Tuesday, October 2, 2007

What's missing from many failed mergers?

What's missing from many failed mergers?

It's no secret that most mergers and acquisitions fail to create value. The Wall Street Journal's "Manager's Journal" takes a look at a common problem with mergers:

But if the past is a guide, markets will focus on assets, portfolios and business synergies and overlook a key to whether the deal is successful: people.

People issues are often the root of failed deals, our research shows. That is because they are frequently an afterthought in the frenzy of a deal. Dealmakers gather reams of financial, commercial and operational data. But they often pay scant attention to what we call human due diligence -- understanding the culture of an organization, the roles that individuals play, and the capabilities and attitudes of its people.

This is certainly the strategy of Warren Buffett, whose conglomerate Berkshire Hathaway (NYSE: BRK.A) has grown successfully by focusing on acquisitions with strong management that wants to stay on. Berkshire avoids integration/people problems by integrating new companies as little as possible.

Given the importance of relationships in the outcome of deals, you have to wonder if some of the more contentious buyouts are doomed to fail.

For instance, Finish Line's (NASDAQ: FINL) acquisition of Genesco (NYSE: GCO): When Genesco reported a bad quarter, Finish Line suggested that it might attempt to back out of the proposed merger agreement. Now lawsuits and rhetorics are flying and shares of Finish Line are scraping five-year lows. It raises the question: If the merger does end up being completed (possibly because Finish Line has no choice), will these people be able to work together?

For a list of other deals that could find themselves struggling because of people problems, check out Private Equity Deals that have Hit Snags. If consummation isn't smooth, then integration isn't likely to be either.