M&A Talk: Dr. J Keith Dunbar
Human Aspects in Successful Integrations
29 February 2016
Despite the popularity of growth strategies based on mergers and acquisitions, the challenges of executing a merger are substantial—40% to 80% fail to meet objectives.
To understand the high failure rate, prior researchers have examined financial characteristics, capability matches, and human factors such as culture.
What was missing was substantive quantitative research on collective leadership capability as a driver of M&A success. To fill that gap, Dr. J . Keith Dunbar conducted a five-year study that aggregated individual leadership assessment data from acquiring and targeted companies in order to create a picture of collective leadership capability. The results were eye-opening, to say the least. Dr. Dunbar shares some of the results, their implications and thoughts on the subject.
M&A Talk is a podcast series highlighting practitioners in the space, with the goal of bringing new and different perspectives to improving the outcomes of Corporate Development and Integration.
A transcript of our podcast with Dr. Dunbar follows.
John Lester: Welcome to eKnow’s M&A Talk. This is John Lester, Director of Marketing and Sales. I’m honored today to be speaking with Dr. J . Keith Dunbar of Potentious. Keith is doing what I consider to be some absolutely groundbreaking work in the area of human development and its relationship to M&A. We’re all aware of the statistics showing that roughly 70% of mergers fail to meet stated objectives and ultimately destroy shareholder value. Dr. Dunbar brings a new perspective to this issue and can show how and where key leadership capabilities, or the lack of, are huge mitigating factors to successful transactions.
First, a little background though. Dr. Dunbar earned his Doctorate of Education from the University of Pennsylvania, Chief Learning Officer Executive Doctorate Program. His dissertation focused on collective leadership capability and whether leadership behaviors are predictors of M&A success in acquiring in target organizations. Also, Keith retired from the U.S. Navy in 2006 after a twenty-one year celebrated career as a Naval Intelligence Officer. Keith, thanks for your service on that.
Keith Dunbar: Yeah, thank you John.
John Lester: Keith, could you explain for our audience, at a high level, the nature of your work?
Keith Dunbar: Yeah, first I want to really thank you and eKnow for having me participate in your podcast series. It’s quite an honor. In a nutshell, what Potentious is really focused on is helping to transform companies that make potential and the growth by focusing on what I consider as the foundational element to M&A success, that is leadership. You mentioned the groundbreaking part. I do believe that it’s groundbreaking research because, in our efforts, we provide M&A leadership risk assessment services so companies can understand what type of leadership strength they have in place, as well as what kind of leadership risk areas might be in place that can affect the deal success. Our goal is really to focus on what it is that we can do to help leaders be successful in executing these deals and achieving the stated objectives of those.
John Lester: Interesting. That sounds like there are a lot of different avenues that you could go down and investigate. What would you say is the single most interesting or compelling concept that you’re working on right now?
Keith Dunbar: The initial research that we did looked at a very small set of leadership skills, actually about fourteen in the data set that we had. Recently, we completed a phase two analysis of the data set where we looked at all thirty leadership skills captured in the data set and also looked at the demographic data that was in the data set as well. What that’s allowed us to do is to identify leadership skills that are predictors of M&A success for both acquires and targets by gender, managerial level, so first line, supervisor, all the way up to top executives. Corporate functions, so whether it’s the sales marketing or the R&D, IT, or engineering groups within an organization. Specific countries such as the U.S., Canada, China, Japan, France, Germany.
Also, industry sectors. We have risk profiles for aerospace companies, healthcare companies, including pharma, technology, media, telecom companies. As well as for cross border. As you know, a lot of organizations will go after companies that are not within the country that they’re in. Now we know what leadership skills are really tied to M&A success by cross border as well. It’s a very robust set of insights that we’ve gained and something that we think can really help companies be more successful. As you mentioned at the beginning, help to reduce these perceived failure rates from 70% to something much less than that.
John Lester: That is very interesting. The whole cross border thing is particularly significant. We’re actually going to be doing a session on that in the near future. Maybe you could spend a moment, because one of the things that really caught my attention was one of the studies I was reading that was talking about the role of middle management and looking at leadership skills in middle management on the acquired side. How most people wouldn’t even recognize that as being something to look at. Could you spend a minute talking about that? I thought that was fascinating.
