Merger Mogul, Cross-Border M&A News, Private Equity Real Estate Alert and Post-Merger Integration News, our free email news alerts
Can This Merger Be Saved?
It's a question that has forever vexed the M&A community: Can flawless integration make a bad deal good?
August 19, 2008
In a more buoyant era, the Time Warner and AOL merger seemed to be a hopeful signal of things to come. The deal, initially, was lauded by marketwatchers and tech mavens alike as an imaginative merger that could provide an archetype for future media conglomerates. It’s only in hindsight, however, that experts are more inclined to assign different superlatives to that fateful decision to combine.
One question hindsight doesn’t answer, however, is: What if? What if the two businesses took a different approach to integration? What if Time Warner put together a more realistic plan upfront? What if the purchase price wasn’t based on synergies that didn’t exist? Basically, could a flawless integration have saved a merger that hindsight tells us had no business ever happening?
Recent activity from strategic buyers tells us that companies have, by and large, taken a more realistic and measured approach to M&A since the tech bubble burst eight years ago. Those same strategic buyers who once threw their hands in the air declaring M&A triumph during the late nineties are using those appendages to crunch numbers harder to eliminate every redundancy, monetize unnecessary assets and, in rare instances, perhaps squeeze the neck of the seller, all in the name of making smarter M&A decisions.
It’s not necessarily integration, per se, but it’s where the integration process begins. Before a bid is even made, acquirers are careful to fireproof a deal by maintaining a realistic approach to synergy calculations. According to Cherie Homa Smith, managing director and group head in KPMG Corporate Finance’s Baltimore office, company management also needs to tether performance goals to more than just a revenue or Ebitda touchstone. Company leadership, prior to close, should already be attached to the long-term goals involving the target's operations. And Smith adds that performance objectives should include more qualitative benchmarks, such as cross-selling and employee retention goals.
Still, that doesn't answer the question of whether or not flawless integration can save a bad deal. It does underscore, however, that bad deals can be avoided in the first place with a focus on integration in the due diligence phase of dealmaking.
To answer the first question, though, marketwatchers might consider the merger between Hewlett Packard and Compaq seven years ago. Initially, the deal was met with widespread growls, and even cost former HP CEO Carly Fiorina her job in 2005, when the consensus among deal pros and pundits was that the merger was a dud. Today, however, most agree that the merger was among the best of the decade. Business schools and consultants even use it as a case study on integration. Stanford Business School, for instance, produced a paper lauding HP's pre-merger planning efforts, while IT consultant IDC cited that HP's adoption of Compaq's fast paced corporate culture helped goose the combined company's business velocity.
Michael Dell famously referred to the transaction as the "dumbest deal of the decade" shortly after it was announced. After over a reported million man-hours spent facilitating the combination, however, the consensus now among pundits is that it was a logical marriage all along.
Steps to a happy marriage
So what exactly goes into a happy marriage? It's question whose answer depends on the situation, but one universal must is for the merging companies to clearly illustrate new roles --- and establish a contingency plan for the likely event that someone will jump ship. George McCormick, director of management consultant Hay Group's M&A team, notes, "Management goes through a period of shock," further describing that the target's management team is then thrust into the uncomfortable position of coping with lesser roles. Delta and Northwest, for example, recently unveiled the new management team for the combined company, ostensibly giving the two companies months to digest the changes before the deal is actually supposed to close.
It's also important, experts say, to get the target company's management team involved. One pro, familiar with Adobe’s 2005 $3.4 billion buy of Macromedia, said that the deal played out like a highlight reel of integration best-practices. Whereas many acquired companies’ management will see themselves relegated to ancillary roles, some of Macromedia’s execs were catapulted to senior roles during integration. The payoff? Once the earn-out checks were issued, some elected not to clean out their desks, making it more likely that the merger's long-term goals, like the short-term hurdles, will also be met.
"Very often, the acquired company’s management has better executives and governance,” McCormick said, adding that recognizing and integrating talent should be a priority for all buyers.
One of the more debatable components to integration is the speed of implementation. Conventional wisdom often dictates that faster is better, and many deal pros will cite a 100-day plan to establish a timeframe for key benchmarks. As the HP/Compaq combo demonstrates, however, sometimes mergers need time gestate. Stephen Miles, a partner and managing director in the leadership consulting practice for executive search firm Heidrick & Struggles, says that for mid-market companies, taking it slow and steady is the surest way to avoid mistakes.
Miles also notes that ambition can sometimes get in the way. He also rejects the idea of a "merger of equals," calling such a deal a "death knell" for buyers and sellers alike. Miles says that first-timers should at first concentrate on tuck-in deals and then progressively go after larger targets. "When you've done something over and over again, you're going to get better at it," he notes.
He emphasizes that even with larger deals, "Someone is being acquired," while a merger of equals creates more questions than answers about where power lies.
Another area where mergers fail is in the culture. To come into the integration process with any preconceived notions of how management will operate can create boardroom rifts, Miles says. And even for acquirers, a sure way to lose employees is to be unclear about expectations. This is one component, Miles concedes, that requires speed. "They derail and fail in weeks or months... not more than a year," he adds.
Of course, like a marriage that has hit one too many pot holes, there are deals that cannot be salvaged. Poor fits, poor integration, poor planning, whatever the cause, some deals just aren't meant to be. At the same time, there are instances in which a flawless integration can whittle a square peg to fit a round hole. And in the end, as HP and Compaq demonstrated, these deals will be seen as logical all along.
For more information on related topics, visit the following:
