Excerpt from "Perfect M&As -
The Art of Business Integration

Paul J. Siegenthaler

Perfect M&As

Most mergers and acquisitions fail. Fact. However, there is a solution. In his book Perfect M&As Paul J Siegenthaler describes how senior and middle managers can increase the likelihood of seamless integration between two businesses.

Good cooks will tell you that making a perfect mayonnaise is an art, and that if you place two egg yolks in a bowl, add oil, let them rest for a while and observe, you shouldn't be surprised if nothing happens.

Likewise when bringing two companies together and expecting them to blend into a single seamless entity.

Executives managing a merger or major acquisition often view the integration exercise as a mere process that needs to be executed. They believe 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.

Definition of success

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

I prefer to focus on success and think of the 20% of companies that actually succeed in reaching the goals they had set themselves in merging or making an important acquisition, and understand what it takes to be sure of being one of those few success stories.

"Every company embarking on a merger assumes it will succeed, when in fact it should assume it will fail unless it engages in specific activities."

But even so, this is an alarmingly low proportion.

Every company embarking on an organisational merger assumes it will succeed, when in fact it should assume it will fail unless it engages in a number of specific activities and avoids the many traps into which all the failed mergers have fallen, time and time again. At a high level, the definition of 'success' is the creation of value for the company, which itself is derived either from improved earnings or some form of strategic advantage that improves the company's prospects compared with its pre-merger position.

My own definition of a successful integration goes one step further, to include not only the final outcome, but the way one got there. I would mark an integration with a 'pass' if the business case underlying the merger or acquisition is delivered; in other words if the integration project is completed on time, within budget (the costs as well as the savings) and results in an organisation that surpasses what the two constituent parts could have achieved individually in terms of return on investment and growth rate.

And I would give the score of 'pass with distinction' if, in addition to delivering the business case, the integration can have taken place in an orderly manner that has retained knowledge and key staff, has provided a number of people in the organisation with an opportunity for self-development, and more broadly has given the organisation a level of comfort in executing the integration that generates an appetite for future similar acquisitions and a continued acceleration of their growth.

There is evidence to show that companies that make regular acquisitions and make this one of their core competencies tend to perform better than their peers. This is the good news because it does mean that not all is random when it comes to the art of integrating companies: there are some lessons that can be learnt and applied.

"The brutal truth is that only 20% of these integration journeys reach the objective they had set themselves."

And yet, looking across the market at the broad diversity of companies that attempt to merge or integrate an acquisition, it seems that the same mistakes are made repeatedly. The consulting firms that provide advice and support to their clients throughout their integration have a wealth of experience; they have done this dozens or hundreds of times before. Yet the brutal truth is that only 20% of these integration journeys reach the objective they had set themselves, while the majority will miss it, and a significant portion of them will actually destroy value. I find this most frustrating, for while it is true that there are myriad things to bear in mind when integrating two companies, it is not rocket science.

The knowledge and experience accumulated by reputed consulting firms often fails to influence their clients' senior leadership when they are about to set out on an integration journey. This is because they tend to dismiss the long 'to do' list provided by their consulting advisors; they may view this as overkill and probably suspect it is a ploy for the consultants to gain even more business by involving as many resources as possible in the integration project.

In the haste and flurry of activity that precedes the announcement of a merger or major acquisition, they do not have the time nor the appetite to not only absorb the long list of things that are important to achieve a successful integration, but to actually consider and truly grasp why these things are important.

Blended into one

Having designed and led company integrations involving up to 12 countries, and managed these not as a consultant but on the client's 'side', I decided to write my book Perfect M&As to share my observations of what really makes the difference between success and failure from the moment the merger or acquisition deal is about to be signed until the two organisations have blended into one and reached stability.

"When it comes to the art of integrating companies there are some lessons that can be learnt and applied."

So much goes on during the integration of two organisations, particularly when these cover a large geographical spread, that it is easy to lose sight of the overall process and omit a few fairly simple things. Most of the literature on mergers and acquisitions states that the causes of failed integrations are a lack of communication, weak leadership and poor handling of aspects relating to human resources. Although this is almost certainly the case, such a broad statement hardly provides any clues as to what needs to be done to ensure success, and how this should be delivered. I therefore chose to go one step further and put my finger on the specific things that make a big difference. We need to dig deeper to observe and understand the consequences of specific behaviours, as well as the impact of the way the integration project is organised and run. It explains why some people will surpass themselves during inordinately stressful times and remain committed to the objective of the integration.

The objective is clear: it is to be among those 20% 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.

Paul J Siegenthaler's book Perfect M&As (23.99, Ecademy Press) has been described as a first-class reference source for delivering the business case of any merger or acquisition.It examines the root causes of most M&A failures, and hones in on the specific elements that senior and middle managers can use or develop to deliver an orderly business integration, a smoother experience for the individuals in the organisation, and the realisation of the benefits that the initiators of the merger had promised to deliver.

 

 

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Published on 10th August 2010 by Finance Director Europe
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