Overcoming Merger Risks
All mergers involve risk—and carry no guarantees of fulfilling ROI expectations. It is commonly believed that less than half of corporate marriages succeed in the minds of the most important constituents: shareholders, customers, and employees.
But as 2010 comes to a close and the credit crunch begins dissipating, many companies have more cash on hand for mergers. United/Continental, Southwest/AirTran, Intel/McAfee, Pfizer/King Pharmaceuticals, Bristol-Myers/ZymoGenetics, and Stanley Works/Black & Decker are involved in various stages of mergers, and many other companies are starting the courting process for anticipated deals in 2011.
How can these companies, and the countless others that will choose mergers as their best pathways to growth, ensure their deal has the best chance of beating the odds? The three critical steps in mitigating merger risk are knowing the level of risk, keeping the integration process versatile, and staying focused on the real value drivers.
The greatest and most obvious merger risk is overpaying for an asset, yet once you sign on the dotted line, you'll find other risks that require evaluation. If the particular expertise of the acquirer matches the market experience of the business it's acquiring, the risk quotient will drop.
What About Talent Flight Risk?
Other characteristics of the deal that affect the level of risk include the fit of the core businesses, size of the deal, type of deal, talent retention plan, and integration capability. A larger company that purchases a ready and willing smaller company—for example, Google's (GOOG) potential acquisition of Groupon—will have a relatively low level of risk, while a big-bucks merger—such as the potential union of Sanofi-Aventis and Genzyme (GENZ), where resistance to the merger exists—may involve high risk indeed. The key is to develop an integration game plan that takes these risks into consideration. For instance, if you determine that talent flight risk exists, find ways to re-recruit those employees so they feel engaged and inspired by the company's future.
Unfortunately, although most experts concur that early integration planning leads to successful mergers, some executives acting on advice from counsel focus their companies more on what they can't do than what they can. Antitrust laws, such as the Sherman Act, Clayton Act, and Hart-Scott-Rodino Act in the U.S. and similar laws set by the European Commission, lead to CEO resistance toward spending time and effort on early integration planning. These executives fear the risk of "gun-jumping"—excess coordination, or acting as one entity before close. As a result, many companies display risk-averse behaviors and fail to take the necessary steps, thus losing valuable time in the integration-planning stage to stack the deck in their favor.
Pre-integration planning does not predict the outcome of the merger prior to the close, nor does it allow the process to proceed by formula. Unfortunately, some companies, after going through exhaustive preparations, set up a highly formulaic approach with a laser focus on asset valuation prior to the close of the deal. But rigidly mechanistic integration is dangerous. To minimize merger risks, companies must think past the traditional "checklist approach" and be more versatile.
Those Cultural Intangibles
Businesses need to listen for the cultural similarities and differences along the way. Integrations are informed by cultural intangibles such as rituals, routines, values, management styles, symbols, and power structures. For instance, one company might have a power structure where any executive can make rapid "yes/no" decisions, whereas another might need several months to anchor the idea and make sure all the informal networks buy in to the decision before taking the next step.
The synergies between the intangibles often determine how risky the integration of the two companies will be.
Culture exerts influence on work patterns, decision-making, communication, expectations, and what it takes to be successful in an organization. For example, one company may have highly transparent communications regarding all actions, while another may communicate information only on a need-to-know basis. Finding the synergies between the two cultures should shape pre-integration planning.
Companies need to realize that the deal is not over 'til it's over. They never should consider the formal integration period completed at the close of the deal. But that is exactly what many companies do. They disband integration teams and transfer ownership of the integration back to the core business far too early, thus creating potential impediments to future success.
Keep Taking the Costs Out
This year's merger of Stanley Works and Black & Decker showed considerable flexibility by extending the formal integration work months after the close of the deal. They increased the gain in cost synergies and lowered the merger risks. Led by Chief Executive John F. Lundgren, the Stanley-Black & Decker merger has resulted in a 20 percent rise in stock price and $1.5 billion additional capitalization of both companies. They continue to focus on taking the cost out in the post-close period while achieving strong new product launches to gain market share and boost top-line growth. "We continue to further develop our cost synergy plans and remain confident in meeting or exceeding our original estimate of $350 million in cost synergies," Lundgren commented in a conference call with analysts,
The final critical step in minimizing merger risk is focusing on the value drivers, not the activities, in the newly integrated business. In doing so, cross-company rapid-results teams can work together to achieve more than originally anticipated.
This involves capturing the high-payoff opportunities. CEOs must insist their post-merger integration teams do more than connect the two companies and the functional boxes. Integrations should be transformational. And synergies must reflect a mix of revenues and cost.
For example, Intel (INTC) and McAfee are betting they can integrate Intel's chips with McAfee's security, but the challenge will lie in getting the intellectual synergies to work during the post-close period. Since the companies were not able to share much intellectual capital prior to close, they need to spend enough time post-close for engineering teams not only to look "under the hood" but also to build a newly combined engine that makes connecting to the Internet safer and more secure and ultimately increases the top line.
Envisioning the Future
Another critical yet often overlooked value creation step is to set the merger intent, a detailed description of what the newly transformed organization will look like strategically, financially, operationally, and organizationally. It's a vision—ideally for one year after the close—that reassures key constituents (employees, customers, investors, and analysts) desperate for confirmation that the deal is less risky and more likely to achieve succeed sooner rather than later.
Created in joint executive team sessions or coalesced through one-on-one dialogue, the merger intent should answer questions about anticipated changes, projected growth and profits, organization size and structure, quality requirements, competitive strategies, and product development and customer service platforms. Most important, it should be clear and specific—i.e. "set a financial goal to increase revenue by 11 percent over the next year and a strategic goal to speed up its go-to-market strategy by 10 percent," rather than general goals, such as "aspiring to be the best company on the face of the earth."
Yes, mergers are fraught with risk, including overpayment and strategic incompatibility. But companies can increase the success margin by assessing the level of risk, keeping the integration process flexible, and focusing on the value drivers. Integration requires a significant amount of planning effort, much of which can be done prior to the close of the deal. Do what it takes to avoid the big risks, but otherwise place the emphasis on the deal's return on the investment.