Five pitfalls in the merger and acquisition process

In the IT industry, there are two fundamental ways for a service provider to expand his or her business: organic growth and acquisitions.

The former requires investing in people and resources to add technical knowledge, expand geographically or both. The latter requires these investments plus much more. If you go the acquisition route, be certain you know what you're doing. You must thoroughly assess your business capabilities and goals to devise the right strategy. It is easy to make a costly mistake from which it would take years to recover -- if you recover at all.

If you opt to grow through the merger and acquisition process, here are five pitfalls to avoid:

1. Misreading the business impact
Before acquiring any company, make sure you understand the impact the addition is likely to have on the overall business -- both financial and non-financial. Does the target company fit into your long-term strategy? Is the culture a good fit, and will the operational methodologies of both companies blend well? You need to anticipate how customers, partners and employees will react. Will there be any resistance? You need a clear grasp of all the potential acquisition impacts. Guessing and wishful thinking won't get you far.

2. Not multiplying correctly
The conventional wisdom in mergers and acquisitions is that 1 and 1 must equal 3; meaning the value created by the merger should be greater than the sum of the two companies had they remained separate. But in reality, 1 and 1 in a merger should equal 11. If you're going through the time, effort and risk of structuring the deal and executing the integration, you should be able to count on a significant return. That may seem crazy, but think about it: What's the point of an acquisition if you don't expect substantial dividends?

3. Overlooking egos
Whether an acquisition succeeds or fails has a lot to do with the egos involved at all levels of the organization. A vice president of sales, chief engineer or COO who resists change or power sharing can poison others on the staff. Beware of employees who want to be king when what you really need is council members. Egocentric personalities end up leaving or causing others to leave, but not without first causing damage. So get to know the characters and weed out those who might work against moving forward once the acquisition is done. The key is to be very realistic about who shares your vision and wants to be part of the future -- and who doesn't. In case of the latter, all options are on the table including the "golden handshake" and other forms of separation. The smart move is to deal with these issues proactively and move on.

4. Not anticipating what comes next
A common mistake shared by buyer and seller alike is to get so caught up in making the deal that they forget what comes after. The merger and acquisition process can be exciting --especially for entrepreneurs who are wired for risk -- but keep in mind that signing on the dotted line is just the beginning. The hard work of executing the integration, blending company cultures and absorbing new customers follows closely behind. Many an acquisition has gone south because the acquirer focused too much on the transaction and didn't prepare for what came after.