How to Avoid the Business Merger Trap

What is the most frequently listed business rationale for two companies merging together? There is no shortage of literature that points to company synergies that decrease operating expenses. This is an important piece of any proposed merger, but it can create the merger trap.

In business, a merger is the combination of two companies into one company. Once the merger has been approved, the combined company sets out to implement a plan that will integrate the two companies. The initial merger activity will look at ways to develop synergies within the new company. This is when management looks at ways to reduce duplicate departments and services.

The desired result from synergy will be a lower operating cost. We can understand that if you lower operating costs while everything else stays the same, then company margins and profits will increase. When profits increase, the merger is a big success and the CEO will be on the cover of Time magazine.

In some mergers, this actually happens post-merger. But there is a long list of failed business mergers dating back many decades. Why do some mergers work better than others? Is it because of better management or better strategies?

I would argue that the majority of failed mergers fall into what I call the merger trap. The merger trap is defined as management's endless focus upon creating synergies and their reluctance to monitor revenue growth. Simply, management took their eye off the ball and existing customers started disappearing without notice.

Following a merger, customer attrition occurs usually as a loss of trust as there is a new face for the combined company. If not communicated correctly, existing customers may be lost due to internal factors. When two sales teams are combined, an inconsistency in service can create issues that will lose existing customers.

To be successful, the post-merger company must have a focus on growing revenues. Management must commit resources to retaining existing customers and growing new ones. A key success factor in mergers is to improve the consumer experience by streamlining existing process. This will add value to the consumer and allow for continued revenue growth.

With the combination of synergies (decreased cost) and revenue growth, company mergers have an excellent chance to be more profitable and more successful in the future. To avoid to the merger trap, add revenue growth to the list of key success factors in business mergers.