Avoiding and solving power struggles in mergers & acquisitions

Image: Oryx Fight by Masiusz Kluzniak on Flickr

Tony Hseih, founder and CEOs of Zappos says that all companies have three org charts:

  1. The official, formal org chart which has been carefully designed to operate the business productively;
  2. The informal org chart, representing where the real power lies and how things actually get done;
  3. The desired org chart — an ever moving target of how the business will hopefully operate at its optimum.

Hseih says the game is to try to get all three org charts as close together as possible. He’s right (even if his solution of forcing through a move to faddy management system Holacracy is a dangerous way of doing it.)

The difference between these three org charts can be large and painful following M&As. It’s one of the key reasons why M&As have such a terrible record for delivering the value they were suppose to realise.

the high hopes and good intentions which herald the merger announcement are frequently disappointed and denied once the hard work of integration begins” (ISR — TowersWatson)

Problems in the formal organisation always have a root in the informal organisation, so this is the place to look if you want to avoid or resolve the power struggles often seen following M&A.

Here’s an example I’ve been working on recently.

A large $1BN company is the acquirer. It’s a relatively new business with fast growth fuelled by venture capital. The company it has acquired is small, well established, with a famous premium brand in its market. Its iconic founder is just as famous.

There’s a strong strategic case for the cash-rich acquirer who can use this established company as a testbed for new technology it is developing. On the other side, the older company has been struggling financially. The acquisition will give it access to funds for innovation and growth as well as strong, experienced management. It also gives an opportunity for the founder, close to retirement, to realise the value they’ve created and exit.

So far so good. But it’s not that simple.

Following completion of the deal, the formal structure is very clear. The old company is now a wholly owned subsidiary of the acquirer. It has a board, headed up by a new CEO, placed there and reporting to the CEO of the acquiring company. Various other board members have also been added. The old founder and one or two of the old guard have positions on the board but no voting rights. They hold no official formal power in the business now.

The informal org chart is a very different picture. The neat, intended structure of one company now existing within the other is not the reality in the hearts and minds of the people there.

When you look beneath the bonnet there are still two separate initiatives. On the informal org chart it’s as if the acquisition never took place. The old founder still wields a great deal of informal power and stories have emerged of unofficial information gathering and influence.

Life is understandably difficult for the new CEO who is like an outsider in the business they are trying to take responsibility for. They feel undermined by the informal power, and board meetings are tense and unsupportive. At the same time, it’s difficult to create and execute an ambitious, creative vision for the company. The new CEO’s nature is future-focussed which is what the company needs and its why they were appointed, yet the baggage of the past and present of the company is seriously getting in the way.

In situations like this you can expect a fight. The will of those holding the formal power can force the issue. The lack of voting rights and ownership can be used against the old guard to remove them from the formal organisation altogether and clear the decks for the new leadership. They can ban the old leaders from company premises. Everyone at the company can be reminded who the new boss is and that orders must be obeyed.

A fight like this will certainly crack the situation open, but it carries its own risks. A power struggle and reliance on top-down power can cause collateral damage. It can be a drain on top talent who won’t put up with being controlled in this way. Good people may leave. You can tell someone to follow-the-leader, but you can’t force them to bring their heart and motivation with them. It’s particularly risky for this particular acquirer who have built a fantastic people-centred culture. To force the issue with such violence would be a direct violation of their values, which can deeply undermine a very healthy culture.

And there’s another subtle but powerful phenomenon which will affect what happens. Time and time again, we see that until an old founder has willingly and fully let go of their informal, creative control, their successor finds it practically impossible to establish a new state of creative flow and realise a new vision effectively. Even if they are removed from the formal organisation, it’s as if there’s still an umbilical cord between the old founder and the business through which the creative juices are flowing. The cord needs to be cut so the new vision-holder can fully step into the vital creative aspect of their role.

So, how can you resolve this sticky situation without a fight?

The key for the new CEO is to firstly acknowledge that creatively speaking there are still two separate initiatives. Whilst they have assumed formal power, they have not been recruited into the informal structure of the old company. This also means acknowledging that the old founder is still the one who is the creative vision holder of the company. It might be hard to accept at first, but it’s an essential reality check if the situation is to be resolved.

Next, the CEO needs to get themselves recruited into the old founder’s initiative. This might be counterintuitive at first and feel like a regressive step, but it’s part of a process to allow the new CEO to fully step into their power.

In this case, the key to getting recruited into the informal org chart is to look at the long-standing, timeless values of the old company. Fortunately, this is something where the old founder and new CEO are well aligned. There’s a strong intent in the initiative and it’s a big reason why the CEO took the job. They need to make it clear to the old founder that they wish to honour and continue this part of their legacy.

