Mergers and acquisitions and takeovers — oh my!

Disclosure: Most of the companies mentioned as merger examples are clients of the author.

There are generally three reasons to acquire another company: synergy between the companies that leads to a competitive advantage; the elimination of a competitor; and the acquisition of critical intellectual property. I’ve been thinking about this in the wake of Elon Musk’s attempt to buy Twitter this week. (It looks more like it’s an effort to buy the CEO job at Twitter, more than the company.)

Not only is this kind of move exceedingly rare, the odds are against it being successful. However, Musk has often been successful when the odds are against him, making this worth watching — and the outcome uncertain. 

The impact on Twitter would undoubtedly be adverse and long lasting; hostile takeovers tend to motivate high-value employees to leave and stop high-value employees from taking a job for a company mid-takeover. And they can be a major distraction, causing the firm that being forcibly acquired to generally underperform.

Let’s talk about mergers and acquisitions and why hostile takeovers are generally a bad idea because they can damage company morale, productivity and viability.

Mergers and acquisitions: Why most fail

I used to run what was essentially a merger clean-up team at IBM, so I spent a great deal of time studying mergers while in IBM Competitive Analysis. What I found was that the reasons mergers fail often have to do with a lack of detailed knowledge and skills and poor due diligence by the acquiring company. On top of that, the rules surrounding pre-approval of a merger limit the acquiring company’s ability to hit the ground running when the process is over. 

Mergers are risky for both the acquiring and acquired company, especially when there’s unexpected friction between the firms’ operations, culture, practices, and leadership. Examples of successful mergers include the Lenovo acquisition of IBM’s PC business and Dell’s acquisition of EMC. (Most of Dell’s mergers are successful due largely to their unique enhancement of IBM’s merger and acquisition process.)

Lenovo’s acquisition of IBM’s PC operation was successful because the transition period was long, the unit was self-contained and left alone until it was fully understood, and employee retention remained high during the process. Dell’s EMC acquisition was successful because Dell had no plan “B” and so moved aggressively and early to fully understand EMC before the merger was approved; that allowed it to move quickly once the deal was approved.

The key in both cases: eliminate issues that hurt the acquired asset, and identify and protect the company assets — human and IP – that add value.

Hostile mergers

In a hostile merger, the acquired company doesn’t want to be acquired. This means there is a distinct lack of knowledge about its operations by then buyer and, even after approval, there may be ongoing resistance and open defiance to new management. You can’t retain and protect assets you are unaware of, and until you have the authority to do so. For Twitter, this means the company is likely to bleed key people at alarming rates and be unable to replace them until the merger is done and leadership changed. Buying the top job, as Musk seems to want to do, also can create animosity with the executive staff, particularly those that thought they were in line for the position. Efforts to sabotage the process, or the new leader, are not unheard of.  

The political and competitive aspects of this also suggest there will be domestic and foreign hurdles unique to this process and difficult to overcome. Musk is already considered a bad actor by the US Securities and Exchange Commission (SEC), and he hasn’t been complying with their prior rulings. (The agency could block his effort based solely on that.) Owning Twitter could also give a lot of power to both SpaceX and Tesla, influence that could be seen as corrupting for the former and unfair competition for the latter. This might prompt governments, both domestic and foreign, to block the merger to protect their automotive industries and assure their SpaceX efforts aren’t compromised.  In the extreme, it could even lead to Tesla and SpaceX facing sanctions post-merger. 

Finally, buying a job to re-create the kind of extreme control Mark Zuckerberg enjoys at Facebook is ill advised, particularly when it’s someone who refuses to adhere to federal disclosure laws. In short, with most hostile takeovers, the odds of success aren’t  good (except when the goal is to eliminate a competitor). Musk’s attempt to acquire Twitter is likely to be a slow motion train wreck that cripples Twitter in the process. 

In short, Musk might successfully buy the CEO job at Twitter, but it would be a Pyrrhic victory at best — and a total disaster once complete. 

The difference between success and failure

Most acquisitions fail. Those that succeed are either very well managed (like the Lenovo/IBM PC merger), extremely well planned and executed (like the Dell/EMC merger), or designed to eliminate a competitor (like the Oracle/Peoplesoft merger). In contrast, hostile acquisitions mostly fail, except when eliminating a competitor (Oracle/Peoplesoft again) because they damage the acquired company. And as we saw with the Broadcom/Qualcomm effort, they can also be blocked to prevent a company from being attacked. A hostile takeover is definitely an attack. 

Management in a company under attack needs to meet with and talk with subordinates regularly, address rumors and fears, reiterate that the effort is being fought at the highest levels and with the full resources of the company, and ask the employees to stay and help fight by focusing on their jobs and ignoring any uncertainty. 

Twitter will most certainly be hurt by Musk is doing, but if it can keep its employees focused and  productive — and ease any concerns about the attempt — management should be able to mitigate most of the productivity drag during the siege.