“… a study … of 300 major mergers conducted over a ten-year period … found that, in 57% of these merged companies, return to shareholders lagged behind the average for their industries.” [“Making the Deal Real,” Harvard Business Review, Jan-Feb 1998]
Mergers and acquisitions – a growing and integral component of business strategy across virtually all industry sectors for quite some time now – are increasingly being characterized as falling short of their promises. Numerous studies over the last ten years peg the “failure” rate in excess of 50 percent, with equally alarming assessments of the number of transactions which actually have diminished combined shareholder value. Stated in its simplest terms, the problem is that mergers and acquisitions are failing to deliver the full value to which the combined stakeholders of the companies involved are entitled.
The Causes
“… more mergers fail due to inadequacies in post-merger integration rather than to any fundamental failure of strategic concept.” [Booz·Allen & Hamilton, 1999]
The forces of free enterprise which are driving record levels of mergers and acquisitions -- a strong stock market, a favorable regulatory environment, and dramatic economic and technological change – are not likely to abate in the foreseeable future. Indeed, there is virtually no evidence that mergers and acquisitions are, in any practical sense, strategically ill-conceived. But, to quote a study by the Hay Group of the radical transformations in the utility industries, “A good, clear strategy is necessary, but it is not sufficient. In the new era, the single most important factor is the ability to execute.”
Experiential data has been extensively documented and analyzed. Root causes have been separated from symptoms. Specific unintended or undesirable consequences have been repeatedly identified. What has emerged is a body of knowledge and opinion dominated by the notion that implementation is the unilateral culprit.
Specifically, here are ten of the most frequently cited causal factors contributing to less than optimum results emanating from mergers and acquisitions:
q Failure to include workplace “culture” in the due diligence phase.
q Ineffective and poorly timed communications.
q Poorly conceived and/or executed strategies for employee retention.
q Private agendas driving the reassignment of personnel.
q Weak planning and slow decision-making (regarding integration matters).
q Inattention to the short-term realities of loss of individual productivity and performance.
q Management denial of the significance of the impact on individual employees.
q Over-zealous attention to internal issues at the expense of maintaining or improving levels of customer service and confidence.
q Visible lack of alignment of the senior management team regarding post-merger strategy and/or operations.
q Visible lack of focused ownership of the success of the business integration process.
Lessons Learned & Applied
“…organizational and cultural problems are more likely than financial factors to sink a merger.” [Bureau of Business Research study of the CFOs and other top financial executives of forty-five Forbes 500 companies, 1996]
There are five key principles that appear to be most critical in achieving the results upon which a merger or acquisition is predicated:
v Aggressive Planning. Optimum results demand quick and decisive action, but only while simultaneously assuring that critical priorities – often unique to each transaction -- have been established. In the realm of business integration, “Doing the right things (first)” takes precedence over “doing things right.”
v Comprehensive Analysis. Value-based initiatives in business integration cross the entire spectrum of strategy, process, technology, and people. Focus on certain specific areas (e.g., integration of technology-based operating systems) without appropriate consideration of the potential interaction with others (e.g., workforce retention) often leads to less than optimum results.
v Self-Attainment. Long-term value creation is dependent on the active involvement of company personnel in the business integration process. Priority must be given to creating the highest levels of workforce “buy in,” company-wide communications effectiveness, and collaboration in every facet of business integration.
v Competent and Effective Team Management. Successful business integration demands the highest levels of competency in project management and facilitation skills. Most work output logically involves teams of subject-matter-expert employees, as well as outside advisors and specialized contractors, many of whom have never worked before together. Independence, objectivity, know-how, and trust become crucial to such projects.
v Entitlement. The level of success achieved in most business integration efforts is rarely the level to which the stakeholders (shareholders, management, employees, and customers) are actually entitled. Any organized approach to business integration, therefore, demands the highest levels of focus on planning, prioritization, and follow-through efforts in operations improvement.
Methodology Framework
“Implementation is a harder act than the doing of a deal.” [Juergen Schrempp, CEO of Diamler-Chrysler, July, 2000]
The complexities of implementing mergers and acquisitions clearly render the maximization of shareholder value at risk when businesses combine. It has become well accepted that the critical factor in the successful consolidation of businesses is the integration process deployed. The process drivers that count are actually relatively straightforward:
1. An unwavering focus on specific merger/acquisition business objectives;
2. Giving as much, if not more, attention to “soft” issues (impacts on people) as “hard” issues (direct impacts on financial measures);
3. Prioritization of actions; and
4. Speed.
A general methodological framework can be described in three phases.
Phase I: Assessment |
Phase II: Implementation |
Phase III: Continuous Improvement |
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Phase I: Assessment |
An integration project should begin by assigning a senior, highly experienced team to an intensive (typically, no more than four weeks in duration) Assessment Phase focused on the development of an Integration Plan appropriate for the organization. The assessment should focus on four critical areas -- Merger Strategy, Business Processes, People, and Technology -- incorporating efficient data gathering methods, and including interviews of key management personnel. Experience guides the team’s analysis, leading to not only the identification of key required initiatives, but also the crucial prioritization of those initiatives.
The ideal result is a specialized, comprehensive, results-driven plan:
n Prioritized issues and tasks and their impact on the integration. n Risk identification and assessment for all issues and tasks. n Specific merger objectives with linked measurements and targets. n Recommended makeup of Integration Cross-Functional Teams (CFTs). n Roles and responsibilities of CFT members. n Early identification of recommended outside resources (as appropriate). n Timelines (starts, milestones, completion dates, etc.). n Cost estimates (where appropriate).
The Integration Plan is reviewed with Senior Management, at which time a decision is made to proceed with implementation of the Plan (Phase II).
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Phase II: Implementation |
The plan implementation begins with the formation of the CFTs and appointment of team leaders that will manage the integration to its completion.
A “Managing CFT” meets frequently and on a regular basis, as well as ad-hoc. Individual CFT Team Leaders should be held accountable for assuring that progress is achieved; that any and all barriers to progress are identified and addressed effectively; and that contingencies are systematically resolved. The Managing CFT provides Senior Management with weekly progress updates, and presents for resolution and action any critical issues that may have a material negative impact on the goals and milestones established in Phase I.
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Phase III: Continuous Improvement |
Business integration offers a unique opportunity for operations enhancement and performance improvement. The organizations involved are already engaged in de facto change and CFTs have been actively engaged to, among other things, reconcile and leverage combined best practices. The purpose of this Phase is to properly position those activities which represent the best opportunities to harvest the leverage uniquely available because of the integration.
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