Keith Dunbar: Yeah, the interesting thing that … we asked another question as we looked at the data and that was, were senior executives or middle managers, of those two groups, which had a greater effect on M&A success. When you looked at the acquires, it was what we really expected. It was senior executives had a greater impact on M&A success. This, again, makes a lot of sense when you consider they’re the ones coming up with the business strategy and the acquisitions strategy that’s part of that and then executing on that acquisition strategy.
The really interesting piece that you kind of pointed out from your reading was that in target companies it wasn’t senior executives, it was middle management had a greater effect on M&A success. I think, inherently, if we looked at acquisitions and what is going on inside of a target company, I think this makes a lot of sense as well. In not all cases, but a lot of cases, an acquire will come into the target company and just take off that top layer of leadership or leave in place a small percentage of those leaders as they perform the integration over these sometimes one, two year periods. What’s left to pick up the pieces for these target companies are really the middle managers. How they influence and motivate the employees that continue to push forward during this acquisition in this integration process when it’s very chaotic, and ambiguous, and complex for them as they move into a new organizational, and potentially a new culture, and a new focus in a business area that maybe they weren’t necessarily in at the time.
John Lester: I almost got the sense, I can’t remember if you made this point or not, and I apologize, but I got the sense that if the acquiring organization is looking at the target organization from a revenue contribution perspective and from a margin contribution perspective, that from an ongoing concern basis, the role of middle management is really to maintain that revenue stream. If you upset that or if you start to lose them, or if they start to lose confidence in the acquiring company, relative to their future, that you’re not going to achieve those stated objectives on the side of the acquired organization. Is that pretty accurate?
Keith Dunbar: Yeah, I think that is very accurate. The other aspect of this is merger and acquisition is a major change event for an organization. I think we sometimes feel that it’s really just major change for the target company because they’re the one that’s getting acquired. The reality is it’s a major change for both the acquiring company. They have to somehow take in this new organization and turn it into a new organization that is really focused on driving and achieving these revenue and profit numbers that is set to be the intended outcome of this deal.
In that case, if you consider these as major change events for both of these organizations, the only way that major change events are successful are with leaders throughout the organization. It can’t just be something that the CEO drives in order for change to be successful. You need leaders from frontline supervisors all the way up to top executives in most of these organizations to make this change successful. That’s why we think this research offers these new insights on to what companies can do to position themselves to be more successful at executing the changes that need to happen, based on whatever the stated objectives of the M&A are.
I will say that a lot of this is also driven by what is the current set of activities that take place in an acquisition. Typically, there’s an immense amount of focus on culture. What is the culture of the acquire? What is the culture of the target company? Where do those diverge? Where are those similar? Then the acquire has to decide, are they going to try and create a new culture from these companies coming together or are they going to try to just assimilate the target company into their culture. The reality is, what we believe, is that that’s the wrong starting place in any kind of deal that you go after because, even if you realize that the two cultures are misaligned and there’s going to have to be a lot of work done to create a new culture or to assimilate them into your culture, the reality is you need leaders with the right skill sets at the right level in order to effect this change, or any other changes that you need to make in order for the deal to be successful.
John Lester: Keith, this is almost counter-intuitive, I would think. So far, what has the reaction from the market been to your research? I’m not even sure if you’ve had a lot of time to get this out into the market. What are you getting a sense of out there?
Keith Dunbar: When we talk to clients and potential clients about this, it makes absolute sense to them. We have to be aware of the current model of leadership assessment that is out there in the market and what most organizations are used to. That’s why we have this tagline that we use called “Change the mindset, change the model, change the outcome.” The current model of leadership assessment in acquisitions is typically focused on the target company senior executives in order to determine which executives that the acquire might want to keep through the acquisition and lock them up for up to three year retention contracts or longer.
If you think of the leadership capabilities that reside in an acquiring company and a target company as an iceberg, the only thing that that leadership assessment model sees is the tip of the iceberg. It looks at the target capability within the executives and it makes a determination but, as we know, there’s all of this uncertainty below the surface with an iceberg because you don’t know the depth, the breadth, or the width of what this iceberg looks like. Our approach, and what we explain to people, we look at the depth, the breadth, and the width of the entire iceberg so you can understand where the strengths are, where the risk areas are. So you can navigate around these different icebergs that are out there pertaining to leadership and get your deal where it needs to be.
John Lester: I would imagine that a lot of this type of work, historically, has been done more around executive and middle management skill sets. It sounds like you’re bringing in the notion that it’s more than skill sets, it’s also behavioral, it’s also cultural. There’s a lot of, I want to say, soft skills, or soft components associated with this. Is that pretty accurate?
