Because you can't number-crunch culture. And financial analysis is almost always where merger evaluations begin, along with some level of strategic analysis. If those assessments seem positive, then a cultural comparison of merging companies might take place. Might--because by the time a merger starts to appear attractive, deal heat has already started to creep in. And as the temperature rises, the ability to back away, even for the best, most rational reasons, starts to creep out.
Now, you would think with all the M&A activity in recent years that companies would have figured out how to hold deal heat at bay. Some have; many haven't. Blame human nature. Blame investment bankers. Blame the fierce competition of the global marketplace. Whatever--too often deal heat is inexorable, especially if there are other contenders in the ring. One result is the "sin" you describe, a disregard for the cross-cultural differences between merging companies. But in the mad dash to the finish line, lots of other M&A mistakes get made.
Perhaps the most painful to observe, not to mention live through, is Reverse Hostage Syndrome, which happens when an acquirer wants a deal so badly he ends up making concessions that are regrettable at best and destructive at worst. Indeed, in many Reverse Hostage situations, the buyer gives up so much in order to seal a deal that ultimately the acquired company can't really be considered acquired at all. It's still calling all its own shots--from strategy to staffing decisions to operational practices to core values. As for relations with the new owner, Reverse Hostage businesses tend to act like they belong to a separate country, and a hostile one at that. They rebuff any suggestions for change with brush-offs like, "You don't understand this industry. Just leave us alone and you'll get your earnings at the end of the quarter." No wonder most "owners" in Reverse Hostage situations are left to wonder, "Why did I pay all that money for nothing?"
A classic case of the Reverse Hostage Syndrome, in fact, is playing out right now at the headquarters of Boston Scientific Corp. (BSX
) It began in 2004, when the company paid $742 million plus some earn-out opportunities to acquire Advanced Bionics, a California company that makes implantable electronic devices to restore hearing and pump pain medications through the blood system. At the time of the purchase, Advanced Bionics was losing money, but Boston Scientific was convinced that the business had the potential to deliver outsize returns and play a major role in its future success.
And maybe someday it will--but right now Advanced Bionics and Boston Scientific are slugging it out in federal court. At the heart of the case is a concession made during negotiations. Alfred Mann, the founder of Advanced Bionics, insisted on staying on as the leader of his company. An overheated Boston Scientific said yes. Maybe its senior executives thought Mann, who is now 81, would retire soon. Maybe they thought he would let Boston Scientific have a say in the business's management. Or maybe they thought Mann would lead the business to profitability.
None of those things happened. And so last July, Boston Scientific asked Mann to resign, saying he was resisting the changes necessary to make Advanced Bionics a moneymaking enterprise. Mann refuted the claim and refused to leave, saying his contract allowed him to run Advanced Bionics for as long as he wished. A federal judge agreed with him--a decision that is now out on appeal.
We certainly don't know enough about this case to know which side is right or wrong. But we do know that Reverse Hostage Syndrome is never worth the price. If you can't buy a company on your terms, fight the burning desire to forge ahead, or at least build in some kind of protection. In the case of an owner who wants to hang around, or even in the case of an owner you want to retain for reasons of leadership or continuity, for instance, forget an earn-out package. Offer a flat retention deal instead--a certain sum for staying a certain period of time--and retain the option to pay the owner off to exit at your will. Such an arrangement gives you the free hand you need to make the strategic and personnel changes required to bring your acquisition to the next level.
No one likes being held up. But Reverse Hostage Syndrome, which can paralyze companies and undermine the potential of even the most promising M&A deal, comes with an added insult. You're being robbed with your own gun. Jack and Suzy Welch look forward to answering your questions about business, company, or career challenges. Please e-mail them at thewelchway@BusinessWeek.com For their podcast discussion of this column, go to www.businessweek.com/search/podcasting.htm