The end of the century is witnessing a radical redrawing of the corporate map. Mergers, acquisitions, joint ventures, divestment, restructuring, outsourcing, virtual businesses and electronic businesses are the engines driving this transformation.
Because of the sums of money involved, acquisitions and mergers have come under close scrutiny. Many commentators put a negative spin on their findings. They point out that only around half fulfil their objectives and only a quarter create shareholder value. Our own survey Colouring in the Map: Mergers and Acquisitions in Europe, just published, reveals an alternative interpretation.
We find that achieving economies is the main objective in only 11% of transactions. When looking at these transactions, around two thirds are successful. Twice as many again create significant economies even if this was not the main aim.
In our survey we find the primary motives for transactions are increasing market share, extending geographic presence and entering new markets. Measuring success against these objectives, we find managers consider over 30% of transactions very successful. They consider 50% are quite successful.
We were interested to compare the successful and unsuccessful transactions. Our findings indicate that it is possible to manage many of the causes of under-performance. By adopting best practices we believe even more transactions could be successful and generate significant value.
We find financial buyers and conglomerates are more successful at creating value than organisations seeking value from synergies. We also find, perhaps unsurprisingly, that failure is more frequent where integration is more complex. Judging by the evidence, integration-the creation of a new entity by bringing together organisationsDis one of the most challenging and riskiest activities an enterprise can undertake.
By contrast, we also find that successful integration is amongst the most powerful generators of value available to organisations. The challenge is how to realise this potential consistently in more transactions. Our research and experience shows this is possible by more and better anticipation, investigation and management throughout the integration lifecycle.
Understanding the integration lifecycle is central to effective and timely action. We use eight stages to model this lifecycle. They derive from the changing relationship between the acquirer and the acquired.
The first two stages cover the period before the target is aware of the acquirer’s intentions. Organisations define objectives and the strategies for achieving them in the “conceive” stage. In the “search” stage they identify the target and create the business case for acquisition. When reacting to an opportunity the “conceive” stage frequently follows identifying the target. Typically, when reacting to opportunity, there is less time for investigation, assessment and planning.
It seems extraordinary that a significant proportion of mergers and acquisitions take place without clear measurable objectives. We recognise motives are sometimes political or emtional to remove a threat or dominate through size. However, we find success is more common when acquirers have well defined, measurable objectives. Without formal objectives, it appears management gives insufficient attention to problems of creating or protecting value.
Plans during this phase are necessarily based on assumption. To a greater or lesser extent this remains true until the deal completes. Assumptions involve uncertainty and therefore risk. Successful acquirers recognise and use this to guide and focus their approach to the deal. At each stage they review risks and decide whether to proceed. Most successful acquirers, we found, were more willing to walk away from a deal at any stage if it appeared unlikely objectives would be achieved
The next three stages cover the period from declaring one’s intentions to completing the deal. We call these stages “offer”, “discover” and “close”.
The first of these, the “offer” stage, includes structuring the deal. It is at this stage one gains first access to the target and dataroom. At its end, there should be conditional agreement of exclusivity for the next stage. This stage is critical to emerging relationships as first contact is made with the target’s people. It is also the point where successful acquirers start planning for integration.
The “discover” stage typically involves due diligence activities. Stakeholder approvals, including those of regulators, are sought. The deal, financial arrangements and overall design and plans for the new organisation are prepared. It is at this stage that the new management team starts to form through developing plans for the future together.
The destabilising effects of a deal on an organisation are often underestimated. If acquirers manage these destabilising effects, they can be a powerful catalyst for beneficial change. If they do not manage them, they almost inevitably lead to failure. Successful acquirers work to identify and remove the causes of stakeholders’ resistance and persuade key personnel to commit to the new entity.
We find successful acquirers use the “offer” and “discover” stages to start planning integration. They work extensively with staff from the target, allowing them to shape the emerging entity. This improves the quality of information available for planning. It also gives plans credibility and helps reassure the target’s people. We also find a conservative approach to planning timescales, costs and benefits reduces the chance of failure. There is a natural bias amongst acquirers, once they have declared their intentions, to talk up the deal. The more successful ones, however, are careful not to be seduced by their sales pitch. They cost in contingencies for uncertainty and risk.
Planning and design pre-deal are usually not straightforward. This is particularly so for hostile bids or auctions. Even where mutual consent exists, competitive pressures and the possibility of not completing may restrict disclosure and cooperation. These are reasons for more planning – not less.
