The Merger Mystery

By Jim Collins

In the early 1980S, Burroughs Corp. was desperately seeking a way to get back in the game against IBM. Burroughs had fallen so far behind that it found itself utterly dwarfed by its larger rival. Burroughs' solution? Undertake the then largest merger in computer history: buy Sperry Corp. and create a new company--dubbed Unisys--as a single-step leap to greatness.

Despite achieving encouraging results in the first few quarters post merger--results easy to attain with one-time cost cutting but hard to sustain--Unisys' cumulative net income in the decade after the merger failed to break even. If you had invested $1 in Burroughs at the end of 1985, that $1--right smack in the middle of one of the greatest stock-market booms in history--would have lost nearly half its value over the subsequent decade. And while Unisys has returned to profitability in recent years, the merger failed to produce a great company.

We should not be surprised. During our research into corporate performance for the book Good to Great, a member of my research team spent 10 weeks focusing on a single question: What role do big mergers and acquisitions play in creating exceptional results? He uncovered a striking fact: not a single company that qualified as having made a sustained transformation in our study ignited its leap with a big acquisition or merger.

Moreover, comparison companies--those that failed to make a leap or, if they did, failed to sustain it--often tried to make themselves great with a big, hairy audacious merger or acquisition. It never worked. They failed to grasp the simple truth that while you can buy your way to growth, you cannot buy your way to greatness. Two big mediocrities joined together never make one great company.

That said, a number of the good-to-great companies did undertake significant acquisitions, but--and this is the key point--they did so in circumstances that clearly differed from those of the mediocre comparisons. First, they never tried to use a big acquisition to ignite a breakthrough but attempted to accelerate greatness only after (usually years after) they had already achieved a breakthrough. Second, their best acquisitions met three litmus tests: 1) the acquisition must accentuate what the company can do better than any other company in the world; 2) the acquisition must enhance a powerful pre-existing economic engine; and 3) the acquisition must fit the driving passions of the company's people.

The ultimate success of the Kmart-Sears merger will depend in large part on whether Kmart has already made a leap to greatness before the merger and, equally, whether acquiring Sears meets these three tests. While I am not an expert on Kmart, its recent exceptional results indicate that it might be a sustained good-to-great case in the making. Yet at the same time, we should be mindful of the lessons of history. No single step, no matter how big, can by itself make a company great.

Jim Collins is author of Good to Great: Why Some Companies Make the Leap ... and Others Don't. He operates a management research laboratory in Boulder, Colo.