Will Your Merger Succeed?
By Eugene G. Lukac
Most mergers fail. Failure means that the new organization is worth less than its pre-merger components. Surveys indicate a failure rate for corporate mergers ranging from 65 percent to 85 percent. Nevertheless, in spite of the abysmal success rate, mergers and acquisitions (M&A) are occurring at an unrelenting pace. In 2005, the biggest M&A year since 2000, deals worth $2.9 trillion were announced, up 38 percent from 2004.
These mergers do not have to fail. Mergers are highly complex projects, but they can succeed if appropriate attention is given to the integration phase.
Why mergers fail
CSC’s analysis of mergers worldwide suggests that the main reason for failure is not the choice of the wrong partner or an improperly constructed deal. The main reason why mergers fail is ineffective planning and execution of the merger integration project. Our experience shows that it matters more what happens after the deal closes than before.
Before a deal is announced, there is a natural sense of excitement in the executive office as it progresses through selection, valuation, due diligence, and negotiation. But confusion can follow announcement of the deal if executives fail to institutionalize a governance process that can maintain momentum through to integration. Successful acquirers have learned to build on the excitement of the announcement to launch a highly focused merger integration project.
In some ways, merger integration projects are just like any other project. There are objectives, deliverables, time lines, milestones, etc. But they are different in some very important ways — especially if the acquired company is comparable in size to the acquirer.
First of all, they’re large. By any measure — cost, staff, duration, or organizational areas involved — a merger integration project can be one of the largest projects the acquirer will ever undertake. It will cut across the entire organization, requiring the intense, carefully coordinated involvement of marketing, operations, finance, HR, IT, and other departments.
Secondly, the stakes are big: The future of the organization is in play, and the careers of senior executives are on the line.
Third, mergers directly impact the most volatile element of all: employees and customers. Employees may wonder if their job is secure. Customers may wonder if the internal focus on the merger will detract from customer service. The potential loss of key employees or major customers is a risk that must be carefully managed.
Finally, and perhaps most importantly, what makes a merger integration project different is that often it is not even recognized as a project: Instead of treating it as a well-structured, hierarchical set of activities with a beginning and an end, departments often are left to deal separately with their counterparts as best they can. At best, this means coming short of achieving the full synergy potential of a merger; at worst, departments will work in conflicting directions. For example, the finance department may be pursuing a best-of-breed solution, while the IT department is following a best-of-fit strategy. A disparate collection of activities cannot be coordinated into a cohesive project.
Critical Factors for Merger Success
Our M&A experience has led us to identify 10 factors that can make or break a merger integration project. Successful organizations are the ones that pay attention to these factors before and during the project.
1. Clear intent All participants in the merger integration project need to understand the reason and expectations for the merger so that they can direct their energies accordingly. A vague statement such as, “We expect synergies of $XXX million” is not enough. Where will those synergies come from? How and when will they be achieved? How much are we able to invest to achieve them?
Failure to understand the merger intent has cost more than one CIO his job. One CIO proudly achieved a complete integration of the two companies’ systems, only to learn that the acquisition was intended as a temporary arrangement prior to a spin off. Another CIO massively reduced the combined IT staff only to find out that the organization would need to grow the IT staff to support the intended level of automation in the production areas.
2. Perseverance The post-merger integration of two large organizations will take months, if not years, to complete. Long-duration projects are notoriously prone to running out of steam. Can the effort be forcefully sustained in spite of the multitude of other business issues that can be expected to demand attention?
3. Leadership Like any other project, merger integration needs a full-time leader. But unlike ordinary projects, merger integration is about creating the organization of the future — an executive-level task. Hence, in order to succeed, a merger integration project needs a high-level, full-time executive leader with the authority and accountability for achieving the goals of the merger.
4. Accountability The merger integration project also needs a team, made up of the best and brightest from both organizations. The creation of the new company cannot be left to those who happen to be available. And those assigned to the project should know clearly how they are accountable.
5. Leverage Merger integration cannot be contracted out. Advice and assistance can be sought if needed, but the project must be owned and run by the organization itself. Although some specific implementation tasks, once defined, can be contracted out, the design of the future state should be done by those who must live with and manage the results produced — and therefore have the most incentive in getting it right.
6. Coordination Merger integration involves most aspects of the organization, and no single plan can encompass the myriad details. Hence, planning must be cascaded down and coordinated up. An overall corporate plan must set the targets, timing, and key checkpoints for all divisions. Each division, in turn, must develop a plan covering its departments, and must coordinate the departments’ individual detailed plans.
7. Experience Very large projects, and merger integration projects in particular, are complex undertakings that require specialized expertise to anticipate and avoid common problems. This is not a good time to learn by trial and error. Companies that have this expertise in-house should leverage it in the project team. Companies that don’t should bring in an external trusted advisor to guide them through the process.
8. Focus Like any project, merger integration work should be kept separate from other projects and from ongoing operations. Full-time team members shouldn’t have other distractions. There are three reasons for this. First, merger integration is too complex to be handled “as time permits.” Second, the merger integration project must not interfere with the ongoing mission-critical operations of the business. Finally, sound project management demands tracking the use of resources against plan, and this cannot be done if the resources are intermixed with other work.
9. Decisiveness A merger integration project involves designing and implementing the company of the future in a limited amount of time. Many choices will have to be made: from the chart of accounts to the location of the warehouses, from the organizational structure to the choice of systems. Many of these decisions will affect the lives and livelihood of people. Nevertheless, these hard choices need to be made in a timely manner and without regret. Clearly, any delays or revisions will affect the results, costs, or schedule of the overall project.
10. Communication Communication is the factor that must be kept in mind most vividly. A merger is a project with lots of moving parts, and the most movable parts are the people involved. A communication plan is critical to the robust organizational change program needed to address their concerns, and enlist their involvement and support.
Success can never be guaranteed, but these 10 factors are the proven guideposts that successful organizations have followed to achieve their merger goals.
Eugene G. Lukac is a partner in CSC’s Consulting Group.
