2.8 Machiavelli and the Sport of Mergers and Acquisitions


2.8 Machiavelli and the Sport of Mergers and Acquisitions

The popular belief is that mergers and acquisitions create value. In some isolated cases, this concept may be true. However, in most instances, mergers and acquisitions fail to deliver significant shareholder value. The initial intention of a merger or acquisition is to create synergy, the speculation that two organizations are worth more together than they are apart, and the combined output is more than either could produce separately. The exceptions happen when the intention of the merger or acquisition is to combine and reutilize surplus cash, one firm is beneath market value and can be purchased, or to defend an existing product by acquiring a failing supplier, a new competitor, or investing in a complementary countercyclical company to offset resource demands. Although other authors have used Machiavelli in regards to business activity, we will now employ him only briefly to put the cultural aspects of mergers and acquisitions into the broad perspective of business value creation. Machiavelli talks about a prince and principalities, as we, in modern terms, talk about CEOs and corporations in the state of mergers or acquisitions. Machiavelli’s observations of how a principality is formed, governed and ruled can be applied to modern merger and acquisition strategies with striking precision. Let us view how companies are acquired and/or merged using Machiavelli’s principles.

Corporations either have an inherited organizational culture culminating from years of experience or they are new. In an existing corporation, a CEO of ordinary ability will be able to run and manage his/her organization with a management team of ordinary abilities unless or until some extraordinary business condition occurs which erodes the confidence of the investors represented by the board of directors. If the erosion of confidence is so great that a succession must take place, a successor from within the firm is often less disruptive to the organizational culture because the newly appointed CEO has risen from the ranks of the organization and is less likely to change the structure that brought him/her to power. In many cases, this internal policy of promotion is adequate to address the conditions that caused the succession because it refocuses the management team and allows the firm to continue to operate within acceptable expectations of the investors.

Yet, Machiavelli points out a potential area of concern which may adversely affect the firm’s long-term value proposition: ‘And in the antiquity and continuity of his rule, the records and causes of innovations die out, because one change always leaves space for the construction of another.’[94] This may explain why so many technology innovations have originated in smaller, less bureaucratic organizations in the last two decades of the twentieth century. If the corporation is new (such as a start-up) or nearly new (such as a spin-off) as in a merger or acquisition, two problems will arise. Firstly, workers, managers and investors will reluctantly pledge their allegiance to the new organization and give their support if they believe they can better themselves or achieve a greater return on investment. This was true at the time of Machiavelli’s principalities and is even truer today, as allegiances are reviewed on a monthly or quarterly basis. When newly formed organizations have a clear vision of the firm’s proposed structure and, more importantly, a value proposition that encourages cross-functional execution towards common goals, the traditional corporate politics is significantly reduced along with corporate latency. Organizational structures reflect, for good or bad, the attitudes, approaches and behaviours of the senior management team. For example, companies like G. O. Carlson, a specialty steel producer in Pennsylvania whose founders encouraged a sense of corporate community and family values, provide an organizational structure in which access to the senior management team is easy and commonplace for all levels of the organization. This is because of the senior team’s desire to be a corporate family and play an integral part in the day-to-day operations of the firm. In contrast, larger organizations, such as Microsoft, General Motors, IBM and other multinational firms, emit a sense of hierarchal power that tends to isolate executives from lower levels of the organizational structure. Neither case is right nor wrong in their approach to organizational structure; they merely project the behaviour of the leadership down into the organization by means of formal and informal lines of communication. The subordinate levels of the organization develop traits reflecting the behaviour of the leadership as a means to support management’s efforts to direct the organization.

That said, when larger, traditionally structured organizations for whatever reason (typically ego) decide to acquire or merge with smaller or newer organizations, the culture and technological infrastructure of the acquiring organization usually prevails, to the detriment of the acquired organization. A significant number of mergers and acquisitions in the 1990s failed to deliver any significant additional value to shareholders, customers or employees. One reason is that the cultures of the organizations failed to develop an operational synergy fast enough to reduce the cost of operations. This is often true when older, more established firms try to retain the management of the acquirer and acquired, keeping organizational structures in place and combining upper level management functions. This process in many cases results in a clash of organizational cultures, frequently attributed to each organization trying to retain the previously established patterns of corporate behaviour. However, firms which made the acquired management team redundant or selected members from both organizations to form a completely new management team often fared better at creating new value. The CEO who engineered the latter set of actions must have had Machiavelli in mind:

And anyone who acquires these lands and wished to maintain them must bear two things in mind; first, that the family line of the old prince must be extinguished, second, that neither their laws nor their taxes be altered; as a result they will become in a very brief time one body with the old principality.[95]

Therefore, when merging, organizations should clearly sort out the management structure and quickly identify which individuals will play the key roles in the transitional organization. Organizations should also be hesitant in changing salary schemes and corporate policies at the same pace. Here Machiavelli gives good counsel in introducing potentially disruptive change to the organizations engaged in a merger or acquisition by clearly delineating the components of change into people (management), culture (behaviour and policies) and cost (salaries and expenses). However, organizations facing rising competitive pressures habitually cannot wait to introduce change over extended periods in order to minimize the disruptive aspects. Firms need to achieve organizational synergy quickly. This is principally true when companies also cast aside traditional hierarchies for a more networked approach to organizational structure. Here again Machiavelli provides insight that can be applied to modern business especially if a firm adopts the concept of a ‘community of practice’, as described in section 2.4:

The other and better solution is to send colonies into one or two places that will act as supports for your own state ... , colonies do not cost much, and with little or no expense a prince can send and maintain them ....[96]

Machiavelli offers the conceptual formation of hybrid organizations in which new groups (or network nodes) can be formed by taking resources from both organizations to form highly specialized operating groups. These new enterprises require a robust technological infrastructure in order to facilitate the communications and collaboration needed to be a community of practice.

However, these organizational transitions are normally not the case when assessing a merger or acquisition from a technology perspective. Technology and, more importantly, technological infrastructure plays an ever-increasing role in assessing the value of a firm’s ability to meet competitive pressures. Surprisingly, few organizations have embraced formal methodologies for technological assessment, and even fewer develop comprehensive technology strategies for the transition during the merger or acquisition. A technology battle that many organizations faced and, in some cases, are still facing is the product of bringing two technology cultures together. For example, many organizations experienced a cultural divide between MacIntosh users and Microsoft Windows advocates. This was especially true in production of graphics; office workers using MacIntoshes at home and other people engaged in visual media creation. Technology departments, eager to reduce the cost of maintaining computer hardware and software, strived for a standard corporate computing platform, often irrespective of the users’ wishes, who, in many cases, were paying the bill. In their defence, the technology organization was acting in the overall best interest of the firm’s long-term objectives, but in most cases could have used a few lessons in public relations.

[94]N. Machiavelli, The Prince (Oxford: Oxford University Press, 1998) p. 8.

[95]Ibid., p. 10.

[96]Ibid., p. 10.




Thinking Beyond Technology. Creating New Value in Business
Thinking Beyond Technology: Creating New Value in Business
ISBN: 1403902550
EAN: 2147483647
Year: 2002
Pages: 77

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