Case Studies
Mergers

Why Mergers Fail: Case Studies in Leadership

We are often asked why mergers fail. Behind our standard answer - "autonomy, self-interest, culture clash"- lies the larger topic of leadership. Often, at both the negotiation and implementation stages, mergers fail due to a failure of leadership. Let's look briefly at two examples of how this plays out.

First is a merger under negotiation among three small chapters of a national human services organization located in a rural county in the Northeast. These chapters share a geography that only the most provincial of mindsets could view as requiring more than one chapter. They each have boards of directors and executive directors of varying levels of sophistication. Their national office has encouraged a merger between them, and even sent a regional representative to discuss the virtues of consolidation with the boards.

Months of merger negotiations developed a clear sense among the members of the negotiating team of the many advantages of a merger: economies of scale, more of the limited staff's time devoted to program activities, and the ability to appeal countywide and regionally to funders. Nonetheless, both during and between meetings, the executive director of the largest of the three chapters consistently undermined the developing partnership. She spread rumors, often slanderous, about the board members of one of the other chapters; she called staff from the other chapters, digging for dirt on their own executive directors and spreading dissension. Her overall goal seemed to be to create enough ill will to scuttle the deal. Her motive seemed to be fear - not that she wouldn't be selected to lead the merged entity (as executive director of the largest chapter, she assumed she would be the merged entity's leader), but that she would not continue to have the level of control over the merged board that she currently enjoyed within her own chapter.

Board members on the negotiating team from this particular executive director's chapter were a small group of forward thinkers. They tried to rein her in, but there was a larger faction of board members made up of individuals not taking part in the negotiations who believed and shared her negative views of the other parties. In the end the negotiators began meeting without staff present (thereby eliminating the executive director's negative influence at least from the negotiations sessions). These meetings went well and resulted in a recommendation to merge. One clause insisted upon by the negotiations team was that the executive director who had been sabotaging the negotiations would not be the executive of the merged entity.

In the end this executive director was able to persuade her board to reject the recommendation of their own delegates to the negotiations committee and vote against merger. Thus the deal fell through. Interestingly, however, all this maneuvering did not strengthen her position within her own chapter. Within a year she was gone. However, so much ill will was created that the prospects for a future merger of the chapters are dim, even with her out of the picture.

The second example involves the merger of two large nonprofit confederations, each with networks of member organizations. Here, the merger was effected with little real negotiating, and the merged board was charged with making the merger "work" after the fact. The merged organization had multiple corporations, unclear reporting relationships, and an unclear agenda. The CEO of the merged entity was not particularly interested in the members, instead preferring to spend time on national policy issues that were sometimes of only tangential interest to the members. He was not a "people-person" and devoted little energy to bridging the cultures within the merged organization; in fact he tended to blame the organization's problems on some of the members from one of the pre-merger entities.

This merger failed in the sense that the two organizations have not yet pulled together to become one. There is enormous tension within the executive staff, and some of the most active member organizations are disaffected. In the end the synergistic potential in this merger has not been realized.

What both of these failed mergers have in common is a lack of leadership. In the first case the executive of the largest chapter put her own interests first - her interest in having almost total dominion over the organization, her fear of answering to a 'real' board of directors - and so scuttled the deal. In the second case the CEO also put his own interests first - his interest in large national policy issues rather than advancing an agenda the organization's members could get behind.

The lesson in both of these cases is that the absence of real leadership - leadership that is interested in the common good, leadership that inspires others to follow - will doom a merger. Whether it is a deal that falls apart, or one that is completed but fails to achieve the potential the deal-makers envisioned, the result is the same - a lost opportunity to advance the mission.

Leadership is a crucial management task, and especially so in strategic restructuring. In the coming months we will be reporting the findings from our recent research into what defines successful leadership in mergers and other forms of strategic restructuring.