Business Models: The Forgotten Tool In M&A Integration

As a Partner at Deloitte I spent a lot time working with clients on M&A integration – particularly integrating organization structures and the people in them.  Over the last decade I have focused more on using Innovation methods to transform organizations from the customer point of view – transformation from the outside in.

It recently struck me that these two disciplines should be introduced to each other.  M&A is known to suffer huge failure rates – touted as high as 70%.  The leading cause of M&A failure is generally described as the inability to integrate people – often discussed under the squishy term “culture.”

I’ve experienced M&A failure and since I worked on the people side the big finger often pointed at me.  Based on feedback my teams would huddle to review what we did and how we could make it better.  Should we tweak our assessment surveys?  Revamp our communications?  Build better training and information programs?  We got better, but it was difficult to become great.

My work on innovation has given me a new lens to look at M&A integration.  Business models.  What strikes me is that if M&A pros examined business models at all steps in the M&A cycle they would definitely improve their success rate.

Here’s an example.  Recently I spent several years advising an Asian technology company on how to use innovation techniques to smooth the post M&A integration of two organizations.  The history is a bit unique.  A decade earlier the acquiring organization had spun-off the other organization because it “didn’t fit.”  Ten years later the performance of the legacy organization had plateaued so they decided to revitalize themselves by buying back their sibling – who was now mature and producing record results.

Well, the misfit of 10 years ago still didn’t fit.  Sure, we can look at the integration mismatch through one of the traditional lenses of people, process, and technology, but what if we look at it as incompatible business models.  What can we learn?

What is a Business Model?

Firstly, we need to define the term “business model”.  There is lots of good research on this topic, which I don’t intend to capture here; however, I summarize business models into three critical questions?

1. Who wants what we’re offering?
2. How do we deliver our offering?
3. How do we make money with our offering?

The first principle in assessing the compatibility of business models is to ask these questions in the order presented; yet, the M&A targeting and diligence phases are over focused on the last question.  Asking the last question first does not produce value; it produces money – usually through synergies in the cost structure.  Not altogether a bad thing, but not a clear path to successful merger integration.

If the criteria for M&A success are value creation and operational effectiveness then you need to attend to questions #1 and #2; and you need to emphasize these during targeting and diligence, not just during integration.

Who Wants Our Offering?

Question #1 is about the “customer value proposition.”  It’s about the preferences of those who want your offer and the sustainable difference that it provides.  Lots of companies sell washing machines in Best Buy’s sea of white.  But why do people buy them?  Sure, some are transactional-churn customers who are looking for the lowest price; but others are looking for a more emotional connection with the appliance and its manufacturers.  They want to be customers for life.

Often acquisition targets are entertained to increase the customer pool.  Really?  If the customer value proposition of the merging organizations isn’t supported by similar customer philosophies then you risk draining the customer pool.  If the acquiring company’s focus is on serving customers through cost structure efficiencies it will crush customers who are looking for an intimate and innovative connection to a product or service.

For instance in 1994 Quaker Oats purchased Snapple for $1.7 billion and sold it three years later for a loss of $1.4 billion.  One reason for this failure was different answers to our question #1.  Quaker had an extremely focussed, mass-market working approach aimed at the end consumer while Snapple's style was eccentric, commercial and tilted towards its distributors.

How Do We Deliver Our Offering?

Question #2 poses similar opportunities and risks for merger integration.  How compatible are the delivery value chains?  How do we: design, produce, distribute, and service our offering?  Where are we on the globalization and outsourcing scales?  GE, for one, has recently realized that separating design from production depletes opportunities for innovation through synergy.  Do the merging organizations think about off-shoring the same way?

Operating infrastructures are often seen as a prime reason for an M&A: “Let’s downsize and integrate: 1+1=3.”  Not so fast!  Delivery systems are complex organisms.  They have their own lives.  Don’t check this box too quickly. 

An example is the decade long ill fated marriage of Daimler Chrysler.  By the 1998 announcement Chrysler led the industry in its innovative short cycle of “concept to showroom.”  This core competence wasn’t good enough for Daimler’s cost saving, consolidation mindset – the Daimler way was the only way.  This wasn’t the single reason for failure but it contributed to Chrysler’s divestiture in 2007.

Conclusion

It seems to me that M&A practitioners have neglected business models and rushed to “value creation” through “synergies in integrating infrastructures” (otherwise known as consolidating facilities and channels to downsize the workforce).  Business model analysis exposes real value.  It shows complementarity of value and exposes the risk of filling value gaps that should not be filled.

M&A decisions are made in an intense, pressure filled environment.  Could business model analysis be an effective conduit for complex M&A information to business people?  Maybe these models are a missing link in the quest for M&A success.