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Six Deadly Sins of M&A Review Jack Welch’s


Six Deadly Sins of M&A Review Jack Welch’s

 Week 8 DiscussionCOLLAPSE

Choose ONE of the following discussion question options to respond to:

Six Deadly Sins of M&A

  • Review Jack Welch’s article “The Six Deadly Sins of Mergers and Acquisitions”
  • Locate and post a link to an article published in the last 5 years in The Wall Street Journal, or another reputable source, about a merger or acquisition that did not go as planned.
  • Which of these “sins” were committed, what issues arose as a result, and what behaviors could the organization have employed to prevent these errors?

OR-

Strategic Alliances

  • Under what circumstances should an organization seek a strategic alliance?
  • Provide a specific example of a company where a strategic alliance was preferential to a merger or acquisition and summarize some of the unique challenges faced by the alliance leadership team.
  • What worked well and what did not?
  • How could the strategic alliance have been managed differently to be more beneficial to the organization(s)?
  • Support your response with references to this week’s readings.

Post your initial response by Wednesday, midnight of your time zone, and reply to at least 2 of your classmates’ initial posts by Sunday, midnight of your time zone.​

!st person to respond to is Christina

 Hi Class, 

“Eddie Lampert, chairman of Kmart, purchased Sears for $11 billion in 2004, changing the name of the company to Sears Holdings” (Delventhal, 1). Kmart and Sears were both very similar companies and both companies were not well off at the time. Part of Jack’s Six Deadly Sins of Mergers and Acquisitions, is to beware the “merger of equals”. It doesn’t add value by merging very similar companies and they end up fighting about which one should be in charge. “Sears Holdings filed for Chapter 11 bankruptcy on Oct. 15, 2018, at which time it had 700 stores across the U.S., $6.9 billion in assets and $11.3 billion in liabilities” (1). Since the merger their revenue continues to go down, while their competitors keep going up. Instead of experiencing with new management techniques and being distant, Lampert should have put a solid management plan in place and make sure to oversee it. Had he been more hands on and more involved Sears Holdings might have been in a much better position today. 

References:

  1. Delventhal, Shoshanna. 2020. Who Killed Sears? Fifty Years on the Road to Ruin. 
  2. Welch, Jack. 2016. The Six Deadly Sins of Mergers & Acquisitions.  

2nd peraon to respond Erica’

 Hey Dr. G and Class!

I have selected Six Deadly Sins of M&A for this week’s DQ.

This week, in Welch’s article, we have learned that no company should shy away from M & M&A, just from its six most common pitfalls (1). The six most common pitfalls are:

  1. Beware any “merger of equals.”
  2. Recognize that the cultural fit of two companies is as important as strategic fit—if not more so.
  3. Run for the hills if you enter a “reverse hostage” situation.
  4. When it comes to integration, boldness is the most sensible approach.
  5. Do not fall into “conqueror syndrome” by marching into your new “territory” and installing your people everywhere.
  6. Do not pay too much.

Locate and post a link to an article published in the last five years in The Wall Street Journal, or another reputable source, about a merger or acquisition that did not go as planned.

The article I found published within the last five years was about the Amazon, and Whole Foods failed merger “One Reason Mergers Fail: The Two Cultures Are Not Compatible.”One Reason Mergers Fail: The Two Cultures Are not Compatible (hbr.org)

Which of these “sins” were committed, what issues arose as a result, and what behaviors could the organization have employed to prevent these errors?

Out of the six sins Welch covered, the one that arose with this acquisition was sin two “2. Recognize that the cultural fit of two companies is as important as strategic fit (1). The deal would allow Amazon to spread into a different sector and grow customer data analysis and allow Whole Foods to be more competitive by lowering pricing. The two companies failed to investigate their cultural compatibility before merging, and now they stand on a fault line researchers call tightness versus looseness (2). The companies could have researched each other culture before the acquisition to identify areas of opportunities to compromise. They also could have outlined the changes and made sure everyone in both organizations understood the changes to help team members embrace the upcoming changes.

