A Perfect Match

May 2, 2012
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During challenging economic times, it’s not uncommon for firms to try to corner key markets by merging with other organizations. Motivations for mergers often include increased strength through combined resources, reduced competition, enhanced validity through a more established brand and increased financial stability. However, for a merger to be successful, it must go beyond the bottom line to understand human dynamics.

The merging of companies is very much like remarriage after divorce. Each firm brings a substantial amount of “baggage” that must be dealt with before the arrangement will be successful. Questions regarding trust and integrity, different cultural influences and structures and a fear of change are all catalysts for conflict during any negotiation but especially during a merger. Statistics show that the failure rate of most mergers and acquisitions lies somewhere between 40 to 80 percent--not because of a lack of organizational fit, but because the firms involved neglected to take into account the human factor.

The way individuals communicate during a merger sets the stage for the amount of conflict that will be encountered during the negotiation. Good communication is particularly important for firms operating in fields with rapidly advancing technology. Companies that are on the leading edge with specialized technologies will be inclined to protect their resources, credibility and intellectual property. Trust is built on rapport and respect over time as well as the expectation that one firm will not act opportunistically during the disclosure needed to identify organizational fit.

Establishing a framework of trust is therefore crucial. Often such a framework is built through interrogative communication--a series of questions and guarded answers that gradually advances the discussions and provides the necessary information on which to base decisions. Throughout the process, there is likely to be a push/pull of uncertainty regarding possible additional motives between the companies.

When trying to align vision, a thorough evaluation of individual company mission statements and goals is a good place to start, yet this crucial and very transparent resource is often overlooked.

The use of formal contracts such as nondisclosure agreements (NDA) or letters of intent (LOI) can shape a relationship and establish rules for communication. However, while such contracts can minimize the tension of guarded communication, they do little to ease the tension of uncertainty. A more effective approach is the use of a best alternative to a negotiated agreement (BATNA). This disclosure can help advance a common goal and reduce the calculations-based trust between the two parties regarding expectations.

Often a feeling of punishment/reward exists when organizations attempt to merge. A successful company is being relinquished for the promised reward of a unified and potentially more successful company. Situational factors coupled with personality factors and history between the parties can substantially increase or diminish the willingness of each party to act on the words, actions or decisions of the other. For this reason, a third party facilitator can be invaluable during merger negotiations. Facilitators can help promote collaborative ideas, provide an exchange of information and equalize the power of legitimacy to advance communication. With or without a facilitator, the goal should be an integrative negotiation strategy (a win-win) through collaborative problem solving.

Differences in organizational culture can have a substantial impact on a merger negotiation. Identifying a satisfactory system of roles and relationships can create tension and stress. The more complex the structure, the more difficult it becomes to form a cohesive, tightly coupled enterprise. Increased complexity means increased costs, rules and policies that must be augmented with lateral strategies.

Merger negotiations will also encounter the inevitable human resistance to change. People dealing with major change will often go through the same emotional stages seen in the grief cycle--denial, anger, bargaining, depression and acceptance. It is the loss of the familiar. In the case of merging companies, organizational hierarchy that was once independent now must be integrated, so there is a perceived loss of status if roles are changed. Loss of freedom, established relationships, camaraderie and client interaction often creates tension when smaller companies merge into a larger environment. A lack of agreement, uncertain long-range strategic planning, protection of limited resources and political maneuvering often result in ambiguous decision-making.

The change required in a merger also creates a power struggle. Researchers of human dynamics agree that relationships affect how negotiations evolve. Conditions that threaten the status of an organization’s leaders also increase organizational politics in the decision-making process. These factors can cause delay and a lack of trust in the formation of the merger, and also set the tone for how change will be viewed in the future. If the merger is successful, future organizational capacity for change will increase. However, an unsuccessful negotiation will lead to a depletion of mental, physical, emotional and financial resources of an organization. The longevity of merger negotiations can misdirect both organizations and waste resources that would otherwise be focused on business development, client productivity and business as unusual. Existing management behaviors must be identified and desired behaviors defined. This top-down level of understanding is a crucial step toward embracing the change that occurs in a merger.

Firms involved in a merger must unify their goals and find a way to act as a single company with a common mission. This is ultimately a human interaction--the individuals involved must identify and align their visions. If the BATNA is not attainable, it is important to know when to walk away.

Merger Negotiation Missteps

•           Assuming what the other side wants
•           Overestimating the other side’s weaknesses
•           Being inflexible
•           Having unreasonable or unsupported goals
•           Allowing emotion to guide negotiations
•           Making a counterproposal to an unreasonable offer (a better approach is to ask for clarity, evidence or an amended offer)
•           Using time as a control
•           Jumping at the first offer
•           Focusing on what the other party gets
•           Neglecting to prepare for the negotiation

Source: Corvette, Barbara A. Budjac (2007) Conflict Management: A Practical Guide to Developing Negotiation Strategies. New Jersey: Pearson

A Merger "¦ or an Alliance?

Firms looking to strengthen their bottom line and expand their markets without a formal merger might want to consider teaming arrangements. Terrametrix, a terrestrial mobile LiDAR company based in Omaha, Neb., relies extensively on teaming in its business model. “Because we don’t compete by chasing after the work ourselves as the lead, we are able to provide benefits to companies who already have working relationships,” says Mike Frecks, president and CEO. “This philosophy promotes relationships and brings additional benefits like specialized resources, increased productivity and safer acquisition. It allows each entity to focus on what they do best, with confidence that we are not competing against each other.”

As with a merger, however, team fit is important. Increased communication and collaboration between the organizations is required. Before entering a teaming arrangement, consider these three key questions:

•           Can the work be done better by collective resources? A good indicator is the complexity of the work and the need for a different approach.

•           Does the work require specialized resources? If there is no other way to address the needs required, then teaming is a viable option. Companies that specialize in areas are set up to do just that so they are more cost efficient.

•           Will teaming free up resources that can be focused elsewhere? Successful teams translate their common purpose into specific, measureable and realistic performance goals.

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