Avoiding Merger Failure

It’s clear that 2006 is a big year for M&A deals, which is good news. But CEOs need to recall an important corollary: 2007 must be a big year for delivering on M&A promises. This is sobering because deal execution is a problem for many companies.

The M&A numbers are impressive. The value of deals in the U.S. is at $925 billion-up 11 percent over 2005 at the same point in the year. That’s despite a decline of 7 percent in the number of deals. It’s the same story in Europe-deal volume is down, but deal value is up 57 percent to $946 billion, according to Mergerstat.

Why is grasping the benefits of these deals troublesome for many companies? After all, the elements of M&A integration aren’t that difficult, and there’s broad agreement on how it should be done.

Based on our experience with more than 600 M&A engagements in the U.S. and abroad, we believe that some executives miss a key point. Although the individual tasks aren’t rocket science, the process as a whole is complex. If one thing misfires, problems multiply and cascade. Much can go wrong.

However, experience also shows that getting four things right will increase the likelihood of achieving the desired results.

1. Keep your deal strategy brief and to the point. Given the turbulence typical of M&A integration, it’s essential to define plainly what the deal is about. Resist the temptation to compile a wish list that covers everything from launching new products to improving R&D to cutting overhead. Making it happen is tough when there’s doubt about the “it.” Realistically, you’ll be able to achieve only two or three major goals, so which will they be? Applying the simplicity principle, two pharmaceutical companies focused on a single strategy for taking costs out of their distribution networks and exceeded their goals by 95 percent.

2. When pursuing cost synergies, avoid cuts that detract from value. Look hard for downside possibilities. Companies that aren’t careful about linkages can shut down programs or slice budgets that are crucial to revenue production. This happened in a technology-sector deal when the acquirer cut employees of the acquired company because its own engineers thought they could take over operation of a key facility integral to customer service. It turned out the facility required more specialized expertise than the acquirer’s engineers anticipated.

3. Create a common enemy. If you focus both companies on a mortal threat in the outside world, less energy will be spent fighting each other. An obvious candidate for the villain role is a competitor. Often, the reason for an M&A transaction is to counter a specific competitor. If that’s your situation, warn your people that making the deal work is the only defense against this foe. Portraying a rival as out to get your job and mine often works because it’s true. A leading technology company is currently losing ground to competitors who are exploiting the company’s missteps during the merger.

4. Manage the process meticulously. In the integration of two aerospace contractors, stringent project management made it possible to blend IT operations across 28 entities and exceed cost reduction targets by 76 percent. Tight control is imperative. Don’t accept one-year plans to realize merger benefits. Demand one-month plans that each lead to some important and measurable outcome. Keep re-prioritizing as you learn more.

M&A integration is daunting for any management team, and one of the main pitfalls is underestimating the challenge. By doing a few things well, your company can improve its chances of delivering the targeted benefits in 2007

Related Atricles

• Merger Mismatch
• When Mega Mergers Don’t Make Sense