Thanks

References

  1. Jack Welch. The Six Deadly Sins of Mergers & Acquisitions (Listen Up Linkedin and Microsoft!). Retrieved from: https://jackwelch.strayer.edu/winning/mergers-and-acquistions-six-deadly-sins/
  2. Michele Gelfand, Sarah Gordon, Chengguang Li, Virginia Choi, and Piotr Prokopowicz. Harvard Business Review. One Reason Mergers Fail: The Two Cultures Aren’t Compatible. Retrieved from: One Reason Mergers Fail: The Two Cultures Aren’t Compatible (hbr.org)

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JWI 540 – Lecture Notes (1214) Page 1 of 11

JWI 540: Strategy

Week Eight Lecture Notes

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JWI 540 – Lecture Notes (1214) Page 2 of 11

MERGERS, ACQUISITIONS, AND STRATEGIC ALLIANCES

What It Means

As you determine which strategy best suits your company, you also need to evaluate whether it is more

effective to achieve that growth by yourself or by teaming up with another organization. While many

organizations cling to self-sufficiency out of a sense of pride or protectiveness, the safest, fastest, and

most profitable road to success can sometimes be through a strategic partnership. That partnership can

range anywhere from forging a stronger supply chain alliance right up to acquiring another company –

perhaps even one of your biggest rivals.

Why It Matters

• Organic growth can take a long time, cost a lot of money, and present a lot of risk. The right kind of strategic partnership can deliver a boost to a core competency that blindsides your competitors and creates “instant” market dominance.

• An acquisition or partnership can allow your organization to stay focused on what it does really well without diverting resources to less profitable activities.

• Your competitors are also considering strategic partnerships, mergers, and acquisitions. If they make their move before you make yours, the impact on your business can be catastrophic, but you must remain alert to the threats and opportunities that M&A moves present in changing the playing field.

“Any strategy, no matter how smart, is

dead on arrival unless a company brings

it to life with people – the right people.”

Jack Welch

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JWI 540 – Lecture Notes (1214) Page 3 of 11

YOUR STARTING POINT

1. What players in your industry, if they were to join forces, would be the most disruptive to the

playing field and what would you need to do to battle them?

2. How open is your culture to partnering with another organization (even a competitor) to pursue

a growth opportunity?

3. If your organization were to combine with another player, who would it be and how would this

drive growth? How could the merger increase your sales footprint, buyer demographics or

operational efficiencies? How would your customers benefit?

4. How would a such a merger or acquisition impact your competitors?

5. If you decided to pursue an acquisition, do you have the skills in-house to evaluate

opportunities, acquire a company, and integrate it?

6. How would your current employees fit into the long-term plan for a merger or acquisition?

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JWI 540 – Lecture Notes (1214) Page 4 of 11

WHEN DO WE GET THE MOST OUT OF PARTNERSHIPS AND ACQUISITIONS?

Sometimes, a company cannot meet its strategic goals on its own. It lacks the resources – the people,

money, skills, physical or intangible assets, even energy – necessary to carry out its strategy. When that

happens, buying the assets or hiring the people you need is an option. So, too, is buying an entire

company.

There is, however, an option that lies between developing what you need internally and buying it

elsewhere: partnering with another business. Working with a partner is useful when your need for

additional resources is short-term. If you are uncertain about how long you will need the resources, it may

be better to enter an arrangement that can be dissolved relatively easily.

THE DIFFERENT WAYS TO PARTNER

Business partnerships can be a relatively informal relationship, like a preferred supplier network in which

you agree to give preference to certain suppliers in exchange for better terms. It can also range all the

way to a formal contractual agreement, such as a joint venture in which two companies share ownership

of a project or enterprise.

Let’s look for a moment at a relationship sometimes called a strategic alliance, which involves a formal

agreement, but not shared ownership. There are three variations on that type of relationship.

1. Alliances can be highly integrated and function almost like a formal partnership. Many areas of

the business are usually involved, from R&D to distribution. For example, Apple and Nike formed

a strategic alliance to place iPod sensors in running shoes and sell related accessories to

runners. They made this alliance not only to provide people with entertainment while they ran, but

also as a way to collect and download information to help runners track their workouts and be

part of a social network of runners. For this alliance to work, it had to be highly integrated

because it involved so many different functions inside both companies, including R&D, marketing,

customer service, manufacturing, and distribution.

2. A focused alliance involves a limited part of each partner’s business, such as manufacturing.

IKEA, for example, had long-standing flexible manufacturing arrangements with some of its

suppliers. IKEA used these suppliers at favorable rates when they had excess manufacturing

capacity, as opposed to creating a separate contract each time it placed an order.

3. Experimental alliances are of shorter duration and involve a specific project – for example,

temporarily using a partner’s distribution network to get customer reactions to your product in a

foreign market – rather than a partnership involving functions of an ongoing business.

