How to Avoid Billion Dollar M&A Bungles

Last Updated Sep 11, 2008 1:15 PM EDT

The Takeaway: If your business is approaching a merger or acquisition, Guy Kawasaki has an interview for you to read. The insights in it, he claims, are both instructive and scary, plus they could save you a bundle of money. The first order of business is to establish why M&A's turn into fiascoes. These include companies,
  • Overestimating the power that comes with additional size.
  • Underestimating the complexity that comes with additional size (US Air in the 80s).
  • Overestimating their hold on customers. (80 percent of executives think their products are better than the competition; 8 percent of customers agree.)
  • Playing semantic games to convince themselves that they have something that matters in a new market (Avon gets into retirement homes).
  • Failing to consider all their options.
  • Overpaying.
There's nothing too shocking in this list (here's an HBR in brief, for example, claiming 50 percent of companies pay too much for an acquisition), but what is fascinating is the author's explanation of the wrong thinking that underlies companies' wrong actions. Mistakes, Mui feels, are often down to psychological biases and institutional issues:
It turns out that we're wired to be overconfident, to come to conclusions too quickly, and to not learn from mistakes. There are also all sorts of institutional issues. People are afraid to challenge the CEO... The CEO is in a tough spot because he can't bounce ideas off much of anyone. He can seem indecisive if he talks out loud in front of his executive team. The same holds true for the board.
Part of the antidote to these very expensive foibles is creating a culture that values dissent such as the one that exited at GE under Jack Welch. Mui recounts the comment of an executive who joined GE from RCA: "what passes for conversation at GE would be considered a mugging at RCA." How can companies assure they're executives are getting a healthy amount of disagreement? Emulate the Persians who rules for three centuries and made decisions twice- once sober, once drunk. Before you place an order for a case of whiskey, Mui clarifies:
Most corporations make major decisions in a state that, while not drunk, is certainly emotional. Companies don't need to have executives pop a few martinis and reconsider their thinking. Executives need to find a thoroughly sober, dispassionate environment in which to give their emotional decisions a second look.
Interested? The interview offers much more including the verdict on Steve Jobs, what Yahoo! should have done and when to stay the course in a market versus when to abandon ship.

The Question: How do you encourage employees to play the devil's advocate when it comes time to make big decisions?

(Image of 50 billion (Zimbabwean) dollars by ZeroOne, CC 2.0)

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    Jessica lives in London where she works as a freelance writer with interests in green business and tech, management, and marketing.