If this conversation is authentic and the founder accepts the CEO’s offer of help, the CEO will have been able to recruit themselves into the informal organisation. You can expect this to immediately begin to ease the tension and power struggle since there is a long-term common goal on which they are aligned.

Following this, conversations can begin about a creative succession of the role of vision-holder from the old founder to the new CEO. This is a separate process to the formal process of dealing with shareholding and voting rights which has already taken place. Many people working in M&A are blind-sided when they realise that changing the formal structure doesn’t necessarily change anything in the informal organisation.

The old founder can then prepare themselves for their creative exit from the initiative, paving the way towards a happy retirement and a satisfied feeling of resolution. At the same time, the new CEO readies themselves to assume the creative leadership role on the informal org chart. Through dialogue, a moment will then pass when both parties sense that something special has passed from one to the other. The old founder will feel like they are out, and the successor knows they are in.

Another CEO I know, who acquired the Bagelman fast food chain in 2011 remembers the moment clearly. It was a full two years after the formal transaction. After revamping the outlets, the old founder surveyed a new-look shop and tenderly put his arm around the new CEO, smiled and said ‘This is really yours now.’ That was the moment the new leader felt themselves fully step into their creative power in the business. They report that after that moment, they felt a new sense of confidence, and creativity towards the future vision of the company is flowing well. There had been power struggles in the earlier days, but in the final act not a shot was fired. We can also expect the old founder to feel a sense of ease and resolution from this moment.

Back to our case study. At the point of succession, the formal and informal org charts match and become aligned to the desired state. The power struggles cease and the business can become forward looking. When the succession has completed successfully like this, others in the initiative sense it. Others naturally align themselves to the new vision, or decide it’s not the place they wish to be, in which case it’s best for all if they decide to leave.

In a business context, this type of approach can sound mystical at first. There can be a belief that business is purely rational and mechanistic. Yet businesses are human systems. Humans are emotional, not always rational, and certainly not mechanistic like robots.

But it’s no more mystical than the many rites of passage we are used to in our every day lives like weddings and coming-of-age ceremonies. A little bit of heartfelt ritual is a very natural and powerful thing. It leaves a lasting impression on those involved and those who witness it.

Family businesses often do this kind of thing very naturally. As the business passes from a leader in one generation to the next, they acknowledge that something more special than just a formal job title and some share deeds has been handed down. It’s like the flame of the enterprise has been passed from hand to hand. The moment is marked by heartfelt ceremony which helps ensure the succession is clear and complete.

It’s my hope that the leaders involved in this story will complete a succession process and remove the power struggles without violence or destroying their culture in the process. There are no guarantees, and many other complexities might come out of the woodwork, but there is a very good chance of success here.

Of course prevention is more desirable than cure. Power struggles can to a great extent be avoided if the M&A process seeks to understand and work consciously with the informal organisation. This can happen in parallel to dealing with the shares, board, money, technical due diligence and all of the other formal elements.

Here are a few tips for doing this:

  1. Start by mapping the informal org chart. Who (remember: it’s always an individual, not a group) is holding the overall vision for the two companies involved?
  2. Consider also mapping deeper levels of the informal org to notice who is holding the vision for sub-initiatives within them. The same dynamics apply to these sub-initiatives too. There’s scope for power struggles lower down the organisation as well as at the top which can can be anticipated and avoided.
  3. Acknowledge that creatively there’s no such thing as a merger. Either the two initiatives remain creatively separate but under common formal ownership, or one is intending to join the other. Do both vision-holders have the same understanding of what’s happening? You need to know this now before the power struggle happens later.
  4. If it’s a take-over, check that one vision-holder definitely wants to bring their initiative inside the other one — to become one element of achieving a larger vision of the acquirer. Don’t assume that money will persuade them — they have to want this in their heart.
  5. If the intention is for one founder to exit immediately or following an earn-out, make sure the path is set for a clean break (if that’s what they really want), creatively as well as formally. Be extremely wary of things like honorary job titles which can allow a founder to hang on and cause all kinds of mischief.
  6. Give space for the rites of passage to take place. Allow creative successions to happen, honouring the past and giving space for the future.

I’ve personally experienced many of the dynamics that play out around founders during my own 15 years as an entrepreneur. I know it’s visceral and often confusing, yet the creativity which can be unlocked when you find the way is absolutely inspirational. If you work consciously with the informal org chart, acknowledge who is holding what vision, and make sure that creative exits and successions are attended to with the same discipline as all of the formal processes, then M&As can help realise ever larger visions in the world.

It’s fascinating and a real privilege to do this kind of work. Drop me a line if you need help with an upcoming M&A or if if feels like the wheels are falling off in the aftermath of one. Don’t panic, you too can find creative flow.