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JWI 540 – Lecture Notes (1214) Page 5 of 11

THE BENEFITS OF PARTNERING The opportunity to learn fast, fail fast, and walk away without trying to salvage a large investment can be

quite valuable. A company enjoys a high potential upside for a relatively small investment while also

being protected from serious downside risk.

Alliances can also be helpful in the case of high-risk investments, enabling the sharing of knowledge and

financial exposure. The emerging green energy industry, for example, has a great deal of uncertainty

around consumer preferences, dominant technologies, regulatory decisions, and costs. Therefore,

partnering with other firms that bring different skill sets and can share the financial risk may be a better

strategy than acquiring a single firm. Indeed, in rapidly changing high-tech sectors, various kinds of

partnerships are common. Both Cisco and Microsoft are known for their strategies of taking small stakes

in entrepreneurial firms – in the form of joint ventures or partnerships on selected projects – rather than

embarking on a more costly and less flexible mergers-and-acquisitions strategy.

THE RISKS OF PARTNERING

Many of the factors that make partnerships and alliances desirable also make them difficult to manage.

The flip side of the freedom to easily dissolve a relationship is that neither party may fully commit to the

project. If a company has a lot riding strategically on a relationship, it can come as a rude surprise when

its partner suddenly pulls out.

Even if the partnership is not dissolved, the less committed partner may be disengaged, slow in making

decisions, reluctant to commit resources, and unwilling to respond with a sense of urgency when internal

problems arise. Partners may be equally committed to a relationship, but in pursuit of different objectives.

Sometimes, the players kid themselves into thinking that they will both be able to reach their goals, but

often, they end up working at cross-purposes.

Horror stories abound about the damage that can be done by a malicious partner who hasn’t entered the

partnership in good faith. For example, one partner may secretly allocate costs from other parts of its

business to a different joint venture, leaving the other partner to unwittingly absorb costs that have

nothing to do with the partnership. The loss of proprietary data, processes, or product designs is also a

threat if clear guidelines and safeguards aren’t in place to prevent intellectual property leaks from one

partner to another.

Taken to the extreme, a partnership can result in the hollowing out of one partner when the other partner

appropriates substantial knowledge, people, or other resources from the venture. In fact, the partnership

may have been formed for one company’s express purpose of weakening the other. Too often, the victim

does not realize what is happening until it is deeply committed to the partnership and the damage has

been done.

HOW TO ENSURE A SUCCESSFUL PARTNERSHIP

As with any strategy, partnerships and alliances require active management. In fact, they may require

even more managerial attention than an in-house strategy because of their frequent focus on risky new

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JWI 540 – Lecture Notes (1214) Page 6 of 11

activities. Partnerships and alliances are more likely to be successful when they have clear and shared

goals with well-defined targets.

They must also have clearly defined benefits supported by a strong business rationale. Tangible results

can come in the form of an increase in sales, for instance. Here, the expected benefits are usually defined

and quantified. But when intangibles are involved, many partnerships are less disciplined. Just hoping

both partners will learn about new markets is not enough. The parties need to specify what they hope to

learn over a certain time period, how the knowledge will be measured, and how it will be used.

Oddly, a strong contract is often associated with a successful partnership, but only if the contract is never

really used. Constant nitpicking about whether one party is following the letter of the contract can lead to

mistrust and failure. It seems the very existence of a contract, though, can contribute to the effort’s

success. Monitoring progress is vitally important to good alliances and partnerships. It may be tempting to

delegate duties to a partner company and hope for the best. But explicit metrics and detailed reporting

must be used to ensure that targets are met and problems are resolved quickly and effectively.

Creating both formal and informal connections between the partner companies provides multiple

channels of communication about both opportunities and problems. Struggling partnerships and alliances

tend to rely on relationships between individuals of the two companies that are either too formal (rigidly

defined and with specified points of communication), or too informal (no specified relationships at all).

While encouraging informal contact between people from the two companies, partnerships must ensure

clear accountability. This way, there is never any doubt about who is in charge and where decisions will

be made.

Qualified management must also be put in place on both sides. In some companies, sharing

management of a partnership is less prestigious than running an internal division. Selecting, preparing,

supporting, and rewarding qualified managers is vital. Particularly in partnerships complicated by

geography and culture – say, a U.S.-China joint venture – no single manager is likely to master all the

necessary skills without support from their home organization.

