Success in Mergers and Acquisitions (PDF)

Success in Mergers and Acquisitions Lessons from M&A anlysis since 1967 "Those who don't know history are destined to repeat it."* Dr. Nick Milner 2 February 2010 *Edmund Burke  2 © Milner LLP 2010 Contents 1. Summary............................................................................................................................................3 2. Introduction ......................................................................................................................................4 3. Success..............................................................................................................................................7 3.1 People ...........................................................................................................................................7 3.1.1 Remember the Human Factor ...............................................................................................7 3.1.2 Manage Relationships............................................................................................................7 3.1.3 Manage Change.....................................................................................................................7 3.1.4 Manage Expectations.............................................................................................................8 3.1.5 Eliminate the Winners and Losers polarisation......................................................................8 3.1.6 Rethink incentives ..................................................................................................................8 3.1.7 Socialise the people ...............................................................................................................9 3.1.8 Communicate with the employees .........................................................................................9 3.2 Processes .....................................................................................................................................9 3.2.1 Ensure Strategic Consistency................................................................................................9 3.2.2 Build Shared Values...............................................................................................................9 3.2.3 Prepare a detailed merger plan ...........................................................................................10 3.2.4 Analyse Future Needs..........................................................................................................10 3.2.5 Agree what should be integrated .........................................................................................10 3.2.6 Establish a strong interface team.........................................................................................11 3.2.7 Focus on the major issues ...................................................................................................11 3.2.8 Establish the new company identity.....................................................................................11 3.2.9 Keep the transfer period to a minimum................................................................................11 3.2.10 Integrate Selectively...........................................................................................................11 3.2.11 Differentiate and De-average.............................................................................................12 3.2.12 Achieve “Quick Wins”.........................................................................................................12 3.3 Technology..................................................................................................................................12 3.3.1 Integrate the Systems ..........................................................................................................12 4. Failure...............................................................................................................................................13 4.1 People .........................................................................................................................................13 4.1.1 Don‟t be insensitive towards people. ...................................................................................13 4.1.2 Beware of who and how many are leaving ..........................................................................13 4.1.3 Corporate Culture Clashes...................................................................................................13 4.2 Processes ...................................................................................................................................14 4.2.1 Don‟t Lose Control ...............................................................................................................14 4.2.1 Avoid Opportunistic Deals....................................................................................................14 4.2.2 Ensure adequate Partner Evaluation ...................................................................................14 4.2.3 Poor Implementation............................................................................................................15 4.3 Technology..................................................................................................................................15 4.3.1 Don‟t let long term R&D slow down .....................................................................................15 5. Discussion .......................................................................................................................................16 6. Conclusions.....................................................................................................................................18 7. References.......................................................................................................................................19 8. Bibliography ....................................................................................................................................21 9. Short Case Studies ........................................................................................................................22 9.1 Crocker Bank ..............................................................................................................................22 9.2 Ciba-Geigy ..................................................................................................................................22 9.3 Asea/Brown Boveri......................................................................................................................23 10. About the author ..........................................................................................................................24  3 © Milner LLP 2010 1. Summary This report reviews the factors which affect the success and failure of mergers. The information is taken from the academic and industrial literature since 1967. The review focuses on the post acquisition, merger phase. To be successful, the merging companies should:  Be explicit about how the merger fits into the corporate strategies of the two companies and make sure those criteria remain visible throughout.  Plan the integration in detail.  Have clear and tight management control of all the interfaces.  Communicate clearly, honestly and frequently to the whole work force to set expectations. Management credibility will depend on whether it does what is says.  Do not try to simply merge the two companies but build a new company, with an identifiable brand, logo and name.  Build on the best practices and approaches of both companies to create the new company and position those as the New Company‟s procedures. This will help to avoid the winners and losers syndrome.  Focus on a few major issues which deliver the major synergies and cost savings. Detail can distract the senior management from the key task.  Move quickly. Speed is one way of reducing resistance. Remember, most mergers take twice as long as expected. Therefore integrate selectively.  Spend a time to make the systems inter-work quickly and plan a fuller integration later.  Above all, remember you are dealing with people. They are the resource which will make the merger work at every level and need to be treated with respect and sensitivity. Mergers across geographic boundaries always create the potential for extra cultural clash. US and UK mergers often appear to be easier because of language and business process. However there are still national differences  4 © Milner LLP 2010 2. Introduction In the “depression” year of 2009, the top 10 M&A deals all exceeded $1billion in value (Brodkin (2009)). To ensure those deals deliver the benefits expected will require very careful implementation. So it seems timely to review the all literature on mergers since 1967 from academic and consultancy sources and determine what makes mergers a success or failure. The literature often uses the term “merger” interchangeably with the “post-acquisition integration process”. In some cases, the literature also reports that merger management has much in common with JV management (Norburn and Schoenberg (1990). The emphasis in this report is on what makes mergers work (in the post acquisition phase) and includes the relevant literature on mergers, acquisitions and JVs. The success rate of acquiring and merging companies is between 40% and 50% measured over a range of criteria (Kitching (1974), Egon Zehnder (1987), Norburn and Schoenberg (1987), Bishop and Kay (1993). The purpose of this review is to extract the key themes which are associated with successes or failures, to be used as background to the BT/MCI merger discussions. Several authors state that there is no merger manual with a set of do’s and don’ts (Ernst and Young (1994), Sudarsanam (1995)) because no two mergers are the same and no two companies are the same. However, this report shows that there are recurring issues which are key to improving the likelihood of success in a merger. There is evidence also that there is at least an order or approach if not a detailed methodology (Mitchell (1988), Coopers and Lybrand (1993)). Experienced integrators Normal company management Very clear initial ideas Inadequate tactical preparation Act immediately Wait and see Continuous communication No special communication effort Determined follow through Half hearted integration Realistic objectives met Drooping profits and Dissatisfaction Good prospects for success High chance of failure Figure 1.Achieving objectives cannot be done as a sideline  5 © Milner LLP 2010 Mitchell‟s (op cit) flow diagram shows the skill sets and activities which he said indicated the likely success failure making an acquisition work. Ernst and Young (1994) have a slightly different approach and state that there are three elements to consider in a successful merger - people, processes and technology/systems. People Processes Technology (Information & Process) Figure 2. Point of integration in a merger Source: Ernst and Young (1994) A merger must have a plan but “what issues should be addressed in the plan?” write Ernst and Young (1994). They believed that “the performance of any company rests squarely on the closely interrelated factors - its processes, people and technology. A successful strategy must address all three.” (P220) The report has been divided into two parts.  Success - i.e. What should a Company do to maximise success  Failure - i.e. What should a Company avoid doing to avert failure Within these sections, the key points in the literature have been sub-divided into;  People  Processes  Technology as described by Ernst and Young (1994). The main points are brought together in the Discussion which includes additional material from the literature.  6 © Milner LLP 2010 Finally the Conclusion, whilst accepting that it is not possible to write a definitive merger manual, extracts key points from the literature and presents a table of Do‟s and Don‟ts.  7 © Milner LLP 2010 3. Success 3.1 People 3.1.1 Remember the Human Factor In the middle of merging companies, with all the complexities of organisation, business process, budgeting etc. it is often easy to be insensitive to the human factor. Sudarsanam (1995) reviewed the literature and noted that “the human factor emerges as a key dimension of both pre-acquisition planning and post-acquisition management.” Hunt et al (1987) studied 40 companies in the UK and US and listed the human factors most often associated with success. (%) Interface between companies perceived as well managed Clear Vision Communicated Incentives and benefits to target staff improved 77 68 68 Perceived business benefit to acquirer 64 Honourable rhetoric 59 Buyer Management earns credibility and respect 55 Table 1. Factors associated with successful acquisitions Source: Hunt et al (1987) Kristie (2009) notes that the human factor is present at every stage of doing and implementing a deal, and what is important to each individual varies significantly. 