March 30, 2015
M&A (Mergers and Acquisitions) talk around the Kraft-Heinz deal has dominated the business news. For most of us outsiders, it seemed like a surprise. We knew something was up with Heinz after the purchase by 3G Capital private equity group. But for Kraft, it seems like there has already been 30+ years of mergers starting with Kraft and General Foods in 1989, then adding Nabisco and Cadbury only to then split those two companies back out into two separate companies: Kraft and Mondelez. Since the split, the Kraft business is flat, the Mondelez continues to decline, likely both companies hurt by the changing diet of consumers as they cut high fat, high sugar products from their diet.
During my 20 year career, I went through three mergers. Each mergers used a different “merger” rule: one went fast, one went slow and one went clumsy. They say it takes 2 years for a merger to work. From my experience it takes longer. Prior to the merger, everyone wastes a lot of time speculating what is going to happen, lots of lunch table chit chat and good people leave in anticipation. Headhunters are now pouncing on the people at Kraft. When the merger finally hits, you spend a lot of time on things not related to growing the brands. You have to train senior leaders above you and sales people beside on the “new” brand. Usually, everyone is trying to appear as smart as they can, but in reality for the next year, they ask the most elementary questions. As people jockey for power, some the brightest and best people I’ve ever worked with turn into school children–gossiping, maneuvering, changing their personality to fit in with key people, and some feeling/appearing demoralized and defeated.
Most M&A research studies estimate that the overall failure rate is at least 50 percent. In surveys with executives conducted in recent years, the percentage of companies that failed to reach the goals of the merger was 83 percent. With those statistics known, you would expect leaders to avoid the M&A activity, yet the trend of mergers and acquisitions has been constantly increasing over the past 20 years. Moreover, the number of mergers and acquisitions and the sums of money invested in them have shattered the record almost every year! Even though acquisitions cost billions, the purchase is much easier to do than executing merger. We see the lack of planning, the realization that synergies are not what you expected, the major differences in the culture becomes clear, negotiation assumptions and mistakes prove costly, and quick decisions made impact the overall motivation.
Here’s a list of the top mergers in history
The reasons most M&A’s happen is the same reason they fail
- Our business is struggling, their business is doing well: So if your business is struggling, you need a turnaround, not the distraction from a merger. The effort undertaken during a merger will only make your business struggle even more. And you acquired a high growth, which means you’re likely buying high at a price premium. That will be hard for you to realize. This premium is generally so high that even successful management activities after the acquisition do not provide ROI (return on investment) and do not remedy the valuation “error.” The only thing left to do is to cut costs, both in people and marketing usually resulting in the struggling business doing even worse and the newly acquired business starting to flatten out.
- Allow us into new markets (new categories, new channels, new geographies). Yes, now your newly merged company will be in new markets, but it doesn’t necessarily translate that your brands will gain easy entry into those markets. At the shelf, retailers may hold your companies share of shelf so that means if you want your new brand in, you have to take out skus of your newly acquired brand. All that means is that as your brand takes time to gain any momentum in the new market it is entering, any gain is offset by a dramatic loss of sales of the brand you took off the shelf. A second risk to entering into markets is the merger may have cost the talent with the knowledge of the new market–and now inexperienced leaders are making decisions about markets they know very little about. With the Heinz-Kraft deal, 60% of Heinz sales are beyond North America, but 2% of Kraft. They have already tried to spin this great myth that this opens up new markets for the old Kraft brands. I want to see them try to sell Velveeta, Jello or Cheez Whiz in France or Italy. Sounds good on the books, but not in reality.
- Imagine the power of us together: the size, clout and efficiencies. In a business driven or dominated by retail, that power can certainly help. Where there are large manufacturing or union costs, the efficiency can be leveraged for lower costs. But when all you have is efficiency, it becomes obsessive and you look everywhere to cut costs in order to pay off the merger. The first round is easy: close redundant plants and warehouses, eliminate duplicate sales people. And you see results. But since every business must show incremental profit to show the merger a success, the second round of synergies that are harder to show. Now you cut brand support–reduce marketing spend, starting re-organizing teams to reduce people, squeeze suppliers for cost reduction. It can work in the short term, but while the organization becomes obsessive about synergies, who is focused on the growth? If the top-line doesn’t grow,you will eventually run out of places to cut. And becoming this huge conglomerate can make you slow to respond, stodgy, risk-averse and ripe with bureaucracy. This starts to sound like the old Kraft General Foods of the 90s and early 2000s, who closed successful businesses, got rid of some great talent through the years and are known as one of the most risk-averse conglomerates around. My big worry about the new Heinz-Kraft is how to make sure the new company can move with the agility needed in this ever changing marketplace.