Finally, a learning mindset helps to manage expectations about how much can be accomplished. It also

removes any stigma of failure associated with a partnership or alliance that dissolves. Ending or

restructuring an alliance is often a powerful indicator of success. The companies may now know enough

to pursue similar opportunities on their own, or they may have gained the confidence to acquire the

resources they need on a temporary basis. The wisdom to know what not to do – and not doing it – is

among the most valuable contributions of a strategic manager.

HOW CAN WE FURTHER OUR STRATEGY THROUGH ACQUISITIONS? Buying another company is one of the most exciting and challenging activities in business. Even a

relatively modest-size acquisition of a publicly traded company traditionally makes the front page of The

Wall Street Journal. At the same time, studies repeatedly conclude that most acquisitions destroy rather

than create value for both companies involved.

Whatever their pros and cons, acquisitions are a fact of life in business. The common label for this activity

– Mergers and Acquisitions, or M&A – is somewhat of a misnomer. One company typically purchases

another one, paying with cash, its own shares, or a combination of the two. There is a buyer and a seller,

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JWI 540 – Lecture Notes (1214) Page 7 of 11

not some neutral merger of two entities. In fact, as Jack wrote in Winning (2005), a true “merger of

equals” rarely occurs and is unlikely to succeed when it does. (pp. 222)

But before we get into more detail, consider some of the potential benefits of acquisitions:

• An acquisition allows a company to obtain, in a single transaction, capabilities or other resources

that would otherwise take years to develop.

• It can reduce costs by eliminating duplication in two companies’ positions and activities, which

can be consolidated in the larger combined entity.

• An acquisition can increase a company’s market share and provide other competitive advantages

that come with greater size.

But executing an acquisition is not easy. Jack (2005) described seven common pitfalls that can destroy or

reduce the value of an acquisition. One pitfall that is often overlooked is that a target company that is a

near-perfect strategic fit may be a disastrous cultural fit. Culture is crucial as you begin to integrate the

acquired company into your own.

HOW DO YOU MAKE A SUCCESSFUL ACQUISITION? Clearly, the acquisition should make strategic sense. You want to be sure an acquisition would actually

further your strategic objectives. Consider whether you could obtain the same strategic result, with much

lower risk, through a partnership or even through organic growth. If you decide an acquisition is justified,

you want to set clear criteria for the selection of a target company.

Several issues could affect whether an acquisition will create value. Whether it involves acquiring a

competitor or moving quickly into an area where you don’t currently compete, you will do well to consider

four issues: pace, power, information, and people.

Pace

An acquisition is often pursued as an alternative to organic growth because of its relatively quick results.

Some managers, therefore, approach every deal as a race against time. Certainly, some situations will

reward the swift. However, rushing can hurt you, both before and after the deal.

Before the deal, rushing may cause you to cut corners on due diligence. Assuming that the deal must get

done quickly often implicitly assumes that the deal must get done at all. Add to that the fear that a rival

might swoop in and snatch your target away before you complete your acquisition, and you have what

Jack called “deal heat.” Can you really blame those caught up in a deal frenzy for a bias toward action?

But instead of focusing on how fast you can get the deal done, focus on how quickly you can discover

whether there is any future in this deal. If there is none, move on and explore other opportunities. But if

there are advantages, then, and only then, move the process forward.

After the deal is completed, rushing to integrate the two organizations and capture the advantages that

were projected sounds sensible, if only to reduce the uncertainty in people’s minds about what will

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JWI 540 – Lecture Notes (1214) Page 8 of 11

happen to their own jobs in the combined entity. Indeed, Jack argued that the integration process should

be complete by the time the deal closes, or at the latest, within 90 days of the closing.

Uncertainty can quickly lead to fear, low morale, and inertia that could permanently stymie integration.

But, especially when the merger of two companies represents a strategic shift for the organization, an

eagerness to get the integrated organization back to “business as usual” can preclude thinking about

fundamental changes that are needed to realize the acquisition’s full strategic potential.

Power

In every organization, an informal power network influences key decisions. Whether you are evaluating

options, exploring opportunities, or investigating financing, it is important to construct a power map of the

new organization you are creating through a merger. Formally or informally, where will key strategic

decisions be made? Who will make staffing and investment decisions post-merger? Who will control

scarce resources and key assets? While you may think many of these answers are found on the

organizational chart, the reality is that many decisions about resources and agendas do not fit neatly into

one person’s job domain.

