By Karen E. Klein With the economy swinging back into growth mode, many outfits are once again looking to expand through strategic partnerships, mergers, and acquisitions. But alliance expert Larraine Segil urges these partnering companies -- both large and small -- to proceed with caution. Segil, a partner at VC outfit Vantage Partners who teaches a course on strategic alliances at Caltech, says such relationships take a lot of effort to arrange and are often disappointing, though when they work "they're amazing." Segil spoke recently to Smart Answers columnist Karen E. Klein on how companies can design a process to ensure that partnerships work for both parties. Edited excerpts of their conversation follow.
Q: How often are mergers and strategic business partnerships successful?
A: The research I've gathered shows that 78% of mergers and acquisitions fall apart within three years of conception, and 70% of alliances either fail outright, fall captive to shifting priorities, or achieve only their initial goals. A majority of alliances, 55%, fall apart within three years after they are formed.
Q: That's not exactly encouraging. What kinds of mistakes do smaller companies make when approaching an alliance or acquisition?
A: The biggest mistake is that the small company has a rather myopic perspective on a potential alliance. The owner goes, "Wow, look! They love what we've got and they're going to give us money!" But a small firm has to get over that mentality quickly, or else the deal will often go to the detriment of the smaller firm and its employees.
There has to be a mindshift, and a more realistic attitude, to make an intelligent business alliance. For instance, the life cycle of both organizations will affect their behavior before and during the alliance. Job changes and marketplace changes can also have a big impact that's not always understood at the beginning. The good news is that the planning team can anticipate what will happen to the partnership at various stages and design ways to cope.
Q: How do job changes at the companies involved make a difference?
A: Well, what if you only have one guy in R&D at a larger company championing the alliance with a smaller firm? When he leaves the company or gets transferred to another position with different priorities, the small company may be left floundering unless someone else with a similar interest in the success of the alliance takes over.
On the other hand, the owner of a smaller company may be attracted to a partnership that will ultimately provide him with a liquidity event. Although he may stay on for a specific period of time, there's often a formal or informal arrangement that says he's going to cash out eventually. In that case, the smaller firm has a real challenge to transition into the dominant culture of the larger company, employees have to find their footing and customers, vendors and suppliers have to be assured that they won't be forgotten.
Q: What are some ways to smooth those transitions?
A: A smaller firm typically makes decisions much faster than a larger corporation. Putting a fast-track decision-making group in the large company that can mimic the speedy decision-making of the smaller company really helps keep negotiations on track.
Also, it's important to identify up front what kind of alliance this is going to be and communicate the details honestly. These arrangements run the gamut from having one company take over everything from finance to legal to administration and marketing and sales, to the other end of the spectrum, where the larger company takes a hands-off approach and the smaller firm keeps its own processes going, but with some administrative support and maybe some human resources help from the bigger partner.
Either method can work if it's done well and there's total clarification in everybody's mind about what's happening. The worst situation is when the details fall somewhere in the middle and neither side really knows what are its responsibilities or expectations. That's where the big problems begin.
Q: What other pitfalls should small business owners watch out for if they're contemplating an alliance?
A: They should be aware that differences and disputes inevitably will arise and they should have an effective way to handle them on the spot, without resorting to litigation down the line. They should also make sure that there is internal alignment and an understanding of the goals for the alliance within their own company. Without good communication, bad decisions will be made -- maybe even about whether to enter into the alliance in the first place. An internal disconnect can also cause an inability to make timely decisions, internal bickering, nondelivery, and put strain on internal resources as people are left unclear about priorities and focus.
Finally, there's a notoriously poor transition from the contracting phase of an alliance or acquisition to the implementation phase, when negotiators bow out and those who are charged with implementation take control. There is often a lack of shared understanding, on the part of the various partners' teams, as to why certain terms were included or excluded from the contract and what certain terms mean. Second, those on each side of the alliance who are charged with implementation often fail to come together as a team capable of working interdependently, no matter how strong the relationship, how clear the contract, or how well understood the purpose.
Again, they have to communicate honestly and frequently. In most alliances I've studied, those on the interface knew there were problems well before they became critical, but failed to raise those issues when they had a chance -- especially with the other partner. Have a question about your business? Ask our small-business experts. Send us an e-mail at Smart Answers, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, N.Y. 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.