Dr. J. Keith Dunbar is the Founder, President and CEO of Potentious, a boutique consultancy focused on the role of leadership in the context of mergers and acquisitions. He sat down with KCRA’s Liz DeVito to discuss his research on the leadership competencies that drive deal success.
KCRA: Research indicates that up to 70 percent of mergers and acquisitions fail to meet objectives and ultimately destroy shareholder value. Why the low success rates?
Dunbar: Significant research has been conducted addressing the reasons for the poor track record regarding M&A success, however, the research has historically focused on the hard aspects, such as financials, capability matches, and geography. While the research is valid, it has not gone far enough in helping executives understand why poor deal performance continues, because it overlooks the impact of the human element in deal success.
KCRA: Your research into the soft aspects impacting deal performance is unique in that it focuses on a single factor—leadership. Why is that?
Dunbar: I have been interested in the role of leadership in organizational performance for quite a long time. As I delved into the M&A literature, however, it became abundantly clear that no one had ever deeply investigated the relationship between leadership capability and deal performance. This really surprised me considering M&As are major change events for both acquirer and target companies, and much academic research pointed to the impact of leadership on successful organizational change. Additionally, while there was plenty of research on the role of culture in M&As, none quantified the impact of leadership. I think culture is the wrong starting point, because leadership is the foundational element that determines M&A success. You need strong leadership to effect the change needed to align cultures in M&As and achieve other stated objectives of these deals.
KCRA: Why does the conversation emphasize culture over leadership?
Dunbar: There is a very real fear factor around cultural risk in M&A. High profile failures linger in executives’ memories, such as the Time Warner-AOL deal of 2000 that stumbled on the culture clash between an old media and a new media company. However, executives need to shift their focus from M&As as cultural integration events to those of a major change events for both acquirer and target companies. Shifting to this perspective clarifies the role and relevance of leadership in M&As.
KCRA: Your research analzyed individual leadership assessment data of over 30,000 executive, senior and middle managers representing 94 M&As conducted between 2004 and 2008. Can you summarize your key findings?
Dunbar: Most importantly, I found that there are specific leadership competencies that impact deal success, as measured by total shareholder return. The weight of these competencies differ for the acquirer and target companies. For example, senior executives at the acquirer have greater effect on M&A success, whereas middle management at the target company has a greater impact on M&A success. This is a critical finding because so much focus during due diligence is on identifying the top one or two levels of leadership in the target company to retain to ensure a smooth integration. This is the employee segment that is identified and incentivized to remain with the acquirer for one, two or three years following deal close. There has been too little effort placed on understanding the leadership capabilities of middle management in target companies.
KCRA: At which point during the deal phase do you recommend analyzing leadership capabilities?
Dunbar: The results of my research suggest that assessing the collective leadership capabilities of acquirer and target companies should be part of the due diligence that precedes an M&A offer and supports integration planning. It also suggests that middle managers at target companies are crucial to success and that efforts to retain them could be beneficial.
This interview appears in KCRA’s recently released research, HR Consulting in Corporate Transactions.