You probably already have a fairly good read on the power bases in your current organization, as do the

employees of the target company concerning their own company. However, unless senior leaders from

both sides consider and discuss how conflicts will really be resolved, how decisions will really be made,

and how ideas will really be assessed, there are likely to be problems following the merger. Simply

assigning job titles and agreeing on formal job definitions is not enough.

Information

Providing information before, during, and after an acquisition is a complex process. Not only are the

messages often complicated, but in many cases, information cannot be shared openly. Different

audiences need to get different information at different times and in different formats. When there are so

many other demands for people’s attention, it is easy to see how information-sharing might not get the

attention it needs.

All too common are errors of sharing too much, too soon, or too little, too late. Once a company has been

through a few cycles of M&A, it will usually define an information-sharing process that works for them. But

this can actually make matters worse. Most companies do not have good measures and feedback around

their sharing of information, so prior errors are often baked into a process and the same problems occur

over and over.

Also, keep in mind that just because you provide information does not mean the intended parties

understand it. In times of stress, miscommunication runs rampant. Some people are selectively blind or

deaf to information that conflicts with the future scenario they want to see.

People

Employees are stretched thin before, during, and after an acquisition. The demands of integration come

on top of their regular work. New processes need to be learned and new tasks mastered. And most

people are on edge emotionally, struggling to adapt to changes and worried about losing their jobs. That

means, as a manager, that you face some significant people challenges. You’ll be trying to match the

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JWI 540 – Lecture Notes (1214) Page 9 of 11

right people with the right jobs in the new organization, and to build the skills needed to exploit the

strategic advantage an acquisition creates. You will undoubtedly face resistance from many people

unhappy with the changes. You may also face the unpleasant task of deciding whom to let go.

Simultaneously, you will have to deal with the emotions of those who go and those who stay. One of the

biggest challenges is balancing the need to spend time on issues related to top performers and key

people while not losing touch with the many others who keep the company running smoothly on a daily

basis.

Pace, power, information, and people don’t operate independently of each other. Information is power.

People may hoard information, or selectively share it in order to advance a departmental or individual

agenda or because they are anxious about the future. Moving forward too rapidly can result in a due

diligence process that fails to produce information that would be helpful in deciding whether to go forward

with an acquisition.

Keeping these four areas in mind during an acquisition can help organize your thinking and avoid some of

the common deal pitfalls. You can thus ensure your efforts to grow in this manner are far more successful

than those of most other firms.

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JWI 540 – Lecture Notes (1214) Page 10 of 11

SUCCEEDING BEYOND THE COURSE

As you read the materials and participate in class activities, stay focused on the key learning outcomes

for the week and how they can be applied to your job.

• Explore the rationale behind forming partnerships and alliances

Don’t think about your organization as a stand-alone entity. Be honest about the opportunities for

growth and what could be done to address them.

o Does your strategy rely solely on organic growth or does it require external resources?

o If external resources are required, in which specific areas are these needed?

o If you don’t make an acquisition (or develop a merger/partnership situation) will you still

be able to execute your chosen strategy?

o If you do complete an acquisition or alliance, will it dramatically increase the speed of

execution and chances of success for your strategy?

o If your strategy does include an acquisition, have you considered the effort it will take to

integrate the purchased company into your organization?

• Evaluate which type(s) of strategic partnerships offer the best risk-reward opportunities

A full-blown acquisition or merger may be the way to win. But it comes with more risk than a

strategic partnership that can, usually, be unwound more easily if things don’t go as planned.

Consider your upstream or downstream suppliers or distributors. Look for opportunities where an

exclusive arrangement could bring a win-win for both companies, but make sure your agreement

is structured in a way that both parties can get out with minimum negative impact.

• Identify critical issues in successful strategic M&A or alliance activities

Before entering into any partnership, be clear on what drives each organization’s success. The

partnership will only work if both sides are winning.

Independent of your motivation to acquire another entity, be mindful about the inherent risks.

Companies are generally bought at a premium and with debt. That automatically raises the

stakes, especially regarding expectations for immediate and long-term returns. Organizations

that are not used to acquiring companies are often surprised by the amount of time and effort it

takes to integrate them. Each organization has their own culture, history, performance metrics

and systems. It takes time and effort to merge of all these and, ultimately, come up with an entity

which incorporates the best of both organizations.

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JWI 540 – Lecture Notes (1214) Page 11 of 11

ACTION PLAN

To apply what I have learned this week in my course to my job, I will…

Action Item(s)

Resources and Tools Needed (from this course and in my workplace)

Timeline and Milestones

Success Metrics

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