3.1.2 Manage Relationships Kitching (1974) in his study of 22 companies said the most successful acquisitions seemed to be distinguished by three characteristics in the relationship between the companies.  Firstly, the parent company appoints a top executive to “ride herd” immediately after the acquisition. The executive not only sets the directions but is sensitive to the local conditions.  The second characteristic is that the reporting procedures and relationship between people in the new merged company are made clear.  Finally, the emphasis is placed on information reporting rather than on budgets. Norburn and Schoenberg (1990) agree that one of the means of building success is the clear and early thought about the appropriate form of management hierarchy and control structure (p86). In their review, they call the issue of hierarchy and control Sovereignty. 3.1.3 Manage Change “In the time period immediately following the merger, the quality of management talent determines the success or failure of the venture, and it is this time that careful planning allows the synergy potential to be released, if it is to be released at all”  8 © Milner LLP 2010 Kitching (1967) (p94). The managers implementing the merger plan and building the merged company are managing change. A successful company prepares its people to do this effectively so that the top level objectives can be achieved. 3.1.4 Manage Expectations Mergers can be won or lost before any real integration work ever begins write Pritchett and Associates (1995). They advocate that a company should move swiftly and purposefully to shape opinions and expectations. Following the first announcement from top management, which they note usually puts heavy emphasis on the merger‟s appealing aspects, comes the beginning of the reaction from media, the industry and staff who start looking thinking about the downside too. It is important for the senior management to protect their credibility because long term “you have got be believable.” Top managers must only make promises that can be kept and Pritchett and Associates (1995) give examples of promises and the problems inherent in them. These include; Promise Problem This is a win-win situation Somewhere people will feel like they have lost and they‟ll say you reneged. We plan to complete the integration by 1998 Most mergers take twice as long as expected. We plan to continue business as usual If it were true, why merge? Table 2. Examples of Promises that are harder to keep than they appear Source: Pritchett and Associates (1995) 3.1.5 Eliminate the Winners and Losers polarisation Merging companies inevitably means that people‟s jobs, responsibilities and priorities change. In the process section, there is a description of taking the best practices from the two merging organisations to give the new company the benefit of the „best of both worlds‟ (Estin and Demeure (1997). The human side of this is that the teams in company who are judged not to have the best practices feel as though they are the losers and have the winners processes imposed on them. The skill of management is to find the right way to make the changes without building a culture of winners and losers (Bengtsson (1992) (p53); Ernst and Young (1994) (p225)). If the management can address this issue successfully then one of the contributing factors to long term culture clash (which can kill mergers) can be avoided. 3.1.6 Rethink incentives Estin and Demeure (1997) suggested a short list of factors important in merger management. They noted that “any merger is a threat to existing jobs as well as to the careers of the managers involved. It is pointless, and dangerous, to hope that managers will initiate and execute ambitious and, by definition, destabilising action plans without fundamental changes in their incentives. Performance measurements and rewards need to be adapted to the new situation and should reflect the additional  9 © Milner LLP 2010 risks to individual staff members. Well-defined transitional objectives need to be established in addition to longer-term business goals.” 3.1.7 Socialise the people Hunt et al (1987) in their research stated that “business life and social life are more closely intertwined” in America “with a consequent requirement to undertake more social mixing than would be expected in Britain” (p53). Bringing the BT and MCI teams together to develop working relationships should also include an element of planned social interaction and the UK people should be made aware that this is part of the job. 3.1.8 Communicate with the employees Pritchett and Associates (1995) advise that companies who are merging should communicate to employees at “E-speed” (i.e. electronic mail). They note that a merger is “high drama... and everybody has an opinion.” They suggest to beat the rumour mill, the companies‟ “ambition should be to over-communicate. Silence is a major sin.” They also state, “Don‟t shave the truth, don‟t play the propaganda game... build your credibility by levelling with them” both good and bad news. Other authors (Estin & Demeure (1997)) agree with the need for a regular communication plan but note that it has to be focused and controlled. 3.2 Processes 3.2.1 Ensure Strategic Consistency Norburn and Schoenberg (1990) state that it is “widely recognised that the starting point for a successful acquisition or joint venture is a clear corporate strategy” (p82). The reason for this is the reasons that motivated the deal, the strategic objectives of the companies and the planned synergies, must be followed through the implementation to ensure both direction and consistency. 