Keith Dunbar: Yeah, I would say that that is pretty accurate. If you think of leadership in two perspectives. There’s the perspective of leadership that is really about the skill that you have. That can be measured through 360 leadership assessments and determine where you stand in regard to a set of skills that an organization believes that you should have. Then there’s also the perspective that you just pointed out which are the behaviors. It’s how do you use your skill sets in order to effect changes in the organization or to keep it motivated and performing on specific objectives.
I can think of Jack Welch, when he was the CEO of General Electric, he had a 2x2 which was focused on what you worked to achieve from an objective perspective and how you achieved it. That was really the behavior part. What he found out was that if he had an executive who was really knocking it out of the ballpark, was achieving the objectives of the organization from a profit-revenue perspective, but he or she was leaving a trail of dead bodies in their wake of how they act as a leader, then they would get rid of those leaders. I think the same thing is in play with mergers and acquisitions where it’s not only understanding what skill sets you leaders have and whether they have those skills at the right levels but really, how do they behave whenever they engage with this target company.
One of the key skills that we identified for acquire was the ability to build trust. If you think about if an acquire can’t build trust with the target company, it makes it very difficult to retain talent, to get the integration to move along at the pace that it needs to move along, and really to be successful.
John Lester: Yeah, exactly. That’s a good point. You alluded earlier to something I want to just hone on for a second. It sounds like your research is also able to help people to understand the implication of the makeup of both sides, relative to generational. Whether they’re Boomers, or Gen Xers, or Millennials. I know that there’s a lot that’s been written about the different behavioral styles, the different perspectives that the age groups have. Without getting too much into giving away the secret sauce, have you been able to uncover some of that and show where the golden nuggets are to be mined?
Keith Dunbar: You know, that’s a great question. Unfortunately, in our data set, while there is age data in the data set, that is something that we have not looked at is to see what leadership skills are predictors of M&A success by generational. Baby Boomer, or Gen X, or Gen Y, for example. That’s a great question and something I think would be very interesting to find out.
John Lester: Interesting, interesting. Have you been able to determine or know with certainty that you can determine what kind of ROI you could indicate to an organization they could get when they allow you to do this kind of work?
Keith Dunbar: Yeah, the interesting things is, with our data set on acquires, we looked at total shareholder return as compared to the large cap index of the country that the company was in. For example, if it was a U.S. company, we compared it against the S&P 500. Positive performers in our data sets, on average, had a 12.24% total shareholder return compared to their large cap. Whereas, negative performing companies had a negative 14.1% total shareholder return.
That was also visible in return on assets. The ability of a company to use its assets to generate growth. For positive performing companies it was 11% return on assets while for negative performers, it was about 5% performance. So a 6% gap there. What we found was that leadership skills for positive performing companies that were the predictors for acquires were in much greater supply in positive performing companies than they were for negative performing companies. What that tells us is, if you have the right sets of leadership skills and the supplies needed within the organization, what we can say is that that should correlate with positive performance, once that acquisition is integrated within a one or a two year period.
John Lester: Keith, for the folks that like the top five, and top ten, and top three things, as most of us do, quite frankly, would you be able to say what you think the top three, or so, learnings are significant to corporate leaders that your research uncovered?
Keith Dunbar: Yes. We’ve already spoken about what was probably the most interesting one, was the difference between senior executives and middle management between acquires and targets. I would say the other interesting thing is a lot of times acquires make acquisitions for innovation purposes. In pharma, they make acquisitions to gain access to R&D capabilities within specific companies. A lot of technology companies do this as well to gain access to new, innovative product and capabilities.
What we found is that for acquiring companies, one of the key strategic leadership skills we looked at was innovation management. The ability of a company to manage the innovation process successfully through their leaders. For acquired, it was not a predictor of M&A success, which was kind of surprising. I think what was more insightful was that it was a predictor of M&A success for the target companies. In this case, what an acquire would want to do is to look at whether the leaders in the target company actually have this leadership skill of innovation management in the right supply, at the right levels, and in the right leaders within the organization. If one of the stated objectives of this acquisition is particularly around improving the innovation capability of the organization.
John Lester: Yeah, that is definitely some interesting information.
