Charles F. Kalmbach
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PDF Help Last year witnessed the greatest rush of merger and
acquisition activity in history. The number of deals averaged 200 per week, the highest ever. The total dollar value of mergers reached $2.5 trillion, more than double the previous record. The year contained a high number of
heavyweight matches, producing the seven largest deals in history, including
Exxon-Mobil, Travelers-Citicorp, and others that left the mouths of spectators
agape.
While deal volumes and values make for happy investment
bankers, consolidation presents serious challenges to executives. Accenture
recently completed a survey of 100 senior executives involved in acquisitions
valued at $500 million or more that closed between 1993 and 1998. The research
showed that only 66 percent of acquisitions met the initial financial and
strategic expectations of the corporate parents, and a mere 12 percent became
true high performers.
Facing high stakes and long odds, companies considering
mergers are looking for practical tools and insights into the merger and
acquisition process—anything to raise performance. One survey finding was that
companies need to tailor their post-merger integration approach to reflect the
character of the deal.
Three Kinds of Deals Not every acquisition is the same. Apart from traditional
deals driven by economies of scale, mergers and acquisitions today can be
sorted into three broad types:
- Skill deals. Skill-driven acquisitions are undertaken
primarily to gain new technologies or know-how. Recent skill deals include
America Online-Netscape and DuPont- Pioneer HiBred. About 30 percent of survey
respondents had undertaken deals to acquire skills.
- Cross-border deals. Acquisitions made outside of one 's own
geographic borders are generally made to give greater global scope or scale.
The recent Thyssen-Krupp merger in automotive components, for example, brought
together Thyssen's Budd unit, a US company with most of its manufacturing
operations across North America, Britain, and Germany, with Krupp's unit, which is strong in South America, France, and other parts of continental Europe.
Another 30 percent of survey respondents had undertaken cross-border deals to
achieve greater global power.
- Cross-industry deals. Acquisitions made outside one's own
industry are now often undertaken to redefine the business. Amazon.com made
such a deal when it bought an online auction business, broadening its business
definition beyond books. In the same spirit, banks are buying software
companies and insurance houses to position themselves for a world of electronic
commerce and integrated financial services. Chemical companies are expanding
their scientific reach by acquiring pharmaceutical and agricultural biotech
companies. Cross-industry deals today are not aimed to achieve a diversified
portfolio, but rather to move into converging or immediately adjacent industries. About 40 percent of our survey respondents had taken part in
cross-industry deals.
Tailoring Integration to Deal Type The survey shows that success is most likely when the approach to post-merger integration was tailored to the type of deal. How did
the most successful survey respondents plan and carry out integration?
Skill Deals: Focus on People
A skill deal will only be successful if key people are retained. As
John Chambers, chief executive officer of Cisco Systems, noted: "In our
industry, you are acquiring people …We pay between $500,000 and $2 million per
person in an acquisition, which is a lot. So you can understand that if you
don't keep the people, you've done a tremendous disservice to your shareholders
and customers.
Survey results showed that skill deal winners tend to:
- Defer integration planning until after the deal is
completed. This seems to be necessary because human resources issues are the
hardest for companies to understand without close and repeated contact with the
acquired company and its people, which can only occur after the merger has
occurred.
- Perform a detailed cultural assessment. Undertake an
assessment of both the acquired company and the acquirer to better plan
cultural integration.
- Recognize that employees can be "key" for one of two
reasons, and must be motivated differently. Some employees are absolutely vital
to the long-term future of the organization. Perhaps because they are also
likely to be mobile and in demand elsewhere, they will assess the merger for
its impact on their own status and prospects. Winners in the survey spent extra
effort persuading these stars that they would have the resources necessary to
advance their innovations and products, and that they would have more effective
support—administration, customer service, etc.—than if the company had remained
independent. Other employees are important primarily during the transition itself, to manage processes, provide continuity with customers, and so forth.
For these employees, money can make all the difference and winners spend
generously.
Cross-Border Deals: Stress Strategy and Leadership
Cross-border deals present cultural challenges and require that leaders
exert their influence over a broad geographic expanse without necessarily being
there in person. Winners in cross-border deals tend to:
- Spend extra effort on strategy formulation. When
consolidating across borders, companies need more time to refine and confirm
assumptions (consumer preferences, competitor strengths and reactions,
regulatory environment, etc.).They also look for value beyond cost reduction
(which may be limited by different countries ' legislative restrictions and tax
codes),such as through added products, supplier leverage, or distribution
channels.
- Integrate top management quickly. Winners in cross-border
deals use a "big bang "approach to leadership consolidation, putting forward a
new leader slate quickly (almost always within the first six months) and in a
single move rather than through iterative announcements.
- Put in place a structure to support cross-border leadership.
Cross-border winners tend to have a full-time and experienced integration
director and team, to use a corporate integration methodology, to consolidate financial reporting (a crucial element of remote leadership and control), and
to spell out a few core principles to steer the integration.
Cross-Industry Deals: Stay Flexible
A cross-industry deal differs from most other acquisitions, which are
essentially takeovers of one industry player by another, stronger player in the
same industry. Cross-industry deals are more like marriages of adjoining but
different businesses, intended to produce a new and more comprehensive business
entity. Success in cross-industry deals requires flexibility. Winners tend to:
- Modify their integration approach over time. Winners often
plan their integration early, during deal making or even strategy planning.
Then, however, they are twice as likely as same-industry winners to adjust their plan midstream.
- Pick and choose best practices. Cross-industry deals seldom
entail a highly successful company taking over a less successful one. Blending
two companies from different businesses makes choosing best practices more
challenging: companies often must select between relevant and irrelevant,
combining business pieces and practices in unexpected ways to deliver a new
value proposition. This naturally demands a more fluid approach.
In post-merger integration, one size does not fit all. Companies can improve their odds of success by adapting their approach to integration to fit the type of merger they are undertaking.
Charles F. Kalmbach is a partner in the Accenture Strategy
practice. He is based in Chicago.
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