In an article about state lotteries, Richard Leone writes in The Prospect, “Perhaps millions of Americans play state lotteries because they are dreamers, or more prosaically, just mathematically challenged.”

Leone’s article decries state-sponsoring of lotteries, but that’s not what drew me to the piece. It caught my eye because I believe many businesses approach mergers and acquisitions in the same manner that people buy lottery tickets.

Leone describes two lottery realities. “First, the odds are dismal.  Second, the poor spend disproportionately.” Both of those truths can also be applied to the owner or CEO who pursues a merger and acquisition. 

As noted in “The Big Idea: The New M&A Playbook” that appeared in the March 2011 edition of the Harvard Business Review, “Companies spend more than $2 trillion on acquisitions every year. Yet study after study puts the failure rate of mergers and acquisitions between 70% and 90%.” So why the hot pursuit of M&As?

The answer lies in the benefits of an M&A, which can look a lot like lottery winnings to many business owners. Take a look at some of the following hypothetical examples of how an M&A could be used for explosive growth in your industry:

• New product lines and territory: If you want to diversify from the label and narrow web industry into a hot niche like digital wide format, you can shortcut the two years it takes to learn the craft and acquire a company skilled in the trade. Expanding your territory through a merge with someone who is already well-established in a targeted region can reap similar benefits.

• Add talent: Let’s say your skill is more in product development than in sales.  To expand your company quickly, you could merge with a company that has an extensive sales force and can quickly roll out your product to a huge client base.

• Expand into different vertical markets: Your label company is doing well, but you’re considering new revenue streams. How about purchasing a packaging firm, so you provide more services for your clients and continue to grow?

• Lower costs: Your benchmarking tells you that a competitor is producing labels at a lower cost per unit. You, however, have superior technology and more capabilities. If you can merge their efficiencies with your core technologies, the results should be spectacular.

Are you starting to feel like someone’s waving a lottery ticket in front of you? You’re not alone. That’s why so many pursue the M&A, and so many fail at the task.

Getting Smart – How to Make M&A Work
Now don’t think that the lessons of the past failures haven’t registered with top-level companies. You read about enough failures like Time Warner-AOL, and you stop throwing caution (and cash) to the wind.

According to Tom Herd of Bloomberg BusinessWeek in his piece “M&A Success: Beating the Odds,” Accenture research and subsequent work with clients show that half of large corporate mergers create at least marginal returns. As Herd notes, this is a contrast to the typically high failure rate of M&As, and a sign that the lottery-mentality among companies pursuing the tactic has changed.

What is the key difference among businesses that make the strategy work? One of the fundamental keys to success is to put less focus on the immediate, bottom-line payout, and more on the long-term, strategic business model.

I refer once again to the Harvard Business Review article.  “There are two reasons to acquire a company, which executives often confuse.  The first is to boost your company’s current performance…The second is to reinvent your business model and thereby fundamentally redirect your company.”

I find the business model approach to be more realistic, more palatable to shareholders, and more likely to inspire a total commitment from your team because it’s really focused on long-term success, and not just the immediate bottom-line numbers. 

Conversely, if you’re thinking in terms of a business model, “Almost nobody understands how to identify the best targets to achieve that goal, how much to pay for them, and how or whether to integrate them. Yet they are the ones most likely to confound investors and pay off spectacularly.”
So if it’s difficult to predict the outcome in either scenario, why pursue an M&A? Because it can be amazingly good for business, as discussed in the aforementioned hypothetical situations. All of them have merit, and all of them fit within a long-term strategy.

Therein lies the secret to the successful M&A. It’s not about winning the lottery.  It’s about running a successful business.  It’s about approaching the strategy in the same way you approached growing your own business.

Take that same kind of approach to an M&A, and you’ll find long-term success. It all starts with losing the lottery approach, and focusing on what happens the day after you close the M&A deal.

The Day After is Just the Beginning
The lottery mentality thinks that the day after you’ve won the big prize, all work is done.  But as proven by past lottery winners, this mindset is all wrong. 

The truth of the matter is that when you close on an M&A, you have won the lottery. You are in position to achieve growth and build tremendous amounts of wealth. But you must have the pieces in place to manage it. Here are five key elements to ensuring your big winnings pan out:

1. Create a post-transition close team. Any merger and acquisition must have a team in place that manages the transition, yet it’s staggering how many don’t.  You must have a team that not only manages from an operations perspective, but also from a cultural perspective. In order for 1+1 to equal three, you must integrate the two companies.  And that doesn’t happen without a lot of blood, sweat and tears.

2. Develop a system to track the financials. All the goodwill of the post-transition close team will be meaningless until you have the internal controls to benchmark gains and losses. Your financial metrics should be data points that can tell you exactly where the processes are breaking down – quantitative assessments that will help you quickly isolate the qualitative shortcomings.

3. Communicate. One of the most important functions of the post close-team will be to effectively communicate the goals of the M&A throughout the company. Nothing scares staff more than operating in the dark.  If you can explain to them in clear terms what the goals are, and how the team can win, you’ll have more people playing ball than abandoning ship.

4. Achieve balance. The hardest part about being a CEO is striking a balance between being a visionary and paying attention to details.  Both are a critical part of your success, but one shouldn’t overpower the other. 

5. Be a leader. For an M&A to truly work, you must lead like never before. In periods of uncertainty, there tends to be a vacuum of power. Don’t let that happen to your company. Be highly visible and operate with integrity.

Essentially, approaching an M&A is like anything in business. If you approach it with the right mindset, you will succeed. Stop thinking that once you close the deal, you’ll be heading to the Caribbean to enjoy your earnings and the good life. It’s just not part of the picture. Treat your M&A like a long-term business strategy, and it won’t be a gamble. In fact, the payoff will likely be more than you ever expected.



Rock LaManna, President and CEO of LaManna Alliance, helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic path.