M&A deals, business logic, and the most precious resource
Do you want to land your business in trouble?
Would you like to end up in strategy textbooks as a cautionary tale?
Start as many meetings as possible with “synergy.”
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The case Business v. Synergy
Judge: Today, we’re hearing Business v. Synergy. The defendant—Synergy—is charged with serious crimes against business. The jury will deliver the verdict. Prosecutor, you have the floor.
Prosecutor: On behalf of thousands of businesspeople worldwide, I charge Synergy with deceiving them by promising extraordinary results that never materialize. I call the prosecution’s witness—Statistics.
Statistics: Numerous studies report that between 70% to 90% of M&A deals fail to deliver the expected value or meet their investment thesis. A Harvard Business Review study noted more than 60% of transactions destroy shareholder value, and up to 90% fail to achieve their intended goals. Among common reasons for failure is overestimating synergies.
Other studies have found that synergy-seeking efforts often fall short of expectations. Strategic decision-making based heavily on synergy potential is a common pitfall that leads to poor outcomes.
Judge: Defense, what do you have to say to that?
Defense: The prosecution makes it sound as if synergy brings nothing but trouble. But the defense has its own witnesses—Facebook, which successfully acquired Instagram, and Google, for which acquiring Android was a success. Besides, businesspeople are grown-ups, they should make data-driven decisions.
Prosecution: But synergy makes businesspeople put shareholders’ interests ahead of customers’. Executives view synergy as a means to boost profits, which seductively lures them, causing them to neglect their customers. They become too internally focused! We must cleanse our world of the corrupting influence of synergy! (raises his arms high).
If you were on the jury, would you find Synergy guilty?
Yachts and business logic
If I got a dollar every time I heard the word ‘synergy,’ Jeff Bezos’s yacht Koru would look like a rubber duck in my bathtub compared to mine.
Executives believe that the whole can be greater than the sum of its parts. They assume that if synergies let them produce anything at lower cost, that output automatically has value in its own right.
But it goes against logic. That’s how “products in search of customers” and “assets in search of an application” emerge.
In business, there’s only one logic:
- The customer needs you’re going to address determine:
- Your target customers.
- The customer value you’re going to create to address this need.
- The customer value you’re going to create defines:
- The assets you need to create from scratch or develop.
- The processes you need to create or develop.
Synergy occurs when two or more of your assets combine to create greater value than they would if used separately.
That’s fine, but you don’t need just any value or profit growth. You need only value that, in turn, helps you create more value for your customers.
- A product can be synergistic with other products, but do your customers actually need it?
- You can acquire a company because its assets have synergies with yours. But will the deal let you offer more value to your customers?
- You can cut costs across your holding by standardizing operations. But will that strengthen your market position?
Most “synergy” projects are like a sprinter pumping up his biceps while his rivals are already tearing down the track.
My clients often ask me: “What’s wrong with synergy if it boosts our profits, cuts costs, and improves efficiency?”
Of course, there’s nothing wrong with your profits growing. But there’s a different issue.
The most precious resource
If you’re a business leader, you have a team.
The team’s energy and creativity are the main drivers of your business growth. But their time is finite, and their energy is limited.
If they’ve spent an entire quarter on a project that increases your profits but creates no value for customers, they can’t spend that time on anything else—it’s gone.
I help companies focus on what customers really need — and build strategy around that. Find out more here.