Losing With Mergers

Dec. 21, 2004
Missteps may shortchange shareholders.

Even as mergers and acquisitions (M&A) around the world continue to occur at a dizzying pace -- Securities Data Co., Newark, N.J., calculates that through mid-December they totaled a stunning $1.6 trillion for 1998 -- there's reason to question whether the boom in business combinations is creating significant shareholder value. Indeed, more than half of all corporate mergers fail to create substantial returns for shareholders, claims a recent study from A.T. Kearney Inc., the Chicago-based management-consulting arm of Electronic Data Systems Corp. Having examined 115 multibillion-dollar mergers in manufacturing, finance, utilities, and services in the U.S. and 13 other countries, Kearney determined that 58% did not produce stock-price appreciation and dividend increases 25% better than the averages for their respective industries. "Companies know what they are supposed to do to make the merger a success, but they often don't follow through with key steps," says Michael Trm, a Dusseldorf-based Kearney vice president and author of the study. Although the study concentrated on highly visible mergers in the Americas, Europe, and Asia between 1993 and 1996, its findings remain valid in 1999. Subsequent questioning of the companies confirms the study's basic findings -- and indicates that even as many as 62% of mergers fail to create significant shareholder value. A clear, shared vision of the strategic goals for the new company seems fundamental to any merger. But, alarmingly, only 28% of the merging companies have specific goals for the company's future, the Kearney study found. What's more, many merged firms surveyed failed to put their management teams into place quickly. As a rule, the first level of top management should be named within seven to 10 days after a deal is closed, and the second level within 30 days to 50 days, Trm advises. But "when you see what companies really do, in only 39% of the cases the top management team is set up in the first 100 days," he says. The consequences of failing to rapidly name executives and assign responsibilities are serious. For instance, six months after the merger, a company that Trm doesn't identify still had two separate sales forces calling on the same customers with two different pitches and two different price lists. In practice, the company was negotiating against itself. The absence of a risk-management system is another major misstep recorded by the Kearney study. Only 32% of the companies it surveyed had one. Potential Y2K computer-glitch problems double in a merger, and newly merged companies, more than ever before, need a plan to keep them focused, Trm stresses. Likewise, he urges newly merged companies to be prepared "with a risk plan to allow [them] to act" against the probability that their competitors and headhunters will try to lure away some of their best managers in the unsettling wake of the merger. With such mergers as Daimler-Benz AG and Chrysler Corp., Hoechst AG and Rhone-Poulenc SA, British Petroleum Co. PLC and Amoco Corp., Exxon Corp. and Mobil Corp., Total SA and Petrofina SA, and America Online Inc. and Netscape Communications Corp. announced or completed, 1998 will provide a wealth of fresh information for Kearney and other M&A analysts. And so, presumably, will 1999. Gabor Garai, a managing partner of the Boston office of Epstein Becker & Green PC, expects M&A activity this year to possibly match the $1.5 trillion total he has estimated for 1998. Stimulating the urge to merge in 1999 will be continued rationalization in the auto, pharmaceutical, and oil industries, and what Garai calls "the comprehensive-solution" issue. "There is a huge recognition on the part of companies that what they must offer to their customers is a solution, not a product. And they must be able to offer a package that is worldwide and that is comprehensive," he states. Example: "If you are in a component business, you have to be able to buy other businesses up and down stream," Garai says.

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