- We will acquire a technology or expertise we don’t have. At first, it makes sense that you can buy the technology or expertise of your competitor, but likely it comes at a premium with no guarantee for success. If it’s a technology buy, you can certainly use it in your own product since you bought it. But we like to say that brands have four choices: better, different, cheaper or not around for very long. Now you’ll have both brands appearing almost the same. It’s very challenging to run two brands in one category–I know from experience. The biggest issue is that the two brands start to resemble each other to the point of duplication–if this worked here why won’t it work there. The same technology under the hood, the same distribution strategies and the same ad agency produces similar ads. The best case study for this was when Ford bought Mazda and used identical parts for cars yet tried to appeal to different targets at different price points. On the other case, when you acquire talent, you also acquire a distinct culture you need to make sure you continue. There are many cases where companies purchased an innovative R&D team and failed because that team was mis-managed and lost that innovative spirit. Case in point was Ford’s purchase of Volvo, almost destroying the brand’s spirit of innovation in safety. Both the Volvo and Mazda brands did much better after escaping Ford. Oddly enough, is it any coincidence that the Ford brand is now one of the best performing brands in the market? It will interesting to see what happens with Apple and Beats by Dre as that deal highly favored Beats, and it’s Apple’s first real attempt at M&A.
- Ego Play: Many times the personal interests of senior management are not always aligned with those of the stockholders. The CEO and management team see personal advantages in the merger, such as greater empowerment and control of a larger organization, improvement of the social-management status, and higher salaries and benefits. With wide-eyed optimism, they convince themselves that they can do a better job managing the brands they acquire, they tell themselves they can find more growth and cut costs at the same time. Ego can get in the way of good strategic thinking. Companies can get in bidding wars and corporate ego sees the price get out of hand. They get so deep into the deal, they have to have it–at all costs. In any transaction, when things get emotional the seller wins.
- Our cultures are a perfect match: Very rarely do we hear this as the primary reason. Yes, we hear it in the press release and at the opening day rally, but as many of us have gone through a few of these, we know that 5 senior leaders meeting 5 other senior leaders and working out a deal is not usually a good indicator that the cultures are a good fit. Even if they say so. Business culture is an odd thing and should not be under-estimated. Usually a merger never allows the due-diligence to find out about whether the cultures fit.
- The brands don’t benefit. And the consumer misses out as well. With a distracted company sorting through the merger and trying to make the numbers, it’s usually innovation that gets delayed or cut. With demand for synergies, production costs/warehouse costs likely impacts ingredient choices and freshness options. Sadly, many times the product just isn’t the same as it used to be.
- Brand Leaders don’t benefit. They have to re-work and re-work plans for new management. And usually the discussions are a step back in the degree of strategic challenge the first year or two. You get questions like “so tell me how this brand works?” or “have we always done it that way?”. As synergies happen, we see options like re-structuring the marketing team to group brands together. That means less attention can be paid to each brand or the details beneath. Brand budgets are scrutinized and cut–usually sticking to the safest options in the plan and eliminating creative ideas that that carry risk.
- The HR team doesn’t benefit. While they are seen as the “evil group” in a merger, they are usually under the most pressure to cut head count and deliver the bad news, while coincidently being challenged to find a new culture from these two companies that don’t fit nicely together. This group bears the brunt of the merger.
- Shareholders: The statistics show that the shareholders of the seller benefits more than the shareholder of the buyer. Considering, mergers can come out of nowhere fast, this is just a crap shoot as to which company stock you hold. But it really does speak to the premium paid in these deals. As they say in Real Estate, never buy high.
- Investment Banks and McKinsey Consulting: At the whim of the leaders, both groups receive huge fees for doing the deal and executing the merger plan. Oddly enough, neither group seems to be at risk or on the hook if the deal or the merger go bad. They just keep moving on to the next deal.
- Senior Leaders in the short-term. With the approval to move forward, they increase their status within every touch point–with retailers, with peers, with agencies and in the business community. They likely benefited financially from the merger–either higher salary bump or bonuses. In the longer term, they are on the hot seat to make this deal pay off, and with a 50% failure rate, they likely won’t last.
Yes mergers are as much of a reality as baseball trades. Like in baseball, managers think we can do more with that asset (brand or player) than they are doing. But more and more, just as the best sports teams are winning because of the organic development of their players, the same holds true for brands. Focus on growing your brands, choosing the right consumer driven strategies and executing with intelligence and passion. Stay focused on your own business instead of drooling over others.
While the grass always looks greener on the other side of the fence, make sure your own business is in good shape.
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