3.2.2 Build Shared Values “Once a deal has been made, the commitment of the top management team alone is insufficient to ensure that it turns out successfully. Their vision and energy must also be shared throughout the new organisation to guarantee that everybody shares the same objectives at all levels” (Gryner and Norburn (1975), Bourgeois (1980)). “Since responsibility for day to day implementation resides at the organisational strata below the levels at which the deal would have been negotiated, employees of a newly acquired company need to feel comfortable about their future role within a larger group. Those assigned to work within a joint venture organisation, must have mutual confidence and a desire to collaborate” Norburn and Schoenberg (1990) (p85). In Hunt et al.‟s study (1987), they concluded that success is likely to come from a “climate that is characterised by clear directions and co-operation rather than competition between acquirer and acquired.”  10 © Milner LLP 2010 3.2.3 Prepare a detailed merger plan Ernst and Young (1994) wrote “If there is any axiom for engineering a successful acquisition it is this: the acquisition must make sense for the acquirer from the beginning. A close second is that there must be a carefully prepared plan for integrating the acquisition” (p216). “Effective implementation is more likely to be achieved if both companies have clear expectations about their post deal roles and responsibilities right from the outset” Norburn and Schoenberg (1990) (p85). Cooper and Lybrand (1993) studied 50 cases and put a detailed post acquisition integration plan at the top of the list of factors that they associated with success (see table 3) (%) Detailed post-acquisition integration plans 76 Clarity of acquisition purpose 76 Good cultural fit 59 High degree of target management co- operation 41 Knowledge of target and its industry 41 Table 3. Factors associated with success Source: Cooper and Lybrand (1993) 3.2.4 Analyse Future Needs Kitching (1974) builds on the need for a detailed merger plan by reporting that his study showed that “successful companies make a careful analysis of their subsidiaries future requirements for parent company funds” (p100). 3.2.5 Agree what should be integrated “What should be integrated in a merger?” ask Ernst and Young (1994). They suggest that a „current state assessment‟ of both companies in the merger should be carried out. By this they mean that the acquiring company should prepare a “map” of the processes, assess how well they are performing from the perspective of time, resources, and quality and determine how compatible the corresponding processes are. The assessment will mean answering the following questions;  what are the costs, benefits, risks and barriers to integrating individual business processes of the two companies?  which processes should be integrated and when?  for the processes to be integrated, how should the combined processes be structured (i.e. adopt the process from one of the companies, a hybrid of both, or a totally new re-engineered process)? Ernst and Young (1994) conclude that “most successful managers realise that asking the right questions is often the toughest part of management. Asking questions from  11 © Milner LLP 2010 the perspective of process rather than organisation adds clarity to the post-merger integration procedure. 3.2.6 Establish a strong interface team A number of authors (Hunt et al. (1988), Bengtsson (1992), Coopers & Lybrand (1993)) agree that a strong interface team is required. Advanced management interfaces and the clarity of communication and direction significantly influence the outcome of the merger. 3.2.7 Focus on the major issues Many companies get lost in the minutiae of integrating two, often very different operations. „The secret is to focus your fire‟ write Estin and Demeure (1997) who found that, in many cases, only a small number of initiatives - usually between three and six - were necessary to achieve 75% of the merger‟s potential value. They say that merging companies need to quickly identify these high payoff actions and carry those out. 3.2.8 Establish the new company identity “Successful companies explain the benefits of presenting the scheme for the first months and a continually up-dated calendar for Manned Change (Bengtsson (1992)). Short term goals include business principles, short term product structures logo and name. All are factors which mould merging companies into a single entity 3.2.9 Keep the transfer period to a minimum „What do you think is the best single predictor of a successful merger integration?” asks Pritchett and Associates (1995) in their booklet Mergers: Life in the Fast Lane. The answer they suggest is “the length of the transition period.” Estin and Demeure (1997) write the important thing, therefore, is not to try to put together a comprehensive plan for achieving 100% of the potential value-added; rather, you should concentrate on what can be done quickly 3.2.10 Integrate Selectively “The aim of an acquisition is to enhance profitability and bolster growth. It is not to "integrate" at any cost. Different areas of the companies should be handled differently, depending on whether full integration is necessary or whether a pooling of resources or simple co-ordination would provide equal or near-equal value. Reorganisation costs, disruption, and time should all be kept to a minimum.” Estin and Demeure (1997). “An analysis of some basic economic variables - economies of scale, run lengths, product range effects, brand values, managerial costs, discretionary costs, etc - will allow you to quantify the value of various degrees of integration at each stage and for each function, product, or service. The value to be gained can then be weighed against the difficulty and cost of implementation, enabling you to focus on only those battles that are worth fighting” (Estin and Demeure (1997)).  12 © Milner LLP 2010 “A key factor for success is having acquisition criteria that are consistent and rigorously applied. Otherwise acquisitions are likely to be distorted by impulses and emotions” Kitching (1974) (p99). 3.2.11 Differentiate and De-average An important complement to value-based planning is best-practice analysis. Looking across both organisations, Estin and Demeure (1997) recommend that “companies involved in mergers should pinpoint the best performer on each key business activity and then, wherever possible, introduce the best practices throughout the merged entity. In this way, the entire organisation will build on its strengths rather than compromising around averages. Moreover, internal benchmarking will enable you to pinpoint the best-performing managers - those who most warrant development and rewards.” 