A simple rule of thumb for mergers

A simple rule of thumb before considering a merger or acquisition is to ask – does the value creation assumption require integrating large numbers of people? If it does – just walk away.

As the old adage goes, life would be easy, if it weren't for other people. Mergers are no exception. Bringing together 2 organisations, each with their own cultures and ways of doing things to create a fertile hybrid is never easy. Corporate histories are littered with the skeletons of failed mergers - Time Warner/AOL, Daimler/Chrysler, Citibank/Travellers to name some of the highest profile ones.

Deal evaluation starts with understanding the merger value creation assumption. Are you buying assets or competences? Is the competence narrowly concentrated in a few people or widely dispersed across the company? Is the competence deeply rooted in the target company’s unique culture?

If you are buying an asset (e.g. a plant, a brand, a technology patent) to plug into your existing business with limited transfer of people, then the people risk is limited. Likewise if you are buying a competence that depends on a small group of free-standing people (e.g. central R&D, deal-making team).

However, if the success of the merger requires a broad integration with thousands of people working together in a new way, the risks are huge. Large enough in most cases to encourage you to walk away immediately. There are other ways to grow a business, but a cultural clash after a merger is one of the fastest ways to destroy one.