
The longer it takes to answer those questions, the higher the risk of losing your best talent is. Not to mention the wasted time. These are messy HR things. These are difficult conversations. But people spend a lot of time stressing and worrying about these things if they’re not clear.
Once the deal gets done, you face the realities of decisions about how people are being organized. Sometimes it’s a matter of deciding who is going to have a job going forward. Clear, crisp decisions are important so that no one’s left hanging. The worst case, which unfortunately happens more times than not, is that integration is very slow and there’s people that go weeks, if not months, wondering who their new boss is, what their new title and role are going to be, or if they’re going to have a job at all. That’s a tremendous amount of uncertainty for people and it depletes a team’s energy and focus, greatly decreasing their ability to produce.
3) No One Wants to Do the Dishes: Bad Synergy
At the beginning, everything is fun and everyone’s on their best behavior. There’s chemistry and momentum. You’re saying the right things, there is a vision of how things are going to fit together and work. Now, there is the reality.
In the strategic partnership and M&A world, a big part of the vision is product– how products will actually integrate and fit together. Partnerships are based around an assumption that there will be synergy leading to added value. Usually, on the way to getting there, hiccups and hurdles arise that must be overcome. Perhaps differences in the systems or architecture that must be resolved before synchronicity can occur.
There ends up being work that was unexpected and challenges that get in the way of the initial vision. At this point, like in a relationship, synergy comes down to people’s ability to work together through adverse as well as ideal circumstances. Can the development teams come together and create a solution?
When it comes to a startup working with an established enterprise, Geoffrey Moore sums it up perfectly: “decision cycles are wildly out of sync, leading to enormous frustration among the entrepreneurs and patronizing responses from the established management” (Crossing the Chasm, pg 150).
It’s the responsibility of the buyer who’s paying money and using shareholder resources to ensure that things work. They need to make sure that they get good value for their money. So it’s on them to do the due diligence and to do whatever is necessary to try to mitigate the risks and flush potential issues out before the transaction takes place.
Once the transaction takes place, the investment is made and the pressure is on to see a return.
4) Turns Out, We Don’t Actually Want the Same Things: Lack of Alignment
Sometimes, we make assumptions about our partners early on in a relationship that lived experiences begin to contradict.
I recently read a Harvard Business Review article that explored why failure rates amongst enterprise acquisitions are so high. It indicated that on a fundamental level, enterprises lack the appropriate foresight needed to match the right candidates to the strategic purpose of the deal they’re looking to make.
They fail to differentiate “between deals that might improve current operations and those that could dramatically transform the company’s growth prospects. As a result, companies too often pay the wrong price and integrate the acquisition in the wrong way.”
Often, there’s a lot of pressure on the big company to do something that will leapfrog them ahead of the competition. They may be falling behind in the market or they may have perceived some competitive pressure. This pressure can lead to frustration when goals aren’t met as planned, which, in turn, can trigger a lack of alignment around what success actually looks like.
There may be a difference of opinion around the metrics or the rate of realization of traction. Typically these come down to numbers, like how much revenue can be achieved. If one party thinks much higher revenue is achievable in a certain period of time and the other partner thinks that’s unrealistic, at some point there’s going to be disappointment.
Another way a breakdown of alignment often presents is around how to achieve a shared goal. One manager may have a certain view of what’s the best way to get those results but the strategy may be out of sync with the other side’s perspective, or worse, their capabilities.
As the authors of a Harvard Business Review article titled “The Big Idea: The New M&A Playbook” write, the problem with enterprise decision making in this space is that “Almost nobody understands how to identify targets that could transform [their] company, how much to pay for them, and how to integrate them.”
5) Unrealistic Expectations Manifest into Real Failures to Deliver
From my experience, it’s common for things to not go as planned. Derailing often occurs right at the beginning of a partnership, whether because of an initial lack of synergy or a failure to align. Whatever the reason, very quickly, “why” things are breaking down starts to matter less than the simple fact that they are.
If early traction is not established, tensions flare and both parties begin to doubt the viability of the partnership. Then, they turn to their contracts, looking for a way out.
This can cause a huge amount of precariousness, because typically what was negotiated in the pre-contract dating phase is based on a best-case scenario. These are big deals and in order to secure them, the valuations needed to be high and both parties probably had to make some pretty big commitments in terms of what kind of sales are going to be realized.
But top-line revenue is one of the most common failure points. A report from the Mckinsey database of companies stated that almost 70 percent of the mergers in their database failed to achieve the synergies expected in this area.
In negotiation, you’re often on a different level— you’re dreaming, or blue-skying, as I like to call it, about what the best possible outcomes are.
As Moore writes in Crossing the Chasm, “each side has probably misrepresented itself in one way or another during partnership negotiations, such that there is plenty of ammunition for each group to fire at the other once tempers get hot” (pg 150).
Perhaps the deal took longer to negotiate than expected and the smaller company lost a lot of momentum because the management team was distracted closing the deal. Perhaps management took their eye off the ball in terms of sales, customers, product delivery, and the day to day running of the business.
Whatever the case, if results aren’t being achieved, fingers start getting pointed, and once fingers are getting pointed, a solution needs to be determined immediately, or else the entire partnership will collapse.
In Summary: Anticipate Problems, Plan for Resolutions
Rates of success in strategic partnerships and M&A deals are slim, but success is achievable and the rewards, if realized, are huge. By setting realistic expectations and quickly adjusting and reacting to problems to nip them in the bud, companies stand a chance of beating the odds.
Go into the deal anticipating where the tensions or breakdowns are likely to occur. Hypothesize solutions in advance, keep an ear close to the ground, and listen for small problems. Act to solve them before they escalate.
Big intractable problems are what trigger breakups, so be cognizant. And be conscientious. Demonstrating a keen willingness to adapt to change and work through challenges sets a precedent for how the two companies will continue to work together.
In The Art of Strategic Partnering: Dancing with Elephants, Mark Sochan provides an in-depth breakdown of each stage of the partnership process.