The importance of compatibility in mergers and acqsitions
Compatibility between your firm and the acquired business is important when merging firms through an acquisition. Once you combine the firms you will need to work together – sharing resources and individuals, and gradually integrating the different parts of the business over time.
Unless the firms are compatible with one another, then the task of integrating will prove difficult, potentially resulting in the rationale for the merger never materializing. If for example, you had expected that the acquisition would allow cost savings from a reduction in duplication, but face challenges actually integrating the two areas, then you may never see the expected reduced duplication. Similarly, if the rationale is around new revenue-enhancing opportunities, such as combining the technologies to launch a new product, such benefits again may not materialize unless you are able to successfully integrate the two firms together.
Dimensions that can influence merger and acquisition competibilities
Substantial differences in firm sizes can impose challenges with integrating the companies together. Very small firms may have different approaches to organizing – without the larger hierarchies common in large firms. Combining the companies together may pose specific challenges for the smaller company, who now must adapt to working within a large firm.
The cultures within companies can vary substantially. This extends beyond national cultures to also include different outlooks and ways of working. Trying to integrate two firms with very different styles and company cultures is challenging – just as it is difficult to change a company culture, it is difficult to combine two together to create a unified new company culture.
Another dimension that can make integration more difficult is if the two firms have very different compensation structures. This can pose challenges irrespective of whether you decide to keep the existing compensation structures or not. If you decide to keep different compensation approaches this can cause animosity between employees that receive different compensation for similar performance. If you decide to integrate it to provide standardized compensation, this can cause issues with employees feeling that they have received the worse deal, preferring the approach that they were on previously.
It is possible that if your firm and the acquired firm were intense rivals in the past, that animosity between employees may result in difficulties integrating the two areas. Employees of the different business areas may think of themselves as superior to the other business – having spent years convincing themselves of their superiority to the former competitor. Getting such individuals to cooperate with one another may be a challenge.
Another area that can cause challenges with integration is if the two different businesses have very different outlooks regarding the industry and its likely evolution. It is not uncommon, particularly in the early stages of an industry or technology, for different firms to have different perspectives of how the industry will evolve and what will be important. When these firms are combined into one firm, this can cause issues – now individuals with very different perspectives must work together can come up with a unified perspective for what is important.
Final thoughts: Consider M&A compatibility before moving forward with the merger
It is important to consider the compatibility between firms before agreeing to the acquisition. It is common for integration decisions to only be considered after the deal has been signed – ignoring the challenges that may come from integration until after it is too late to back out. This has the danger that acquisitions that do not make sense are pursued because it is too late to back out. Giving consideration in advance to the challenges likely to arise when the firms are integrated can help avoid the possibility that firms embark on a long challenging integration process.