8. Why We Waste $1,200,000,000,000 a Year: Mergers and Acquisitions, Corporate Culture, and Communication

Companies don’t grow to a massive size all by themselves. Nearly every company in the world with more than 10,000 employees (and many that are smaller than that) have either merged with or acquired another company, or many. This activity, called mergers and acquisitions (M&A for short), is one of the most important and difficult processes in business.

Every year, about $2 trillion worth of M&A activity occurs. Some of this activity is truly epic in scale, with gargantuan deals such as AOL’s acquisition of Time Warner for $164.7 billion in 2000 standing out not just for its monstrous size but also for its monumental failure. Failure in M&A is actually the rule rather than the exception, with most estimates pegging M&A failure north of 60%. In fact, the three largest mergers and acquisitions¹ of all time either ended in breakup or resulted in financial catastrophe, costing the companies involved a combined $466 billion.

These failures cost the world economy $1.2 trillion every year, enough money to pay for the college tuition of every student in the United States and still have a bit left over to solve Greece’s debt crisis. Wasting that amount of money is criminal and demands a solution.

Of course, companies don’t set out to blow billions of dollars on a questionable deal. They spend a great amount of time researching and negotiating with potential M&A partners. Some of this work is done by M&A experts, who charge millions of dollars to investigate the financial performance and potential synergies that could be realized through M&A. Many of these deals are years in the making, with a vast amount of careful planning and formal procedures put in place to make sure M&A goes smoothly.

Yet these plans fail repeatedly, and companies continue to follow the same doomed path as those before them. Business leaders mostly shrug and take the common refrain: “M&A is just hard.” This statement is fair enough, because many things are just hard. Building a supersonic jet is hard. Designing a computer processor with hundreds of millions of parts is hard. The thing is, those things still get done well, with vastly higher success rates than occurs with M&A.

My perspective on this problem is a little different. Consider the state of M&A: Thousands of some of the smartest people in the world work on exactly the same problem and consistently fail. Either M&A is impossible and companies should just resign themselves to blowing $1.2 trillion a year, or they are focusing on the wrong things.

Let’s start with one particularly famous example of M&A: eBay’s acquisition of Skype.

Back in 2005, however, a potential suitor in the form of eBay appeared on Skype’s doorstep. This is the same eBay that makes the overwhelming majority of its money from an online marketplace where people buy and sell all variety of products, from toothbrushes to TVs to entire towns. What connection does online communication have to a community of buyers and sellers, you ask? According to then eBay CEO Meg Whitman, it would allow for people to make much higher value, complex deals through their online marketplace:

Buying a used bulldozer, for example, could take a high degree of involvement from both buyer and seller because it’s expensive and complex. Doing this entirely through e-mail or IM could be difficult. Using Skype will be quicker and easier and very cost effective.²

Okay, so one must assume that bulldozer purchases are not going to be that common on eBay. Although eBay has had its share of off-the-wall transactions, even from a cursory glance, it seems like there’s not going to be too much natural synergy between these two companies. Strangely, however, analysts were by and large very positive about this acquisition. JPMorgan analyst Imran Khan wrote:

We believe eBay will leverage Skype’s products to improve both customer service and buyer/seller communication. Also, Skype has various products in its pipeline which we believe will add more efficiencies to eBay’s platform (e.g., video, which could be used for product demos).

Will Stofega from the research firm IDC echoed this sentiment:

Beyond adding an application for eBay customers, Skype entails a new revenue stream for eBay and another way of getting beyond the portal. They wanted to get into the game to become a more full service portal.

These reactions left me scratching my head. Were we looking at the same acquisition? Integrating products, especially ones that are as different as VoIP and an online marketplace, is extremely difficult. Besides both having a bit of messaging functionality, Skype is a completely different beast.

On top of that, Skype has its headquarters is Luxembourg, whereas eBay is based in San Jose. Despite the fact that eBay was buying a company that specialized in improving communication across distance, Skype can’t fix a time difference of nine hours. This means that exactly zero overlap in workday occurs between the two companies, even assuming people come in at 8 a.m. Any integration is going to take a lot of late night/early morning hours and a lot of travel. As discussed in Chapter 4, this is a recipe for a long, hard road ahead.

The analysts, however, were not looking at these obstacles. They were looking at the financials, at the long-term strategic implications of such a deal. As such, most of them didn’t blink at eBay’s offer of approximately $3.1 billion dollars to acquire Skype.

