Alan Martin and Ulmar Riaz
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In the automotive components industry, merger and
acquisition activity continues at a tear. Deal volume rose almost fourfold
between 1988 and 1997, with worldwide value reaching $30.4 billion last year.
This pattern of acquisition and consolidation is driven by powerful forces:
components manufacturers want to achieve the benefits of scale and global reach
and to offer the broader system solutions that automakers increasingly demand.
For many years, aggressive acquisition and consolidation
delivered superior results. Between 1992 and 1997,companies categorized as high
acquirers (averaging one acquisition per year during those years or achieving a
cumulative disclosed acquisition value above $600 million) substantially
outperformed low acquirers, achieving an average annual total shareholder
return of 10.2 percent compared to -5.1 percent for low acquirers.
Now the link between acquisition volume and performance is
weakening. Several recent large acquisitions have had trouble meeting market
expectations. High acquirers as a group are starting to underperform low
acquirers on several indicators including median total shareholder returns,
return on assets (ROA),and earnings before interest expense and taxes (EBIT).
What is causing the change—and what does the change portend
for managers in this or any industry where acquisition is still the driving
force yet successful acquisitions are proving more difficult to achieve?
Diagnosing the Troubles Acquisitions are complex, and poor performance tends to
have many causes. Nonetheless, Accenture research points to three areas of
increasing difficulty:
- Larger, more complex deals. The nature of mergers and
acquisitions is changing, putting particular pressure on the integration
process. Deals are simply bigger in dollar terms, and are more expensive for
the acquiring company. They are often made outside the company's core business,
and they often cross borders and involve global organizations, which introduces
substantially different integration challenges. Often, the acquired company is
already a strong performer or is an acquirer in its own right. Finally, in many
cases today, companies are acquiring multiple companies as part of a single
strategy.
- Rushed due diligence. Companies are often rushed through the
due diligence process and so lack time to adequately understand the potential
for operational synergies and cultural compatibility. This is especially true
when a large competitor is acquired and multiple bidders are involved. Then,
the due diligence process is often foreshortened and confined to data rooms.
Unable to access the target company's senior management team and engineering
staff or to tour manufacturing facilities, acquirers can find themselves
unprepared for what lies ahead.
- Serial acquisition at a too-rapid pace. Successful
consolidators usually pause after an acquisition, taking six to 18 months to
integrate their purchase, reduce costs, and locate synergies across the new
units. But in this industry, with companies coming up for auction and customers
continually demanding more scale and scope, consolidators lack the luxury of
long periods between acquisitions.
Managing M&A Complexity The reality for automotive components manufacturers is that
easy acquisitions have all been made, yet the consolidation process will likely
continue apace for another five to 10 years. To succeed in this difficult
environment, what will companies have to do?
- Adopt a flexible approach to integration strategy. Many
companies have not yet realized that the new challenge of integrating major
acquisitions requires consideration of different organizational and operating
models. It is no longer good enough to do business as usual and assume that the
way we absorbed the $200 million acquisition last year will work for the $5
billion monster just acquired. The strategy for integration needs careful
consideration of a range of options from "absorb" at one end to "preserve" at
the other end (the holding company model). In between lie a multitude of
"blend" options taking the best of both sides. There is no prescriptive answer.
Managers must look at the various options and evaluate the overall benefits
versus speed of implementation (speed is money). Companies need to make sure
that all alternatives have been evaluated and that they clearly understand why
a particular integration strategy is being adopted.
- Find a way to generate revenue from synergies. When
companies merge, cost synergies are relatively easy to quantify pre-deal and to
implement post-deal. But revenue synergies are more elusive. It is hard to be
sure how customers will react (in financial services mergers, massive customer
defection is quite common),whether customers will actually buy the new,
expanded "total systems capabilities," and how much of the company's declared
cost savings they will demand in price concessions (this is common in
automotive supplier M&A where the customers have huge purchasing power over
the suppliers). Nevertheless, revenue synergies must be identified and
delivered. The stock markets will be content with cost synergies for the first
year after the deal, but thereafter they will want to see growth. Customer
Relationship Management and Product Technology Management are the two core
business processes that will enable the delivery of revenue.
- Establish a program office to manage the integration process
day to day. Given the need to consider new integration strategies and operating
models, most firms now engaged in major deals are appointing a full-time
Integration Program Management Office. The structure, size, and authority of
this group varies between companies but the purpose is the same—to ensure
consistency of actions, accuracy of information, speed of implementation, and
an "early warning" flag when things go off-track. The Program Management Office
also has a major role in accumulating integration know-how such that when
another deal is done in the future there is less need to re-invent the wheel.
Managers in the automotive components industry are not
unique in the challenges they face. Other industries also face the challenges
of a mature and complex consolidation process. Acquisition and success once
went hand in hand; now success requires the development of new corporate
skills.
Alan Martin is an associate partner is the Accenture
Automotive and Industrial Equipment Strategy practice. He is based in Boston.
Umar Riaz is a senior manager in the Accenture Automotive
and Industrial Equipment Strategy practice. He is based in New York.
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