In theory, it was simple. Whole Foods, the anti-artificial supermarket chain that represents the zenith of upper-middle class U.S. accomplishment, was struggling through a decline in sales due primarily to increased competition in adjacent spaces. Ubiquitous online retailer Amazon had been trying to break into the natural-foods market and grocery delivery for years. So, on the surface, Amazon’s announcement last month to buy Whole Foods seemed to be mutually beneficial. However, does an attractive merger on paper necessarily translate into a successful venture in practice?
Unfortunately, mergers and acquisitions are not as appealing as executive boards sometimes want them to be. According to a study conducted by KPMG, 83 percent of mergers and acquisitions fail to deliver shareholder return. Accounting for the unknown or the hard-to-measure can be impossible for executives. Data and projections are comforting metrics, yet a holistic approach has traditionally been successful. So, what makes for a good merger?
Aligned objectives
One straightforward, quantifiable measure is if both companies at the table have objectives that align well. When the vision is murky, it can lead to some disastrous results.
In 1997, Quaker Oats bought Snapple for$1.7 billion in an attempt to buy into the soft drink market. However, Quaker didn’t recognize that Snapple had created success in a niche market, so when trying to bring the brand’s success mainstream, the company failed to create interest among new consumers. Quaker sold Snapple for $300 million after just 27 months.
However, when companies work together they sometimes create magic. There might be no better example than the merger between Disney and Pixar. Disney is a monolithic mega-company with intellectual property, real estate, merchandising and media properties that is perhaps best known for creating children’s entertainment. Pixar fit the bill as a Disney target for acquisition; having produced runaway animated hit films like “Toy Story” and “Finding Nemo”. There existed a clear synergy.
When Disney acquired Pixar, each company had their own objectives, yet their collaboration strengthened their projects. “Frozen” was a result of their well-blended objectives that became the fifth-highest grossing film of all time.
Corporate Clash
Daimler AG, which owns Mercedes-Benz, bought Chrysler for $36 billion in 1998 in an effort to increase North American market share. However, Chrysler employees were resentful when the high-end brand began to control all aspects of the Chrysler business and culture. The clash in cultures created unfavorable conditions for the two to coexist and merge smoothly. Coupled with declining sales in cars and competition with Asian makers, Daimler AG dissolved the merger for just $7.4 billion in 2007.
Yet, the power of culture to drive innovation can be seen in the merger between Proctor & Gamble and Gillette. P&G CEO A.G Lafley made extensive efforts to welcome and comfort Gillette employees. After combining their London offices, lunch hour was dedicated to create relationships between the employees. This new positioning helped P&G to take larger control of men’s grooming products.
Company culture is often overlooked or denigrated as insignificant. However, the outlook and emotions of employees severely predict the strength and future of the new company. If employees are not encouraged or convinced then transition period will be drawn out, painful and, quite often, fail.
Due Diligence
It can be a deal breaker when those negotiating do not research and plan for the risks. This occurred when Sears Holding and Kmart decided to merge in 2004. Both companies saw a decline in sales in the changing the market. However, they did not account for the evolving consumer preference. Both companies had a lack of brand awareness that did not create consumer loyalty. Their prices were also not competitive enough for newer, cheaper fashion stores. The improper outline in inefficiencies caused a further decline in sales and the two stores have been struggling since.
Mergers and acquisitions do not singularly spell insurmountable obstacles. Many companies have had great success consolidating operations and capital. Yet, innovation, brand awareness and strategic investment are all costs that are imperative to consider. They are worth their price when a company whole-heartedly embraces these goals.
Marketing guru Simon Sinek may have said it best when he posited that “[m]ergers are like marriages. They are the bringing together of two individuals. If you wouldn't marry someone for the 'operational efficiencies' they offer in the running of a household, then why would you combine two companies with unique cultures and identities for that reason?”
For companies that solely focus on the financial gain, the deal may not be a bargain for the lasting repercussions in the future. Failure is possible when executives believe the hard work ends at closing. On the contrary, that is when the hard work just begins.