If you look at any merger and acquisition analysis, typically anywhere from 60 to 80 percent of merger and acquisitions fail by not generating, and likely, destroying shareholder value. There are various reasons for this, and no limitation of ideas on how to avoid it. There's the typical "I have five fingers, so let's create a 5 point guide" from consultants at McKinsey, or the buzz-word generating articles (this is edgy, so our catch phrase must contain "Edge") at HBR.

The obvious annoyance these articles generate is likely what triggered my mind to consider an alternate and simpler explanation - time. I went on my typical walk in the afternoon and was listening to the Bloomberg M&A podcast Deal of the Week , followed by one of my favorites, Masters in Business , and realized I wasn't getting my actual work done. I questioned my use of time; however, the daily walks are essential to my well being. That triggered the thought on the complexity of deals, and all the messaging about synergies and the potential value. Yet, none of the models seem to subtract the cost to the business from DISTRACTIONS and DISRUPTIONS. 

I was surprised that one company did a much better job of describing this, Bain. They still couldn't resist calling it a "10 step" plan (I think it evolutionary at this point, "Gee, I have two hands, 10 fingers, let's create the 10 commandments"), but it did focus on the key idea of retaining your best people and setting a time/deadline model, and centralizing decisions to limit disruption and reducing complexity. Let's consider a thought experiment and another view on Warren Buffett - full disclosure, while I admire the man, I have not read any of his books, but I have read Benjamin Graham. (I have read a variety of articles on the man though, and did watch the recent HBO Documentary "Becoming Warren Buffett") 

Buffett - Don't mess with the business, trust the people

Most of us are familiar with the genius value investing prowess of Buffett, the buy at a good price and hold forever mantra. There are a variety of explanations for his acquisition success: risk-reward, long-term appreciate of stocks, timing, etc. I have not heard or read as much on people and time-complexity considerations. I have seen skim coverage in the past about CEO's looking for the Buffett stamp of approval, and here's another consideration to his success:

  • Time-Complexity: He doesn't waste time "integrating" the business or looking for synergies (in most cases). He buys the business, uninterrupted, and just lets management continue to do what they do best - generate a return. Also consider how small Buffett's Omaha office is - I think he stated it's less than 40 people (maybe even 30) - just let the business do what they do best. Don't waste time and resources trying to create some conglomerate.
  • People: The added benefit for employees is uninterrupted work time. Buffett bought us? Great, let's keep making money! Buffett is a vote of confidence, and having his backing would give me comfort and probably make me more productive. I don't have to worry about burning out trying to close out the merger. I likely will not have job insecurity, so why would I look elsewhere? I would guess that having Buffett invest in you is probably one of the best retentions strategies for your best talent.  

My Argument

If I'm a productive employee, and dedicating 100% of my work time to improving the business, taking time away to focus on a merger or acquisition does take away from the business - especially in the short run. Longer term the transaction my payoff, but at what short term costs? What if the integration is more complex than anticipated, there's a poor decision making structure, and the transaction is not as efficient as initially thought? This suggests that the opportunity costs are not properly deducted from any synergy models. I remember business school models where the main focus was on an optimistic financial outlook, with some strategic acknowledgement of "risks" and then creating a second model with some financial range of outcomes, but it misses the larger point of people.

This could make the case for paying and bringing in consultants and other experts, but their vested interest is in the transaction, not the long-term success of the proposed merger or acquisition. The complexity of integrating outside help is still a short term resource drain. The distractions, job insecurity, and burnout from putting the extra work must have some very hidden costs that likely contribute to the poor success rate of M&A activity. If you let people stay focused on the business, they will likely generate a return for your investment.

You can spend thousands of hours and resources behind academic research, multi-point plans, working out synergies, scaling the business, etc. Or just letting the people stay focused on the business, generating a return. 

What If the Business is Bad?

This is a different context. If one or both of the businesses (or even the industry) are in decline, then perhaps some measure of intervention is required. But again, we face an opportunity cost. Spending effort to merge, looking for synergies, could just be throwing good money after bad. Again, wasted effort and time, perhaps even expediting the exit of good people. An alternative then is to maximize return by minimizing initial invest (getting a good price), squeeze what you can in returns, and ride the tide down, slowly climbing down into the descent. Again, it appears that adding layers of complexity to merge the business, over commit to integrate, raises the probability of failure.

Don't Mess With A Good Thing

This is likely one of the simplest way to explain Warren Buffet's success - don't mess with a good thing. Find a good business, buy right, and let it earn a return. There is the first level of uncertainty in the initial investment. If you then decide to merge and integrate, this adds a second layer of uncertainty and more complexity. If we reduce the outcome of the initial investment to a simple binary, and then the decision to merge, successful or not successful, one can quickly see the odds are not favorable.  So why mess with a good thing?

The temptation to do more, to be great is always there. Every business knows they need to adapt and change. The role as an investor though, whether an individual or as a management team representing an organization, is how you usher capital, resources, and time. Will you let your people continue to focus on the business and generate a return for your investment? The opportunity cost to realize synergies is probably much higher than you think. Protect the best people, have a strict timeline, and minimize interruptions to the business, then maybe it is worth it - but I would probably focus my time on those businesses I can just leave alone and let them do what they do best for my investment.