Let’s fast forward a few years to the fall of 2009. The acquisition of Skype by eBay has not gone well. There are no major joint product offerings to speak of, and Skype’s revenue has failed to expand at a pace rapid enough to offset the huge amount of cash that eBay laid down for the purchase. eBay cuts its losses and agrees to sell 70% of Skype to Silver Lake Partners, a private investment firm. eBay’s loss on the sale: approximately $1.2 billion. For those of you keeping score, this acquisition is essentially equivalent to eBay putting $300 million in a paper shredder every year that it owned Skype.

Given the challenges identified earlier in this discussion, these difficulties shouldn’t have come as a surprise. Beyond the time zone problem, eBay and Skype are very different companies. This might seem like a surprise to many, because they’re both tech startups with employees that have relatively similar educational backgrounds. Beneath that, however, lie different norms around communication and information exchange.

As you might expect, employees at Skype like to use Skype—a lot. They assiduously update their status messages, save chat logs for later consumption, and generally thrive on quick long-distance communication. In addition, Skype the company focuses on remaining informal and decidedly free of jargon in its interactions. Rather than take pride in uber-geekiness, Skype takes pride in helping people communicate.³

eBay is very different. Compared to Skype’s miniscule team of 150 programmers, eBay at the time had more than 10,000 employees working in sales, marketing, and of course, programming. Companies of this size often develop a more formal character, and eBay was no exception. In fact, eBay’s executives went so far as to mock the “amateurish” board meetings at one of their startup partners, something that came to light after their bitter breakup with Craigslist.⁴

Although the lack of strategic synergies in actual technological offerings no doubt had a major hand in sinking eBay’s acquisition of Skype, these cultural factors cannot be underestimated. In general, if a company doesn’t communicate effectively, problems are bound to occur.

Ironically, Skype has recently been the subject of increased M&A activity from another tech giant: Microsoft. In 2011 Microsoft made a whopping $8.5 billion offer for Skype, which was subsequently accepted and universally panned by analysts (perhaps wanting to avoid the same error twice).

From a cultural perspective, however, some hope exists that a Microsoft–Skype marriage could succeed. For one thing, Microsoft is a truly global company, with major offices in Europe and all parts of the world. This would make communication and integration of a new Skype business unit much easier than that attempted by eBay six years earlier. Of course, the formal/informal dynamic at Microsoft is similar to eBay’s, so time will tell whether this acquisition adds to the ever-growing tally of losses due to M&A.

Suppose your company decides to go ahead with the acquisition. Teams are put together, merging the actual organizations into a single unit. This usually means redesigning the org charts, opening new offices, and changing everything around so that formally these two organizations are now one. What needs to be investigated, however, is whether this integration has actually occurred on a collaborative level.

If the new, combined organization is still acting like two companies, then a problem exists. This was, in fact, the subject of a study done by my collaborator Sinan Aral from MIT.⁵ Interestingly, this study was not about M&A at all. He and his co-authors were investigating how e-mail communication related to the productivity of individual workers. When they looked at the communication data as a network, they saw something extremely interesting. The organization looked as if it were split into two groups, with little communication passing between the different parts of the organization.

Curious, after the study was completed, they returned to the company to see how they were progressing. They were informed that things had not been going so well, and in fact the company had split up. Sinan already knew where they had split it: into the two groups that he had seen in the communication network data.

Clearly, attention must be paid to the social integration between merging companies. By observing how this changes over time, the M&A team can quickly intervene if it seems like the formerly separate organizations are not interacting effectively. If teams are separated over distance, then getting them together face to face after the merger can ensure that they’re able to develop higher levels of trust, as discussed in Chapter 4. Even better, mixing desks between the two companies can increase the number of serendipitous interactions across former organizational boundaries.

What causes these integration dynamics to arise in the first place? Of course, the cultures of both organizations play into it, as does physical layout and the formal organizational structure. However, the team that is in charge of the merger decides how to use each of these integration levers, and that’s where responsibility ultimately lies.

The team responsible for merger integration is tasked with developing the processes and plans around combining the two companies. As with other teams, a number of issues can emerge in terms of communication patterns. One person can dominate the conversation, people can interrupt each other, and so on. In M&A these problems are magnified, because the two organizations can have radically different cultures.

Some companies, for example, could have strong social norms around group debate, encouraging people to speak out when they don’t agree. Other companies prefer to air disagreements in private, only discussing general ideas when in larger groups. If these two companies merge, their cultural differences could easily start them off on the wrong foot. This means that merger integration teams must be extremely sensitive to these differences. Before substantive discussions take place, frank and open discussion must occur about how each company operates. Having this open communication might seem like common sense, but cultural difference problems destroy group dynamics with surprising frequency.

