Staying Sane in a MAD World

The business world is going MAD, again. That is MAD as in Mergers, Acquisitions and Divestitures. The value of MAD that took place in the fourth quarter of 2004 out paced all of 1999 – heretofore a record year for corporate buying and selling activity. And 2005 is shaping up to be a blockbuster as well. According Business Week (see: http://www.businessweek.com/magazine/content/05_08/b3921038_mz011.htm $144 billion of deals have been announced already in the first 40 days of this year! In just the past few weeks several mega deals have been announced involving some of the most venerable names in the business world such as AT&T, Gillette and MCI.

Investment bankers and merger lawyers are rushing to put in their yacht orders in time for the summer season. Executives of acquired companies are dusting off their golden parachutes. Or make that platinum in the case of James Kilts, the CEO of Gillette, who reportedly stands to make $150-$180 million if the P&G deal closes. Rank-and-file workers meanwhile are nervously looking over their shoulders for the inevitable wave of staff cuts that follows many high-profile mergers.

Mergers and acquisitions are invariably politically charged events. They can represent a major change in the status quo of the combining organizations. This means redrawing the organizational map, redistributing power, and restructuring people, processes and assets. In any significant change of this type some groups and individuals will be come out ahead of where they were before the MAD while others will see their positions diminished or even lost entirely.

Corporate combinations are notorious for destroying more value than they create. The best scenario for MAD is when it is a formal part of a sound business strategy. The rationale is explicitly articulated and consistent across a series of deals, and the principles that guide candidate selection and post-merger implementation are well understood. The post-deal implementation focuses on highly visible real synergies and a dedicated pre- and post-merger capability is deployed to quickly realize them.

The majority of these types of MAD deal are small- to medium-sized acquisitions of companies done to gain new technologies, products or key talent. Companies like Cisco, Medtronic and GE have impressive track records in doing strategy-driven deals. If you work for, or are acquired by, a company like these, a MAD event will likely improve your lot. HR and cultural compatibility considerations are often top priorities in these types of deals. But many strategy-driven combinations are also focused on consolidating operations and rationalizing costs. In this situation, the consequences can be quite unpleasant (layoffs, terminations, demotions, disposals, etc.), especially if you are on the receiving end of them.

Often MAD is not well-thought out or smartly executed to plan. It is reactive – i.e. a response to external forces such as deregulation of an industry, an economic downturn, a merging of big market competitors, etc. Many attempt to protect or rescue a business. Event-driven deals are all the more challenging because they frequently involve merging competitors and the timing of the deal is rarely optimal. Many have occurred in industries undergoing major change such as computers, telecommunications, energy utilities and pharmaceuticals.

Not surprisingly, event-driven mergers frequently deliver disappointing results because the strategic rationale is forced, due diligence hurried and big risks underestimated or ignored. People and cultures often clash as yesterday’s fierce competitors find it difficult to suddenly act like partners. Combining the best aspects of two distinct organizational cultures or morphing them into a new uniform culture is extremely difficult to pull off.

The trickiest MAD situation is one that is not driven by a clear, stable or sensible rationale. Many so-called ‘blockbuster’ deals fall into this category and the ego of the executives involved is often a critical influencing factor. Remember AOL merging with Time Warner? Steve Case, Gerald Levin, Ted Turner – these guys have egos with a capital ‘E’. In these instances, an enormous amount of power, prestige and money is up for grabs. Size matters – the bigger the deal the better. The target may be viewed as a prize and ‘financial engineering’ is often employed to portray the deal in the best possible light to Wall Street analysts and investors.

The fallout from these kinds of corporate marriages can be downright toxic. Post-merger integration is frequently an afterthought as wheeling-and-dealing executives spend little time thinking about the operational realities of combining the companies. An organizational free-for-all frequently ensues with lots of collateral damage, much of it inflicted on customers and rank-and-file employees.

So run for cover. Hide the kids. Board the windows. Hold on tight to your sanity. The corporate world’s going MAD again.