In a 2018 letter to his shareholders, Warren Buffett made the following observation:
“Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase. Subordinates will be cheering, envisioning enlarged domains and the compensation levels that typically increase with corporate size. Investment bankers, smelling huge fees, will be applauding as well. (Don’t ask the barber whether you need a haircut.) If the historical performance of the target falls short of validating its acquisition, large “synergies” will be forecast. Spreadsheets never disappoint.”
This is not a very charitable picture of the motivations driving M&A, but it contains an element of truth nevertheless. High-level executives and corp dev teams are often overly enthusiastic about potential deals.
In certain respects, overexcitement is inevitable. Upper echelon executives are often far removed from the low-level operational details of their companies — and corp dev personnel typically come from investment banking backgrounds, where the deal itself is considered more important than the particulars of its execution. Both groups tend to focus on the high-level strategic potential of target assets, downplaying or ignoring more tactical considerations. When they rally behind a particular deal, their enthusiasm and conviction create a pronounced bias towards positive target assessment. Integration specialists can provide a counterbalancing perspective, and encourage the team to develop a more realistic and nuanced picture of the asset. All too often, however, these specialists are not consulted during the diligence process.
In these situations, corp dev inevitably sees everything through rose-colored glasses. The team tends to overestimate the value that a target asset will bring to the company, and consequently downplay or outright ignore potential red flags revealed during diligence. Often, the executive-level personnel in charge of finalizing the deal will have unofficially decided to close with the target long before signing the LOI. Corp dev conducts confirmatory due diligence as a legal formality, and only truly revelatory discoveries will cause the buyer to walk. Post-close, the new asset is dumped on the integration team, who then must figure out a way to make it valuable.
In 1998, Daimler-Benz (now Daimler AG) announced that it was “merging” with Chrysler in a stock swap valued at over $35 billion. At the time, this was the largest international deal ever. From a strategic perspective, the merger seemed like the perfect match: the two automakers had complementary product offerings, and were expected to achieve significant production synergies by consolidating their manufacturing.
The large synergies forecast by both boards ultimately legitimized the deal in the eyes of the shareholders, who overwhelmingly approved the deal shortly after it was proposed. But less than 10 years later, after suffering massive losses, Daimler spun off Chrysler for only $7.4 billion. What went wrong?
Well, just about everything. The deal was made in bad faith to begin with. Daimler-Benz made a big show out of presenting the deal as a “merger of equals” — guaranteeing brand independence, dual headquarters and boards, the use of English as the standard corporate language, and, of course, the incorporation of “Chrysler” into the new company name. In reality, Daimler-Benz regarded the deal as a takeover. In 2000, DaimlerChrysler CEO Jürgen Schrempp announced to the German paper Handelsblatt that Daimler-Benz upper management had always viewed the Chrysler deal as an acquisition, explaining that ‘The Merger of Equals’ statement was necessary in order to earn the support of Chrysler's workers and the American public, but it was never reality.” Schrempp’s statement angered many Chrysler employees, who felt that they had been duped by their new partners. The erosion of faith contributed heavily to the poor internal alignment of the two companies — goodwill is one of the most important intangibles driving deal success.
And those forecast manufacturing synergies? Such synergies never materialized. Daimler-Benz originally agreed to share a wide variety of parts with Chrysler, in a move to drive production costs down. Daimler-Benz rolled back this plan considerably, however, ultimately providing Chrysler with very little manufacturing support — support Chrysler desperately needed to remain competitive at a time when Japanese automakers dominated the American market. Ultimately, Daimler-Benz’s promise to maintain dual headquarters and boards, coupled with their failure to integrate Chrysler’s manufacturing infrastructure into their own, meant that Chrysler was run more or less as a wholly independent subsidiary, failing to realize synergies of any kind.
"You had two companies from different countries with different languages and different styles come together yet there were no synergies. It was simply an exercise in empire-building by Juergen Schrempp," remarked Dave Healy, an analyst with Burnham Securities.
According to George Peterson, another analyst, Schrempp forced the deal through without doing his homework. “Due diligence? Daimler-Benz never did due diligence before it bought Chrysler, never looked into the future to see whether Chrysler could afford to be competitive with the others in the industry.”
Chrysler also rushed into the deal, although for a different reason. In 1998, Chrysler attempted to forestall an imminent hostile takeover by billionaire investor Kirk Kerkorian, leading their CEO Bob Eaton to seek out Daimler-Benz as a white knight alternative. As former Chrysler chairman Lee Iacocca later remarked: “Eaton panicked.”