This issue is best illustrated in a study we did using the Sociometric Badges in a collaborative engineering project with student groups from different countries. These groups of between 8 and 10 were responsible for building a Rube Goldberg machine, which would be judged by a panel of experts. The winning machine would then be placed in a prestigious science museum in Tokyo. Participants wore the Sociometric Badges throughout the week-long exercise, and groups received daily feedback from the badges on their communication patterns. Importantly, the groups were made up of both American and Japanese students, some of whom did not have a high level of English proficiency. As you might expect, this made communication difficult, even though the groups each had two facilitators who were fluent in both Japanese and English.

As the exercise went on, however, group dynamics gradually improved. After seeing their feedback, the American students realized that they needed to slow down and try to elicit more communication from their Japanese counterparts, and the Japanese students saw that they needed to speak up more. By the end of the week, the groups were collaborating extremely well.

Figure 8.1 illustrates how communication patterns changed for one of the groups. Each circle represents a participant, with the size of the circle indicating total speaking time. The color shows the interactivity level for each participant (black = interactive, white = lecture style). Interactivity here is defined as the amount of time a person speaks before someone else starts speaking. The lines represent turn taking—in other words who speaks after whom.

Figure 8.1. Collaboration dynamics for an international student group

As you can see from Figure 8.1, on the first day the two Japanese students are barely participating (the two lower-left circles), and there is a strong clique of American students (four top circles). These dynamics persist for a day or two, but gradually they start to change. By the end of the event, it’s clear that the students are all very interactive, participating frequently, and not engaging in the sort of cliqueish behavior that occurred at the beginning. The facilitators (the two lower-right circles) are also barely participating, which is a huge positive. We went on to validate these results in laboratory experiments, even giving feedback in real time to show how data from the badges could be used to seamlessly alter conversational dynamics in positive ways.

For merger integration teams, the message couldn’t be clearer. These teams often don’t have a common language, relying on translators to get the job done. But as illustrated by the study, that might not be enough. Even when these groups do speak the same language, each organization has its own communication styles that could wreak havoc on the delicate, complicated process of merger integration.

However, some companies have gotten good at M&A precisely because they pay attention to these issues. Google, for example, goes through dozens of acquisitions a year, and it has a great M&A track record, with an acquisition success rate of more than 60%.⁶ Part of this success is due to its strong commitment to culture and its integration process, while another factor is its reliance on data to drive internal company dynamics.

You might not be surprised that when it comes to applying data to these issues, Google is at the forefront. They have a human resources division unlike any in the industry. Dubbed “People Analytics,” (I approve of the title) this group is made up of PhDs from top management schools, former consultants, and programmers. This background helps them apply an experimental and data-driven approach to company culture.

The People Analytics team analyzes internal e-mail communication patterns to try to understand how information flows within Google. It experiments with benefits, changing the way that some people are paid or the type of food they have available. It uses dozens of surveys sent out over the course of the year to see how these changes affect job satisfaction and performance. It even has a yearly survey called Googlegeist that assesses the engagement and happiness of Google’s workforce.

The results speak for themselves. Google is able to recruit the best and the brightest talent, and in 2012 it was ranked as the best place to work by Fortune⁷ (as well as in 2007 and 2008). Today it has grown into an Internet juggernaut with a higher market capitalization than Coca-Cola.

Google’s success, however, isn’t so easy to transfer to other companies. It has an HR group full of top-flight management PhDs and employees who are willing to devote a lot of their time so HR can collect data. This software company is also not averse to rapid experimentation, which is something that would be a bit more difficult to implement in, say, a major financial institution.

With access to even more data streams from devices such as the Sociometric Badge, however, companies can apply the Google approach in other industries and even improve on it. By putting a strong emphasis on culture and making use of electronic communication data, Google is able to cut the typical M&A failure rate by about 50%. Now imagine adding Sociometric Badges to that equation. Suddenly there is a good chance to lower M&A failure to more reasonable levels, to use data to fundamentally reshape the M&A process.

The math is pretty simple. Bad M&A deals lead to losses of $1.2 trillion a year. E-mail data is free, and even if every year companies bought sensors for every employee involved in M&A anywhere in the world, they would still come out with about 99.9% of the savings over the current miserable M&A performance. To deal with the ever-increasing complexity of M&A, and the world in general, using these sensors is a no brainer.