By Doug Sheridan, EnergyPoint Research In Part 1 of this series, we discussed how customer defections and dissatisfaction can play very real roles in the underperformance (or outright failure) of even the most highly touted mergers and acquisitions. In Part 2, we’ll look at the different types of M&A combinations and the impacts on customers that tend to arise from each. When it comes to M&A, understanding the legacy attitudes toward customers and customer satisfaction that exist at the acquiring company relative to those at the company being purchased can go a long way in predicting a deal’s eventual impact on customers. Below is a discussion of four different types of M&A combinations and the likely risk and opportunity they can pose for customers: Type 1: High Customer Satisfaction Buys Low Customer Satisfaction Assuming the acquiring company is aware through due diligence or other means of an acquired company’s low customer satisfaction levels in advance of a deal being completed, Type 1 combinations tend to offer the best probability for actually improving customer satisfaction at an acquired company. This is the case mainly because post-deal integration usually ferrets out and eliminates the practices, offerings and/or personnel responsible for the poor customer satisfaction levels at the company being acquired. In other words, the acquired company is effectively reshaped and reorganized in the image of the more customer-oriented acquirer (who also happens to be the shot-caller). The result is improved customer satisfaction for the acquired company’s customers. As a result, we view Type 1 transactions as generally low risk/high opportunity for customers. Type 2: High Customer Satisfaction Buys High Customer Satisfaction When both companies are aware and respectful of each others’ high customer satisfaction levels, Type 2 combinations tend to produce more smooth sailing than rough seas for customers. Still, post-deal integration can offer pitfalls as the companies decide which organization’s culture and way of doing things will survive — and which will not. In the best-case scenario, the process goes swimmingly and the acquired company’s customers are as satisfied afterwards as they were prior. Should the integration process not go smoothly, however, the risk of defection of key employees and management at either, or both, companies grows. In this case, customer satisfaction levels of the newly combined organization can experience declines. Also, it’s important to note that since both companies enjoyed high levels of customer satisfaction prior to the deal, there’s less room for satisfaction levels to rise once the deal is completed. In other words, any change in customer satisfaction ratings post-deal is more likely to be downward than upward. On balance, Type 2 combinations are best viewed as moderate risk/low opportunity for customers. Type 3: Low Customer Satisfaction Buys High Customer Satisfaction On the surface, it might seem instances of companies with low customer satisfaction purchasing companies with high customer satisfaction are few and far between. In reality, it happens all of the time. In most cases, large acquisitive players — companies that long ago lost their customer focus — pick up well-regarded smaller players in an effort to their boost market share. In other cases, the target is a smaller company that operates in a different, but highly coveted, space. Either way, these kinds of combinations tend to do considerable harm to customer satisfaction at the acquired company. Why? Because the deal is usually about economies of scale/scope and cost-cutting, not customers. The acquiring company often has little interest in learning about, and even less in maintaining, the unique culture within the acquired company. Even when acquirers do intend be more nurturing than slashing, inertia usually dictates that the buyer’s culture wins out within a couple of years. Overall, we therefore see Type 3 transactions as high risk/low opportunity for customers. Type 4: Low Customer Satisfaction Buys Low Customer Satisfaction So, what are the results when two drunks attempt to hold each other up? First of all, they remain drunk. Second, they eventually tumble over — often conspicuously. The same holds for when two companies that don’t have either the understanding or inclination to properly take care of their customers decide to combine. Since neither possesses the necessary culture or knowledge to meet customer needs, they usually embrace a mix of bad practices passed on from each others’ companies. And because managements at these types of companies tend to be more comfortable cutting costs than creating value for their customers, the combined entity often produces even lower customer satisfaction levels than either of the two did prior to the transaction. In other words, -1 plus -1 equals -3. Some ugly math, indeed. In short, when it comes to Type 4 combinations, it’s high risk/moderate opportunity. As a result, customers can often expect bumpy rides. So, let’s take inventory. Of the four types of M&A combinations, only one offers low levels of risk for customers on average, while two offer high levels. When it comes to opportunity, or promise, for improved customer satisfaction post deal, only one scenario offers high levels of opportunity, and two offer low levels. Not very good odds, are they? If one were to calculate expected value to customers of the average M&A transaction, the net result would almost assuredly be a negative. And, in our opinion, it’s one of the biggest problems with M&A. In the third and final post of this series, we’ll discuss what suppliers and customers can do to mitigate risks to customer satisfaction and performance from M&A. Doug Sheridan is managing director and founder of EnergyPoint Research. This blog posting originally appeared on EnergyPoint Research’s website.