Why Mergers Fail: Biased Decisions & Corporate Politics

By | October 5, 2013
Counterproductive Teamwork

Image courtesy of Kjnnt / FreeDigitalPhotos.net

Having been through three mergers and acquisitions over the years at various companies I have worked for, there are obvious patterns that emerge that can make or break the success of the merger.  The first one I will cover is about the changes in corporate governance that necessarily happen when two entities merge or one buys another.

One of the most dangerous things that happen immediately after a merger is the expected consolidation of power and the related corporate politics that come with it.  What happens is that people, especially middle managers, realize that if they do not protect their power-base, they may not have power (or even a job) in the new company order.  So instead of working together for the better of the company, the focus now becomes how to survive the coming game of musical chairs.

This frequently results in the most ruthless people trying to eliminate or marginalize any competition they have within the company, no matter what their value is to the company.  Some will even go so far as setting people up to fail or even make up or exaggerate claims of misconduct to get rid of their rivals.

The danger is people will be retained or removed because of who they know in the company, rather than their skillsets or past and future potential contribution to the company.

Decisions Based on Corporate Politics

Related to the danger of people jockeying for positions of power in the new company order, is management making business decisions based on protecting themselves and their teams, rather than what is best of the company.

Example: Keeping the More Expensive Data Center

You will often see divisions or offices closing where it does not make financial or business sense to.  One example in the wild was a newly merged company trying to consolidate data centers.  Instead of closing the more expensive one on the east coast, which had higher labor costs and higher office space cost, they initially chose to close the one in the southwest which was significantly cheaper to run.  Why?  Because the people making most of the decisions were on the east coast, and they did what was necessary to preserve their jobs.  Apparently a bean counter figured out that the whole exercise made no sense financially, and the top management stopped the closing of the southwest data center.  By then it was too late.  Most of the staff had been laid off, and the east coast staff had already taken over most systems remotely, ensuring the east coast team’s continued survival.  The company wound up maintaining both data center locations, and paying the higher cost staff, eliminating most of the cost savings that was intended.

Example: Layoff Based on Division, Not Skill

Another example in the wild is the wholesale closing of division or subsidiary of a company, because it duplicates some of the functions of another division or subsidiary that is part of the merger.  This by itself is not bad for the company, because part of the purpose of merging is to combine resources and eliminate duplicate work.

The dangerous aspect of this is valuable people being laid off simply because they are under the wrong hierarchy, while less valuable people are kept.  How this happens is that the people in power after the merger keep all their friends and associates, while removing anyone who would be a potential threat to their continued service in the company.

One company removed 90% of a division, which included some world-renowned experts in their fields and some of the best talent in the industry, simply because they were in the wrong division and would potentially displace friends of the managers in power.  The talented staff flocked to their competitors, and years later the company had to file for bankruptcy.

Why This is Bad for Business

While a lot of this may seem typical in most mergers and acquisitions, these behaviors are bad for the business because of the lost cost savings and the loss of highly qualified people, who will just go work for your competitors.  It is also bad for morale, because your employees will pick up that layoffs are based on who you know, and not what you provide for the company, which encourages them to engage in protective behavior (play corporate politics, eliminate rivals, suck up to the right people, etc.) rather than work on improving the company.


 

Scott M. Stolz

Entrepreneur, Educator, Author.
Helping people embrace life's opportunities.™