Written by admin on June 1, 2009 – 13:02
Have you discovered that achieving cost related synergies in mergers and acquisitions (M&A) is like looking for the Lost Dutchman’s gold mine? Most companies looking for them never realize their sought-after treasure:
- 39% of companies entering into merger and acquisition activity indicate at the outset that they are attempting to reduce the combined direct operating costs through the merger of the two companies. Of that 39%, only 35% of them achieve their goal.
- 9% of companies entering into merger and acquisition activities indicate at the outset that they are attempting to reduce indirect and overhead costs for the combined enterprise. Of that 9%, only 39% achieve their goal.
However, the fact that most fail doesn’t mean the task is impossible; it means the task is difficult, and most are not adequately prepared.
Today’s companies have the greatest opportunity in history to achieve cost-related synergies. The advents of computers, telecommunications, and the Internet have made businesses incredibly transparent. Three of the most discretely quantifiable and controllable cost synergy elements in today’s companies are:
- Moving to a shared service model and reducing staffing redundancies. This is especially true in areas such as Human Resources, Finance, Customer Service, and Information Technology
- Achieving procurement leverage through greater volume in purchases and consolidation of suppliers to produce discounts, lowering material costs
- Rationalization of facilities and capital equipment following the closing of the deal. This boosts the utilization of fewer resources, and eliminating those which are less capable and/or less well suited to the long term strategy of the company
These, and many more areas of opportunity, should be clearly identified and evaluated during the Due Diligence phase of the M&A process. If there are so many clear opportunities for today’s companies to achieve cost-related synergies when they merge or do an acquisition, why do so few of them materialize? Successful C-level executives from some of the biggest companies in the world, with extensive backgrounds in M&A activity, cite these reasons:
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- Lack of clarity around the reasons for the merger or acquisition
- Lack of effective metrics for the success of M&A transactions
- Poor governance; a general lack of accountability among executives over three to five years following the transaction
- Insufficient time and attention to detail in due diligence and integration
- The dynamics of the business environment; some business strategies simply don’t hold up over time.
In order to capture the expected cost-related synergies in merging companies (whether the merging results from company mergers or company acquisition), management must do these things:
- Address all thee areas of the business – leadership, processes and systems. Failing to address leadership aspects such as organization structure, performance measures, and alignment of goals can be deadly. Equally debilitating to profitability is failing to understand the fundamental business processes of the companies involved. Without that insight, consolidation efforts don’t yield expected results. In addition, companies who do not focus on getting commonality in their data and information systems find that things like consolidating purchases are far more challenging than expected.
- Move as quickly as possible toward commonality between the companies involved. Those who are most successful in M&A are those who bring acquired businesses quickly and effectively onto a common platform of fundamental business processes and information systems. Use that action to retain and more fully utilize the most capable processes. At the same time, use the broader information and skills of the combined enterprise to seize additional opportunities without growing infrastructure. When you fail to do so, it allows acquired business units to remain more autonomous for longer, stretching out the time to break-even from their M&A transactions. It will take your company longer to do everything from closing the financial books to redistributing work among business units.
- Be willing to make the tough calls - especially related to leadership, staffing, and facilities consolidations. The inability of management to make tough calls on consolidation was reported to be “significant-to-severe” by more than 75% of senior M&A managers. Another “top five” response was management hubris / unwillingness to recognize problems. C-level M&A executive interviews also show that “double-boxing” (the practice of putting two people in a single “box” on the organization chart) following M&A transactions is disastrous. It is important to understand which executives will be in leadership positions following the transaction. Do not take the path of least resistance in these situations in order to avoid offending someone.