Keith Dunbar: Then, the third one here is around women leaders. Something that we were really surprised to find out when you compare women leaders to men leaders in these deals for the acquiring company. Actually, women leaders have more strategic leadership skills as predictors of M&A success than men do. The women were better at judgement, thinking strategically, innovation management, and global insights. Whereas, men leaders were really only good at providing vision in an organization. We thought that was a really interesting insight because I think, for the most part, we don’t think about … Whether this is fair or unfair, we don’t think about women as being more strategic in organizations. I’d say that was a really helpful insight to gain.
John Lester: That is. Now, did that track across age groups and regions of the country and different countries? Did that track completely across?
Keith Dunbar: We didn’t have enough data in the data set to look at women by geographic region or women by specific countries. Again, since we didn’t look at the age part of this, I can’t really answer that question either.
John Lester: Sounds like a follow along project for you.
Keith Dunbar: Yes, I used three, right?
John Lester: Yeah, exactly, exactly. Coming in the near term future. Keith, for our eKnow M&A tools folks out there, the users that are in the audience, have you thought about how you would be able to marry the work that you’re doing at the implementation stage into process management, which is really the basis of eKnow’s M&A tools?
Keith Dunbar: Yeah, I gave this some really heavy thought and I really consider it complementary. The way that I view the eKnow M&A tool kit is really this one-stop location where your clients can go look and see information about the deal, how it’s progressing. It provides them information in order to make decisions and take action. It also provides this ability as an early warning system too, right? If your clients go, using your tool, and see that certain things are behind schedule or that decisions need to be made and these decisions get made, then it requires leaders in the organization to go out and execute on these decisions, right?
John Lester: Correct.
Keith Dunbar: If you think of the example here … Let’s say that there’s a decision that we must have greater integration of the R&D function, since we talked about that earlier. Because the deal objective said it needed to be accomplished in the first six months of the deal but your tool indicates that it’s only 40% integrated. Then, we can look and review the Potentious M&A Leadership Risk Assessment and find that maybe they have low skills in building relationships, influencing others, and motivating others. Then that cues leaders in the organization that they need to focus some specific leadership interventions in the direction of that organization to help get it back on track and speed up the integration process. That’s why I consider this really very complimentary of looking at the decisions that have to be made and how the eKnow tool helps speed up that process by putting all of this data and information in one place. Also, taking a look at it from a leadership perspective of what you have to do in order to execute on these decisions or where you start to see problems that are taking place.
John Lester: Yeah, it sounds like what you’re saying is that it allows you to make minor course corrections during the journey as opposed to waiting until the end and finding out that you landed in the wrong port. That sounds good.
Keith Dunbar: Yeah, exactly. You missed that leadership iceberg, right? You’re able to maneuver around it.
John Lester: Yeah, the one you didn’t want to hit. That’s fabulous. This is great and I would very much like to continue this conversation and I welcome you back. As I said, this is even more fascinating the more we get into it. I want to schedule another one with you and want to create another podcast for our listeners. Give us a little bit of a hint as to what aspect you think we’re going to want to talk about next. Let’s put a teaser out there for them.
Keith Dunbar: I think it’s really interesting to take a look at what leadership skills are predictors of M&A success by country and cross border, as you indicated. It’s always been a hot topic, primarily because of the cultural issue associated with cross border mergers and the different national cultures the countries bring. Really taking a deeper dive on what do these leadership skills look like and what would they look like in a successful acquisition or a less successful acquisition, I think could really be an interesting thing to discuss.
John Lester: Yeah, especially as we move into India certainly is emerging. All of what typically get classified as the third world countries, even the Vietnams and the Cambodias, even a lot of the smaller South American countries that we don’t have that much data on, this is going to be quite fascinating.
Keith Dunbar: Yes, yes, absolutely.
John Lester: Keith, how can people get more information? Where do they go to get more information about your work, about you, and if they want to contact you. How are they going to be able to do that?
Keith Dunbar: They can go to our website, obviously, www.potentious.com. There’s actually a white paper that goes into a little bit more detail on the research and what it is that we provide clients. They can go there and get a lot of information. They can also give us a call at our office number which is (202) 450-0988. They can send me an email at email@example.com. I’m happy to talk to them about how we might be able to partner with them to enable their M&A success.
John Lester: This is great. Keith, I really thank you for taking the time. We definitely look forward to our next conversation. Hopefully, very shortly. To our listeners out there, thank you for joining us. Have a great day. We’ll be back with another podcast soon. Take care.
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