3.2.12 Achieve “Quick Wins” Estin and Demeure (1997) and Pritchett and Associates (1995) advise that the merging companies aim for quick wins. Pritchett and Associates give some practical examples (see Table 4) of what early wins look like and the reactions that they get. The two company leaders have met and get along. “They are real people” A new name and logo are rolled out. “Its pretty snappy.” Employee benefits packages are consolidated. “We are not forgotten.” A big sale is completed. “We can work together.” Deserving candidates are promoted. “There’s room for winners here.” Unpopular product lines are killed off. “Its about time.” One company adopts anther‟s best practices. “We can learn from them.” Onerous policies and procedures are discontinued. “Finally!” Table 4. Examples of Quick Wins Source: Pritchett and Associates (1995) They conclude that “far more convincing than all that [i.e. quick wins] though are financial victories. As the saying goes, money doesn‟t talk, it screams.” 3.3 Technology 3.3.1 Integrate the Systems People must be able to communicate quickly and easily to share information and work together on the common aims of the new company. Integrating the telephone systems and the internal directories, and the electronic mail systems must be an early consideration Simmons (1988).  13 © Milner LLP 2010 4. Failure 4.1 People 4.1.1 Don’t be insensitive towards people. “The integration process is fraught with uncertainty, fear and anxiety among target company staff, which may lead to withdrawal of their commitment and loss of morale. The acquirer‟s implementation team must handle these concerns with tact, sympathy and understanding in order to instil confidence and trust between the two companies personnel” (Sudarsanam (1995)). Poor timing and insensitivity in implementing change repeatedly emerge as one of the main causes of post-acquisition trouble (Bengtsson (1992) (p31)). 4.1.2 Beware of who and how many are leaving “After almost every acquisition, people leave. Some get fed up after being at the low end of a winner-loser situation. Some ... would prefer to leave than adapt to the new corporate culture...” Ernst and Young (1994). The failure is if the wrong people leave or too many leave. In both instances, the post merger integration plan should indicate which people are critical to keep and time and effort must be expended to retain them. 4.1.3 Corporate Culture Clashes The most often cited reason for failed merger is the clash between corporate culture and the inability of the senior officers of the two organisations to reduce it. Mitchell (1988) and Coopers and Lybrand (1993) in their studies rated it as having a greater negative impact on the outcome than the absence of a plan (see table 5). Bengtsson (1992) described the problem not as „clashes‟ but as “corporate culture shock” (p36). She said the shock was “the reason given in many companies for their failure to reap the full benefits of otherwise promising deals.” She noted the shock arose at a variety of levels from harmonising management styles, routines, privileges, informal chains of command etc. through to the less measurable company roots, traditions, reputations and relative ages of the companies. (%) Target management attitudes and cultural difference 85 No post-acquisition integration planning 80 Lack of knowledge of knowledge of industry or target 45 Poor management of target 45 No prior acquisition experience 30 Table 5. Causes of failure Source: Coopers and Lybrand (1993)  14 © Milner LLP 2010 4.2 Processes 4.2.1 Don’t Lose Control In a review of 10 British Companies disastrous mergers, Nisse (1991) concludes that “lack of control is the principle theme” (p12). Failing to control companies is all the more acute when the merger involves an overseas company. Nisse (op cit) cites Midland Bank‟s attempt to merger with Crocker in the USA and describes the crucial role of the regulator and inability of Midland to control Crocker „spending‟ the anticipated capital from Midland (See Case Studies). Hunt et al. (1988) in their study of 40 companies also supported the notion of unclear direction and weak interfaces leading to failure (see table 6). (%) Buyer Management fails to impress 72 No Clear Vision 67 Incentives and benefits to target staff reduced 67 Changes confined to business 61 Interface lax 58 No perceived business benefit to acquirer 44 Assurances broken 39 Table 6. Factors associated with unsuccessful acquisitions Source: Hunt et al. (1988) 4.2.1 Avoid Opportunistic Deals Norburn and Schoenberg (1990) in their review of the literature state that one of the three main factors associated with failed mergers is „Opportunistic Deals.‟ They write that “many authors have noted that opportunistic acquisitions or joint ventures - those made outside the framework of an agreed corporate strategy - carry the danger of taking the company down a strategic path that is unsound” (p79). They cite Renault‟s “hastily arranged agreement” with American Motors Corporation as an example. 4.2.2 Ensure adequate Partner Evaluation Poor evaluation of a partner can have significant effects on a company according to Norburn and Schoenberg (1990). In acquisitions, it can lead to unrealistic evaluations. They noted that UK public take-overs have “been inclined to pay an average forty percent premium over their target company‟s pre-bid stock market valuation (citing Acquisitions Monthly, August 1989) (p78). The existence of bid premiums of 40% can only be justified in cases where the post merger benefits have been solidly defined” (p80). The fate of Coloroll who bought John Crowther in 1998 is put down to the effects of an unrealistic valuation.  15 © Milner LLP 2010 4.2.3 Poor Implementation Kitching (1974) noted that “a carefully devised strategy does not by itself make a successful acquisition programme. The post merger battle has to be won by the „managers of change in the parent company.” 4.3 Technology 4.3.1 Don’t let long term R&D slow down Post (1994) reported that one of the effects of a merger is that both companies‟ R&D slows down. Long term R&D may not impact on short term profitability but it may result in loss of people and skills development, and it is also an indication to the customer and the industry at large that there is a loss of purpose and direction.