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Mergers: 1+1 Doesn't Have to Equal 3

Mergers: 1+1 Doesn't Have to Equal 3

March 16, 2012
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As the distribution M&A deal market continues to pick up, it’s worth noting that a deal doesn’t stop when it closes. The real work begins after the transaction is complete.

In a recent article from Knowledge@Wharton, the online journal of the Wharton School of the University of Pennsylvania, the author contends that in a merger, 1+1 doesn’t have to equal 3 – as many people hope it will when they are thinking only about the financial side of the equation. Instead, the goal should be 1+1=1.

The “new merger math,” as the article calls it, goes beyond economic synergy – it includes psychological synergy as well. This means that when merging, two companies must consider the identities of each company. (While culture is important, as well, identity is different.) Merging two companies “seriously disrupts” the identities of both organizations. A merged organization will succeed when employees feel a “sense of belonging to a single enterprise with whom they can identify and to which they are motivated to contribute.”

For example, in one case mentioned in the article, when SBC Communications took over AT&T in 2005, the company decided to use AT&T as the name for the merged entity. But most of the post-merger executive team were from SBC. So SBC’s identity, so to speak, won out.  In another case, when two local branches of the same bank were merged, the company encountered problems because the employees of each were used to viewing their branches as independently and distinctly operated from the whole, even though culturally the two were similar.

The question of identity – discussed in detail in the article – should be addressed long before a deal is complete. Read more here.

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