Merger Madness

Most mergers go disastrously wrong. Paul J Siegenthaler, author of Perfect M&As, sets out his recipe for a successful one.

Place two egg yolks in a bowl, add oil, let them rest for a while. Observe… you were hoping for mayonnaise, but nothing happens. Is that at all surprising? Likewise when bringing two companies together and expecting them to blend into a single seamless entity.

Good cooks will tell you that making a perfect mayonnaise is an art. Executives managing a merger or major acquisition often view the integration exercise as a mere process that needs to be executed. They believe that the pieces of the puzzle will automatically fall into place after some time.

And yet there is clear evidence that this is not the case. Just as a mayonnaise can curdle, so can organisations. When that happens, putting things right again can be incredibly difficult; in some instances the damage will be irreversible.

Estimates of the proportions of mergers and acquisitions that fail vary widely, possibly because there are different interpretations of what constitutes a failure. Wharton accounting Professor Robert Holthausen states that most published research on this topic situates the failure rate between 50 per cent and 80 per cent. A survey by KPMG International places the threshold at the 80 per cent top end.

The most damaging myth is the belief that, given enough time, two organisations put together will gradually develop new ways of working and end up blending into one seamless business. Why should this happen?

Would two individuals locked in one room spontaneously form solid couple for the rest of their lives? A cogent business case may act as a “logical magnet” which draws the two businesses to one another, but will they blend or collide?

The success of the integration rests on a few imperative pillars that prepare the two organisations and accompany them on their voyage of integration. Omit one of these pillars and your integration project is likely to topple over:

•     Diagnosis and preparation

•      Detailed planning

•      Clear governance

•     Resourcing and project team environnent

•      Team redeployment

•      Communication and leadership

We are only going to scratch the surface of the first one in this short article. The first step, “Diagnosis and preparation” is sadly where most companies miss the greatest opportunity.

By diagnosis, I mean much more than mere due diligence. A well organised “data room” may detect some of the hurdles and complexities that will need to be overcome during the integration process: forewarned is forearmed. But this is not sufficient.

Successful business integration can only begin once you have determined how the information from the data room will be used, as well as the commercially sensitive information which will become available only from the day the two companies are under common ownership.

The reason this is the most significant opportunity is because the aim here is twofold: firstly to gain time at the start of the integration process by completing a number of very time-consuming tasks ahead of Day One, and secondly to accelerate the pace of implementation of subsequent phases of the integration.

I like to focus on three areas:

•     Data standardisation: decide on common definitions and common data structures (be it manufacturing cost data, HR data, customer data, product classification, financial data…). This allows both companies to restate their historical data in accordance with those new common definitions and templates.
This is a very time-consuming exercise and it pays dividends: on “Day One”, both sets of re-stated information will be ready to be analysed on a like-with-like basis. A huge time saving!

•      Decision-making tools: this is about agreeing the rules which will apply when the integration begins; for example how the products or services of the future combined portfolio will be positioned and prioritised relative to each other, where the future offices or factories will be located, how the trading terms will be harmonised etc.

This does not pre-empt what those decisions will be but defines and prioritizes the criteria that will be considered in making those decisions. The benefit of pre-agreed and well documented decision tools is immense in companies involving a number of business units each having to go through the same integration process; this ensures coherence and avoids the need to re-invent the wheel.

•      Simulations: without any exchange of commercially sensitive information between the two parties of the merger or acquisition, third-party advisors can be nominated to carry out a pre-analysis of this data, so that areas of particularly high complexity or risk can be identified in advance of the integration’s kick-off.

This provides valuable clues when it comes to resourcing the integration project team to ensure the number and calibre of the team members are sufficient to tackle and resolve those complex issues.

The objective is clear: it is to be among those 20 per cent of companies that can claim, when all is over, that their decision to merge was the right one, that it was executed brilliantly, and that by doing so they have generated significant value.