Why mergers succeed or fail
Then comes the painful realisation that post merger integration isn’t working.
The reasons, say PA Consulting in their research, carried out with the University of Edinburgh man-agement school, are as follows:
? Mergers deliver greater shareholder value when the acquirer recognises that cultural differences exist, regardless of how similar the businesses may appear. (Returns are 2.7 percent higher than if the merger had not taken place.)
But don’t go overboard, because over integration of the merger target can damage shareholder value. Highly integrated mergers are generally less successful than those which aim for medium level of integration (these see improved returns of 3.1 percent; the returns are 5.9 percent for medium level and 2.8 percent for high level).
? Cross-party integration teams help improve returns. Where 40 percent or more of the integration team are from the target organisation, returns increase by 6.5 percent.
? The motive for the merger also affects the final return. Acquiring to obtain new technology is the most rewarding, with returns of 6.1 percent higher than expected.
The aim of the research was to establish how corporate acquirers can maximise their chances of success and reduce the risks during post-deal integration.
The joint study covered 85 M&A deals worth over £50 million each. The researchers used short-term share price returns to evaluate the success of different approaches to postmerger integ-ration, and identify the factors making up ?best practice’ in terms of maximising value for shareholders.
Findings suggest organisations that anticipate problems in the integration process, and are more critical of the results achieved, are more likely to produce higher returns for shareholders.
A measured and selective approach to post merger integration, coupled with recognition that different companies have different cultures – no matter how similar the businesses appear – are two determinants of success.
Executives who took part in the research voiced concerns on dangers in over-integration, or in moving too fast in an attempt to realise all your synergies at once.
The key they said was to remind yourself where value was being created, and protect it during the integration process.
This research gives clear message: certain approaches to post-merger implementation give higher returns than others.
The biggest returns come from detailed advance planning, rigo-rous cash based progress report-ing, and, of course, from getting the people issues right – which means involving people from the target organisation as early as possible.
The proven success factors identified include:
Planning and control factors
? Plan in detail – companies that planned to high level of detail achieved returns of 4.5 percent over those with lower levels of planning – for risk management, budgeting and cost control and tracking benefits
? Get the level of integration right to preserve the intrinsic value of the target – companies improved their returns by medium level integration achieved 3.13 percent higher return than high level integration by medium level integration
? Incorporate shareholder value measures into the planning and implementation – companies that used weekly or monthly reporting of progress using cash measure saw returns improve by 2.8 percent
? Create an integration and communications plan before deal completion – companies that did this improved their return by 2.3 percent.
People factors
? Importance of human resources – returns were 3.12 percent higher where HR issues were seen as ?important’
? Reward the integration team – where explicit bonuses were offered to the integration team, returns increased by 4.7 percent
? Form the integration team early and with staff from the target organisation – which increased returns by 6.5 percent.
