Making Mergers Profitable
by Donald Spitzer, KPMG
Although mergers too
often prove to be economic disappointments, the odds for achieving
added shareholder value have gone up dramatically in the last
few years. A 1999 study of deals from 1996 to 1998 showed
that only 17% of large mergers had added shareholder value.
A more recent study, covering 1997-1999 deals, shows that
almost a third of them (i.e., 35% of the US deals, 24% of
the European ones) had added value for the shareholders. During
the same time frame, the percentage of deals decreasing shareholder
value dropped from 53% to 31%. In 2000, some 30,000 global
mergers or acquisitions, worth $3 trillion, took place. Experience
with previous mergers in itself does not increase the likelihood
of a successful deal, but focusing on adding value as an explicit
goal does increase the odds of success.
Take a lesson from
the winners. The deals that increase shareholder value typically
display certain planning and execution characteristics, which
the unsuccessful deals lack. To make money for shareholders,
plan early, get the board involved, focus on value and constantly
review your assumptions, have a formal process plan, get a
good process manager involved quickly, give that manager broad
responsibilities, and hire a good external advisor. Companies
that had all the planning characteristics noted add value
twice as often as other companies.
Start planning soon.
The earlier a company begins to explore all the aspects of
a potential merger, the better the outcome. Early involvement
of the directors increases the probability of sound financial
planning in assessing whether to make a bid. Questioning whether
and how the target’s strengths will realistically enhance
value for the acquiror is also a valuable exercise. Early
concern for added value also reins in pricing to a level that
will permit an increase in value. Pay too much, and an otherwise
good deal can still fail financially. Even at the earliest
stages of bid contemplation, consider how to execute the actual
process of integration and what resources will be needed to
merge successfully.
Active process management.
Effective process management characterizes the best deals.
Having individual executives responsible for the various aspects
of the bid assessment and then the integration will enhance
the probability of success. Although European companies usually
had a director responsible for the implementation of deals,
American companies more often gave their process managers
more latitude to effect mergers and acquisitions. The US companies
also focused more specifically on value generation. Formal
plans with clear responsibilities throughout the pre-merger
and merger period enhance the probability of adding value.
More than any other person, the process manager has an overview
of the entire process from first tentative approaches through
full integration. Companies with formal process managers secure
added value 71% more often than other companies. The sooner
the process manager takes charge of the deal process, the
greater the likelihood of success.
Get advisors on board
fast. If changes occur in any aspect of deal assessment or
integration, they need to be evaluated in the context of every
other aspect of the deal. Within that ongoing re-evaluation
process, using third-party advisors provides invaluable perspective
to the process manager. Companies with external advisors add
value 39% more often than other companies. External advisors
often can more objectively identify the potential value enhancers
and destroyers, not to mention the deal killers. They can
help to price deals and to suggest modifications that will
improve the ongoing process of deal implementation.
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