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.

About the Author

John McClenahen | Former Senior Editor, IndustryWeek

John S. McClenahen, is an occasional essayist on the Web site of IndustryWeek, the executive management publication from which he retired in 2006. He began his journalism career as a broadcast journalist at Westinghouse Broadcasting’s KYW in Cleveland, Ohio. In May 1967, he joined Penton Media Inc. in Cleveland and in September 1967 was transferred to Washington, DC, the base from which for nearly 40 years he wrote primarily about national and international economics and politics, and corporate social responsibility.

      McClenahen, a native of Ohio now residing in Maryland, is an award-winning writer and photographer. He is the author of three books of poetry, most recently An Unexpected Poet (2013), and several books of photographs, including Black, White, and Shades of Grey (2014). He also is the author of a children’s book, Henry at His Beach (2014).

      His photograph “Provincetown: Fog Rising 2004” was selected for the Smithsonian Institution’s 2011 juried exhibition Artists at Work and displayed in the S. Dillon Ripley Center at the Smithsonian Institution in Washington, D.C., from June until October 2011. Five of his photographs are in the collection of St. Lawrence University and displayed on campus in Canton, New York.

      John McClenahen’s essay “Incorporating America: Whitman in Context” was designated one of the five best works published in The Journal of Graduate Liberal Studies during the twelve-year editorship of R. Barry Leavis of Rollins College. John McClenahen’s several journalism prizes include the coveted Jesse H. Neal Award. He also is the author of the commemorative poem “Upon 50 Years,” celebrating the fiftieth anniversary of the founding of Wolfson College Cambridge, and appearing in “The Wolfson Review.”

      John McClenahen received a B.A. (English with a minor in government) from St. Lawrence University, an M.A., (English) from Western Reserve University, and a Master of Arts in Liberal Studies from Georgetown University, where he also pursued doctoral studies. At St. Lawrence University, he was elected to academic honor societies in English and government and to Omicron Delta Kappa, the University’s highest undergraduate honor. John McClenahen was a participant in the 32nd Annual Wharton Seminars for Journalists at the Wharton School at the University of Pennsylvania in Philadelphia. During the Easter Term of the 1986 academic year, John McClenahen was the first American to hold a prestigious Press Fellowship at Wolfson College, Cambridge, in the United Kingdom.

      John McClenahen has served on the Editorial Board of Confluence: The Journal of Graduate Liberal Studies and was co-founder and first editor of Liberal Studies at Georgetown. He has been a volunteer researcher on the William Steinway Diary Project at the Smithsonian Institution, Washington, D.C., and has been an assistant professorial lecturer at The George Washington University in Washington, D.C.