In the end, almost everything went wrong with the DaimlerChrysler deal. Both companies failed to complete the proper upfront research and due diligence. Full integration was never achieved, or even attempted. Bad faith and malaligned company cultures fueled resentment and poor performance. The deal resulted in a disastrous spin-off for Daimler and a second bankruptcy and government bailout for Chrysler, leading many analysts to regard the DaimlerChrysler deal as one of the most catastrophic M&A failures of all time.
“Corp dev people are often investment bankers who are just interested in finding targets to be acquired. It's what they do. Then the integration team is stuck with making the acquisition valuable.”
— Integration Specialist at Autodesk
“For corp dev, it’s all about the deal. That's what they know. [...] Some of the people I've run across are literally like deer in the headlights when they are faced with integration challenges.”
— Integration Specialist at Verizon
DaimlerChrysler may sound like an extreme example, but this type of failure is unfortunately quite common. Traditional thinking tends to treat the dealmaking and integration phases of the M&A lifecycle as separate projects carried out by independent teams. The disconnectedness of the phases (sometimes referred to as ‘The Great Divide’) creates a deep rift in communication between corp dev and integration, with potentially serious consequences for both teams and the deal’s long-term success.
Approaching the M&A process as a series of discrete projects is a textbook example of a traditional style of project management. The traditional emphasis on linearity and sequential workflow ultimately fails to meet the needs of a complex and dynamic process like M&A.
The first step towards addressing those shortcomings and improving the M&A process is simple: treat the M&A lifecycle as a holistic process. Approaching M&A as an integrated project likely means rethinking how you conceive of M&A at the most fundamental level. Throw out the idea that M&A consists of two distinct projects. The separation between the corp dev and integration teams in a traditional approach to M&A is highly problematic: since corp dev is not accountable for post-close success, their overambitious assumptions can create trouble for the integration team responsible for validating the deal. Instead of this disjointed and misaligned approach, envision the integration effort as an organic extension of due diligence, with corp dev and integration operating as a close partnership during the entire M&A lifecycle. This synthesis is the essence of Agile M&A: Agile M&A realizes a true partnership between corp dev and integration, or even their functioning as a single team.
In practice, bridging the gap between corp dev and integration can be approached in a variety of ways. The specific route taken will vary for each project, depending upon the unique requirements of individual deals and the nature of the companies involved. However, the Agile M&A Process Model advocates a universal governing strategy: to strive to incorporate an integration perspective as early in the M&A lifecycle as possible. Using the integration team to conduct confirmatory due diligence is a particularly effective approach and one which serial acquirers in the tech industry are increasingly beginning to adopt.
Broadly speaking, the Agile M&A Process Model approaches the M&A project as follows: the corp dev team conducts early diligence of potential targets, ideally with the help of the integration lead and relevant functional experts. When corp dev lands on a likely acquisition, the integration team then assembles and begins to consider the post-merger integration plan. The integration lead becomes involved early in the process and is responsible for validating value drivers and delivering on projected synergies. The deal lead’s early involvement allows for the development of attainable goals, circumventing conventional issues that arise from overambitious forecasts. Following LOI, the integration team conducts confirmatory due diligence — the process of identifying risks and ensuring that what is being represented is accurate. Since this team will be responsible for integrating the target, they take this process very seriously. Around this time the Integration Management Office (IMO) should be established as well, if necessary — serial acquirers may be running an IMO continuously. The IMO is deployed to assemble and coordinate small cross-functional teams to complete integration tasks.
“Having the team that does diligence be a part of the integration is really important because if [the integration team has access to] certain information earlier, [they will do] things differently. During the transaction and diligence, you build really strong relationships with the inbound management and team members. Those relationships are the same ones that are really helpful during integration. I have been on [diligence] teams where we have not engaged in integration until really late in the transaction. I do feel sorry for the deal leads because we have to spend time backing up and understanding why we are at this point in the transaction. I think if you know more earlier and can shape those early conversations, and get the key data sooner, then you will have a better idea of the plan, which ultimately stacks the deck in favor of the acquisition being successful.”
— James Harris, Principle of Corporate Development Integration at Google
The consolidation of traditionally distinct teams into a single highly effective unit helps to address two of the largest and most common problems in M&A: overestimating synergies, and inadequately preparing for integration. Since the integration team completes the entire M&A project, they benefit from an inherently more developed understanding of the project, a greater degree of visibility, and superior access to information. This represents a vast improvement over the fragmented relationship traditional corp dev and integration teams employ. The Agile approach to M&A is based upon these advantages. Meanwhile, if the foundation is built upon with the right combination of tools and techniques, the integration team will be able to operate with the speed, flexibility, and teamwork characteristic of Agile’s approach.
Additional resources for integration planning available at agilema.com