In 2016, GE acquired Baker Hughes for $30 billion only to find that expected synergies in revenues and costs did not transpire. In 2018, GE announced it would separate from Baker Hughes, marking down the valuation of Baker Hughes to less than $15 billion.
A March 2019 Wall Street Journal survey of 1,000 corporate executives identified several impediments to merger and acquisition success: expected sales not materializing (33%), execution and integration gaps (32%), failure to achieve expected cost synergies (26%), failure to achieve expected revenue synergies (23%) and lack of cultural alignment (20%). CMOs, guided by a customer focus, can play a critical role in overcoming these hurdles.
M&As are likely to fail when senior leaders focus on operations and finance at the expense of focusing on customers.
To avoid a similar outcome, companies can take three steps to bring a customer-focused approach to M&As.
Measure Customer Satisfaction and Its Drivers for Both Companies Before and After the M&A
Research shows that customer satisfaction is the most reliable and consistent predictor of sales. Measuring the level of customer satisfaction and the weight of satisfaction drivers can quantify the relative health of each company’s customer base. Let’s say an industrial company we’ll call ParentCO wanted to acquire a competitor that we’ll call TargetCO. ParentCO helped conduct a study measuring customer satisfaction and its drivers for both companies. Results showed that TargetCO’s customer satisfaction was lower than ParentCO; further, TargetCO’s customers were dissatisfied with its sales and bidding process and its product quality, both key drivers of overall satisfaction.
Prior to the acquisition, TargetCO developed specific goals in terms of satisfaction targets along with an operational plan to improve the sales process and product quality. Executives at the merged company worked together to monitor the post-merger goals, achieving a 12% increase in overall customer satisfaction for TargetCO and a 23% sales improvement within two quarters. By developing measurable customer KPIs that link to operational KPIs, they led the merger to success.
Have a Dual Focus
Many companies emphasize either revenue expansion through customer satisfaction or cost reduction through efficiency initiatives. Some companies have a dual focus—simultaneously achieving revenue expansion through satisfied customers and cost reduction through efficiency initiatives.
A 2005 Marketing Science study of 77 Fortune 100 firms between 1994 and 2000 sought to answer this question by measuring customer satisfaction and cost efficiency. It found that only firms that could simultaneously achieve cost reduction and customer satisfaction—a dual focus—showed an increase in long-term firm value. For an average firm with a market value of $46 billion, achievement of dual focus was worth $1.61 billion in firm value.
A 2013 Journal of Service Research article showed this same effect for merging firms. The study compared firms that implemented a dual focus to those that did not. Results showed that among merging firms, only those with a dual focus showed an increase in firm value. Firms that focused only on customer satisfaction or only on efficiency failed to realize these gains. Strategically, a singular focus on efficiency—at the expense of customer satisfaction—can reduce the chances of achieving a successful merger. At Kraft Heinz, management was so focused on improving manufacturing efficiency that it failed to incorporate the shifts in customer needs—healthier products, nutritional labeling and organic ingredients—in its offerings.
On average, an M&A destroys over $400 million value because senior leaders focus on financial efficiencies at the expense of focusing on customers. To avert this outcome, executives should consider several steps.
Align Your Customer-Facing Resources
Merging companies often bring different types of customer-facing resources to the table: sales force, marketing collateral, social media presence, customer databases, consumer research expertise and product pipeline. A purposeful alignment of these resources after a merger can influence the return of the merger or acquisition. If the motive for an M&A is to consolidate, then the firms should align these resources to be as similar as possible.
An alignment of customer-facing resources can ensure synergies among the firms, present a unified value proposition to their combined customer base and ensure that customers are less likely to switch to competitive offerings. As an example, the motive behind the Kraft Heinz merger was to consolidate. From all available accounts it seems that Kraft Heinz was mostly focused on manufacturing efficiencies with little attention paid to aligning marketing resources. Thus, even as its costs declined, its sales stagnated.
To align resources, executives at merging companies should set a joint task force to develop an inventory of resources, rate the quality of resources each firm brings to the table and identify areas that require alignment. In the case of an industrial company we helped, a task force identified specific alignment initiatives: migrate the different CRM systems to a single platform, harmonize the sales force incentive plan, and mandate that both companies adhere to a unified brand standard and use a single advertising agency. Because these alignment opportunities were identified in the pre-merger stage and a plan of action was developed, they were achieved within a relatively short period of time after the merger, thus accelerating revenue expansion.
CONCLUSION. M&As require a customer-based perspective to mitigate the downside and maximize their upside. Three crucial strategies for this include focusing strategy by measuring customer satisfaction and its drivers, achieving a dual focus through simultaneous revenue expansion and cost reduction, and developing a concrete road map for aligning marketing resources.
References:
- This blog is based on my earlier article from 2019. https://www.ama.org/marketing-news/how-customer-focus-improves-the-success-of-mergers-and-acquisitions/
- Umashankar, Nita, S. Cem Bahadir, and Sundar Bharadwaj (2022), “Despite efficiencies, mergers and acquisitions reduce firm value by hurting customer satisfaction,” Journal of Marketing, 86(2), 66–86.