What Lenovo can teach us about making takeovers work
By Andrew Hill
If you are wondering where your transformational merger is going wrong, you may want to look in the toilets.
After Lenovo bought IBM's personal computer business in 2005, the Chinese company replaced traditional squat toilets in its Beijing headquarters with western-style sit-down bowls to put non-Chinese colleagues and customers at ease.
It was just one symbol of the attention to detail that eventually made a success of the sometimes tortured integration of the two companies. Others included switching to English as the enlarged group's corporate language from day one, to the distress of some Mandarin-speakers, and making sure coffee, as well as traditional loose-leaf tea, was available when westerners visited Chinese facilities.
Since January, Lenovo has announced the purchase of IBM's x86 server business for US$2.3bn and the Motorola handset business from Google for US$2.9bn. Just absorbing one of those large deals would be challenging, but Yolanda Conyers, Lenovo's chief diversity officer, told me the company has learnt from experience: "It's gotten easier because we put the hard work in early."
If only that were true of all companies. I chaired a discussion with 60 senior executives and advisers last week about how to turn visionary deals into reality. On a show of hands, virtually all of them had been involved in some capacity in an acquisition, which should mean that merger implementation is now a core skill for many.
But while dealmaking no longer suffers the 70 per cent failure rate of the bid-first, ask-questions-later takeovers of the 1990s, 54 per cent of a sample of more recent UK and US deals examined by London's Cass Business School destroyed value in the two years after acquisition. Whatever language you translate it into, the message is clear: not good enough.
It is too simple to invite companies to stop dealmaking altogether. The problems encountered by Lenovo - and detailed in The Lenovo Way, a new book by Ms Conyers and colleague Gina Qiao - are enough to put anybody off the cross-border, transformational variety.
Boards should beware of deals done for the chief executive's ego. But many large companies at least need to develop a technique for successfully absorbing smaller acquisitions.
A starting point would be to stop calling these deals 'bolt-ons', which is disparaging to the entrepreneurial businesses you are buying and implies that a bloke with a monkey-wrench can attach the new company in a morning. Merely bolting on an acquisition is to guarantee that over time it will rust away through neglect.
Cass research - and the experts I consulted last week - suggest that omitting to consult the company's "people" early enough makes it more likely a deal will fail. Involve HR even in the targeting of acquisitions and the chances of success should improve.
Deciding who will be in charge is critical, but hard decisions on people and culture need to be taken throughout the organisation. The IBM PC deal was "a struggle because we didn't know how to deal with diversity, leadership and culture", admits Lenovo's Ms Qiao.
Failure to integrate systems can also cripple a deal. Johanna Waterous - who, as a consultant, private equity adviser and non-executive director, has seen transactions from all angles - says poor information technology integration can infect an entire organisation with problems that last years.
Her rule of thumb is that boards need to assume melding IT will take five times as long and cost five times as much as they first estimate.
It is a mixed blessing that consultancies are now always at hand with their Big Book of Deal Integration to assist the process. Advisers who have seen 40 or 50 deals to completion and beyond will know more about the practicalities than the nervous chief executive doing his or her first big transaction.
But it is the CEO who has to live with the consequences, and no manual can account for the myriad differences between companies and the multiple challenges that combining them will generate.
In this respect only, Ms Conyers and Ms Qiao are ill-served by the title of their book (which was not their first choice). As they point out, an adaptable state of mind is more important than a fixed "way" or template for integration. If you cannot be flexible, you may as well flush the whole rationale for the deal away.
(c) 2014 The Financial Times Limited