The “close” stage is when the deal completes. This is the launch of the new legal entity. Political and emotional goals can trap senior management into believing they have achieved their goals once the transaction completes. Advisors, who receive their rewards at completion rather than when benefits are realised, can encourage this point of view. For successful acquirers, completion marks the birth of the new entity. They recognise the need for careful nurturing after the deal to secure sustainable value.
It is possible to plan before completion, but only after completion can transformation begin. The period after completion of the deal has two stages. These we call the “mobilise” and “integrate” stages.
Successful acquirers typically use the period immediately following the deal to “mobilise” the integration effort. They construct detailed designs and plans for implementation before integration starts. They also equip their people with the understanding and skills they need to fulfil their roles. This applies to those who will maintain existing business in the interim as well as those responsible for integration. Because of the complexities, we find it is advantageous to divide the integration programme into manageable projects. At the same time, managing dependencies and interfaces between projects is necessary to avoid fragmentation.
The successful acquirer will typically pay as much attention to maintaining existing business in the interim as they do to the integration. They often create a separate team, with specialist skills, to implement the required changes. Those maintaining ongoing operations are their client. They will take over control of operations as the integration team delivers them. Many successful acquirers use the integration team for bringing on their best young talent. They recognise that few other areas will expose them to the breadth and depth of issues critical to the success of their business.
During integration there is a significant increase in workload over that required for day-to-day operations. Integration also requires skills that would not normally be available unless an organisation is continually undertaking this type of activity. Successful acquirers often make use of outside specialists to help integration as well as using them in the period before completion.
Provided one has taken care with the overall plans and design for integration, it is beneficial to implement changes with a quick payback first. Early demonstrable success is one of the best persuaders and motivators available. Early benefits can also help fund longer term transformation. Successful acquirers employ flexible tactics during integration while remaining firmly focused on the goals. If benefits are intractable or impossible to realise in one area, moving on avoids frustration and loss of momentum.
The eighth stage of the lifecycle is “review”. This stage tracks the delivery of the integration programme until implementation is complete and the benefits secured. We found formal reviews were carried out in less than half of all transactions. They were more common in organisations who regularly undertake deals. Typically, all reviews measure some of the costs but few organisations measure the complete costs and benefits. However, those that do are also more successful.
Despite all of these measures, we did find examples of organisations with well-developed integration processes, who undertake transactions continuously, that sometimes fail. Occasionally this happens because of circumstances that truly are outside their ability to control. More often, however, they arise because interpersonal relationships between the parties breakdown.
We found that acquirers rarely have a process for building positive relationships. Poor relationships can upset even the best laid plans. They certainly add to costs or diminish benefits if not causing outright failure. We found much anecdotal evidence that poor relationships lie at the heart of most deals that fail or did not fulfil expectations.
There are many ways for wrong attitudes to destroy opportunity. Arrogance leads to believing only we know what is best. Lack of respect for the target can lead to not listening to or acting on their views. Insensitivity can lead to careless words and deeds that sour relationships. Selfishness prevents sharing opportunities and benefits. Meanness prevents making the investment needed to realise the full potential. Lack of trust provokes defensiveness. Lack of involvement causes resistance. These effects are often instantaneous forming at first contact. Very often it is then impossible to regain trust.
Without shared vision, common purpose, collective responsibility, mutual benefit and a sense of caring for each other, it is unlikely that the deal will create sustainable value. We found the most successful acquirers are particularly careful to manage how relationships develop during the lifecycle.
Differences in culture are often blamed when problems of attitude and relationships arise. Differences in culture often cause problems, but we find these problems are not inevitable. Nor is it necessary to homogenise cultures to produce success. We find trying to force cultural change is a frequent cause of mass defections and resistance. On the contrary, an ability to exploit cultural diversity is a powerful way to create value. The more successful acquirers are sensitive to what makes individuals tick. They actively consult the target and frequently adopt their suggestions for integration.
Our experience, working with our clients, is that it is possible to enhance the risk/reward ratio of corporate transactions. Failure arises from unclear objectives, complexity, inadequate processes, lack of investment, under-resourcing and poor attitudes when dealing with people. By addressing these at every stage it is possible to manage most of the causes of failure.
The current level of transaction activity is a response to changes in our business environment. These changes are irreversible. We owe it to ourselves and each other to seize the opportunity to create value as well as survive. The majority of transactions occurring now are successful on their own terms. We look forward to many more that realise their full potential.