- Communicate! One C-level executive I interviewed recently said: “You can’t over-communicate.” Effective communication stems the flow of rumors. It gets a consistent message out to the troops. It keeps everyone focused on the appropriate sources of information. It reinforces the newly merged management structure, and eases the concerns of all stakeholders – from the management team to customers and shareholders. It also helps to reduce the attrition rates among key management and staff members. Another executive said: “We always had a motto that went: ‘8 times, 8 ways.’ We felt that a message wasn’t communicated effectively unless the employees heard it eight different times through eight different channels.” Those channels included e-Mail, direct one-on-one communications, newsletters, press releases, and so on. Topics surrounding cost reduction, such as the consolidation of facilities, staff reductions, and reorganizations always bring about an extraordinary of unrest and uncertainty. The work force and the customer base are both affected. Quelling rumors and getting everyone on the same page requires continuous, accurate communications
- Plan the integration activity in detail ahead of the announcement. Then execute the plan. The level of detail in planning around integration activity is rarely adequate in M&A transactions. Companies fail to delve deeply enough into the business processes and supporting information systems of targeted acquisitions. They never really understand how to align them. If your company follows that path, the integration team will encounter nasty surprises. Those surprises will occur when the time comes to share information and move into shared service operations to reduce overhead costs. When the announcement is made, companies should already understand four things: 1) Their business strategies, 2) the initiatives that will be implemented to achieve combined financial operating targets, 3) the specific actions that will be taken at what times, and 4) which executives are accountable for the completion of each of these actions.
Capturing cost related synergies in M&A transactions isn’t rocket science, but it is hard work. It involves paying close attention to detail in processes and systems. It entails making tough consolidation related calls. It requires resolute leadership to adherence to company-wide process and system standards. M&A management, like any other form of leadership, is not for the faint of heart. However, the benefits of getting it right are enormous.
Management consultant Bill Duncan helps companies boost their earnings through aligning and strengthening their business processes and information systems. To learn more about Bill Duncan’s new book, Enterprise Optimization: Making Acquisitions Pay Off, visit http://www.earningsperformance.com
Article Source: http://EzineArticles.com/
This is a good overview of the mindset needed to pull off a successful execution during the post merger phase, and if embraced it will certainly help to avoid merger issues that so often plague transactions. The one critical point I have to make is that it looks like the posting is geared toward the attitude a C-level executive must take, but then discusses due diligence (as an example), which so often don’t actually involve the C-level executives, but are performed by M&A analysts or accountants. C-level executives need to lead through policy and the post needs to go deeper into the “policies” a C-level executive should implement to ensure the sprit of the points are embraced by the M&A analysts working the deal and making decisions.
Anyway, it’s good advice for anyone running or involved in a merger acquisition or divestiture….Bravo!
This posting really portrays the depth of expertise required to pull of a M&A or divestiture restructuring. You can see why so many organizations have post merger issues or blow their TSA commitments during divestitures and spin offs.
This may be a good framework for achieving the desired synergies, but you need to start by looking at the combination of the companies holistically. The first question that should be asked is, “what would it cost to run a combined entity?” How you slice and dice the company to achieve synergies can be answered later, perhaps using the model above. The one very important part that is hit on here is that you need to make these determinations during the due diligence process. Anyone signing up to perform an M&A transaction without answering this question during the due diligence phase is bound to experience merger issues that will sink the deal.
Planning the integration activity prior to the deal is the most important point you made. If you don’t have a realistic straw-man of how long it will take to compete the post-merger integration, during the pre-merger, there is no way of knowing when synergies will be realized.
I wanted to point out a very important merger strategy dynamic in regards to your point about, “Plan the integration activity in detail ahead of the announcement.” Not only does the planning need to take place during the due diligence, but it is critical to establish a “jointly managed” M&A Transition Program Office (TPO). Without establishing a central point to organize, track, and oversee post merger activity, comprised of accountable leadership from “both” of the merging organizations, the effort is subject to chaos as cultures clash. Furthermore, if executives from the acquiring organization are placed solely in charge, it has an adverse effect on the entire effort because of the demoralizing impact it has on the acquired company’s associates. This is compounded by the lack of critical institutional or market specific knowledge that would be brought to the table if the acquired company’s executives had a vested interest in the success of the transaction. Ideally, that interest would extend to a positive post merger valuation as well, but I digress. Having a jointly led TPO may seem like a trivial element, but it is critical to the merger’s success!