Surviving an Acquisition

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As a rule of thumb, it is known that acquirees are disposable. Essentially, if someone bought your firm, you are in a weaker position and are relatively disposable. There are exceptions to this rule, for example, if the company bought the firm specifically for its people, as is often the case in tech (Google and Cisco are both well-known for acquiring for the talent), or if it bought it for an ongoing project. For example, Andy Rubin of Android over at Google, and, I suspect, Kevin Systrom of Instagram over at Facebook (although the dust will not settle on that one for a while). But overall, especially at the top management layers, an acquiree does not fare well long-term.

This is actually one of the key reasons behind golden parachutes. Boards want their executives managing the business for the best interests of the shareholder. A CEO or COO or CMO fairly well knows that his/her company, if it is acquired, will dispose of the existing executive in favour of the one already in place at the acquirer. This, in turn, drives the executive to be biased against an acquisition, and thus structure to prevent it, even subconsciously. The golden parachute frees the executive from the concern about post-acquisition by providing him/her with a parachute to land safely from being acquired.

Personally, I was at Scudder Investments when Deutsche Bank acquired them from Zurich Global, and the balance of power was very clear. I have seen the same many times over, as friends, colleagues and clients have either acquired or been acquired. Earlier this week, I met the COO of a consulting firm who started at an acquired firm. The larger consulting house had purchased his firm in order to expand its geographical presence. In most normal circumstances, the executive would have some form of 12-to-24-month incentive package to help transition, but then leave or be eased out. Contrary to expectations, the gentleman succeeded very well in the acquirer, rapidly becoming the COO.

I asked him how he had broken the pattern. His answer was interesting and illuminating, although it is unlikely to work everywhere:

  • Deliver and wait: A little patience goes a long way. Acquisitions are a time of disruption. An executive who is patient, learns the ins and outs of the new firm, and is able to deliver above-average returns in the midst of turmoil will stand out.
  • Results matter: In this respect, as in an ongoing concern, results matter. The manager who delivers positive results is more likely to be promoted, whichever firm he comes from.
  • Culture matters: Clearly, the acquiring firm had a culture that eschewed "us vs them", i.e. belittling the acquirees.

And, of course, it didn't hurt that the executive here was smart as a whip.

This will not work everywhere. Culture is probably the biggest factor. However, when it works, everyone wins, especially the shareholders. I suspect this may also work better in a privately held firm, where interest in the long-term financial benefits, i.e. the shareholders, is closest to the managers. In publicly held firms, where the organizations are larger, and the agency problem is more of an issue, power games and negative cultures are more likely to play a prominent role.