An Acquisition Gone Wrong! A Coup D’Etat in the Boardroom!

Acquisition Failure

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The CEO called an emergency meeting in the Boardroom.  The President of our Division, myself, the prior owners of a company we had just acquired, and one of our major shareholders/board members were to attend.  The sh*t had hit the fan with our latest acquisition.

It had only been a few months since the acquisition had been completed.  This was certainly long enough for the honeymoon period to be over.  But now it looked like we were quickly heading for a divorce.

What went wrong?

The Acquisition Background

Acquisition strategy

The company was on an acquisition binge.  We had a tremendous infusion of cash and we were looking to expand quickly both organically and by acquisition.

Our Division had created its own acquisition strategy and we had identified one company that was of great interest.  The target company was privately owned by 2 entrepreneurs who had begun and grown the business very successfully over time.

In the course of due diligence it was apparent that the target company owners were very hands on with their business.  They micromanaged every detail.  Virtually every expense required their personal approval.  But they had great customer commitment and satisfaction.

My boss architected the deal.    The arrangement was that the two owners would be bought out but they would stay on in an operating capacity reporting to our Division President. The wining and dining that was a part of the due diligence process didn’t highlight any issues in working together.  It was all systems go.

The deal was completed!  Everyone celebrated.  And then the work began.  I spent most of my time with the newly acquired company learning and managing their operations.  I was on the manufacturing floor, in all of the day to day meetings, and increasingly making the operating decisions for the new company.  And my relationship with the prior owners was great.

But in the background the relationship between the Division President and the prior owners was increasingly frayed.  They were collectively focused on strategy and strategic direction.  Yet in working together post-acquisition it was apparent that their leadership styles clashed, their views on the direction of the business were at odds, and they each had diminished views on the others’ abilities.

After a few months this tension had boiled over.  The Division President and the prior owners had come to a working impasse.  The prior owners didn’t believe he could run the overall business.  They told the CEO that they wanted to take control over the entire Division and kick the Division President out.  It was a declaration of war.

And that’s when the emergency meeting was called.  The situation had to be resolved one way or the other.

What Went Wrong?

How did we get to this place?  The situation was untenable.  What had only a few months before been a source of great excitement and opportunity had now turned into palace intrigue on a grandiose scale.  There was a coup d’tat underway!

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Cultural Disconnect

The prior owners had built their company from the ground up.  They started with nothing but an idea and grand plans and turned their company into an internationally recognized firm which great credibility.  They were hands on in every way and they knew everything that was going on.  And they answered to no one but each other.

The Division President managed more at arms length.  He was not into the details and focused at a very high level.   He was used to managing in a large corporate environment and could easily navigate his way through the corporate jungle.

They were all very good with Customers, Employees, and Executives in their own right.  But their approaches and styles were very different.

With the acquisition complete the prior owners readily took part of the money from the sale upfront but the rest was held to be released in the future based on business performance.  But they weren’t mentally prepared for giving up control over the company that they had created and grown over several decades.  Now they had to answer to someone else.

The Division President also was not experienced in how to manage this kind of situation or how to manage such independent leaders. He assumed that this was going to be just like managing another division without grasping the issues that the prior owners were struggling with and empathizing with them.

Over time this cultural chasm grew, which evolved into both parties believing that the other was less competent than they themselves were.  This manifested itself in greater frustration with, and distrust in, each other.

Organization Design

As the saying goes you can’t have too many cooks in the kitchen.  Both the Division President and the prior owners were used to being solely in charge. When the rubber hit the road and they all had to work together there was clearly a loss of control, authority and independence experienced by all.  And they each thought they were the smartest people in the room (making none of them the smartest people in the room).

The organization design and the roles and reporting that were discussed as a part of the due diligence were not properly ratified.  There was a phenomenal change in responsibilities expected of the prior owners.  And there was a tremendous expectation in leadership from the Division President.  Yet there was absolutely no involvement of Human Resources in the process, and there was no Change Management work stream at play.

Everybody is excited in the due diligence stage.  And this exuberance can be blinding as to what happens when the acquisition is completed.  This was clearly the case here.  It seemed to be a reasonable organization design but with more detailed workshops on the organization design in the due diligence phase it is possible that potential future problems could have been identified earlier.

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The Structure of the Deal 

As mentioned earlier the prior owners received part of the proceeds of the deal upfront but the rest (perhaps as much as half) was held back.  The other half was to be released in the future as both a form of retention bonus and as a carrot to ensure that the newly acquired, and integrated business, continued to grow and succeed.

Retention is often a key issue in the course of an acquisition.  But the arrangement was such that the prior owners were still being held accountable for the performance of the business yet they were being given significantly diminished authority and responsibility.  As successful entrepreneurs they couldn’t reconcile the situation, especially when they felt the Division President was not as competent as they were.

So What Happened?

The situation was unsustainable.  In the end something had to give otherwise the entire business would suffer.  The CEO decided to buy the prior owners out of the deal.  The personality conflict created by the cultural clash, the organization design, and the structure of the deal turned out to be completely destructive.

The loss of experience was unfortunate with the departure of the prior owners.  As in everything it was a time to dive in and make it work regardless.

The Division was able to integrate the newly acquired company successfully thereafter generating record levels of profit, cash flow and return on invested capital (ROIC).  But the path we had to take to get there was difficult and treacherous.

Acquisition Conclusion

One of the single biggest factors impacting the successful integration of any acquisition is the cultures of the two companies.  On top of that the amount of change that is usually being expected can be highly disruptive to the employees of the acquired company at a minimum.

While there is no full proof solution it is certainly important to spend as much time as possible in the due diligence stage focused on culture, change management and human resources.  A lot of the time people focus exclusively on the financials, redundancies, and products/services.

This is important for sure but if you don’t address the culture and change management issues you could find that even the most financially viable deal will fall apart.

Originally published on April 17, 2018.

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