Reaping the Benefits of Mergers and Acquisitions

John Coffey, Valerie Garrow, Linda Holbeche

• Publisher: Routledge
• Year: 2012
• Print ISBN: 9781138470088
• eBook ISBN: 9781136369728
• Topic: Business
• Subtopic: Business General
• Index: Business

Will the early years of the new century continue to witness the huge growth in merger and acquisition activity which marked the end of the last? The chances are that they will - witness the value of deals carried out by the top five investment banks in the first quarter of 2001 alone ($456.2 billion). The quest for the golden fleece is alive and well. Will the majority of M&As continue to fail to achieve their potential value? This book is about breaking out of the cycle of grand strategy, great prospects, poor implementation, lost opportunities. The authors believe that it is possible for M&As to realise their value - and more. Bringing home the golden fleece involves more than just setting sail in quest for riches. It's about understanding the destination/end game, and working out the most appropriate route. This book has been written with the practitioner in mind, with the thirteen chapters split into three sections. The first section provides an overview of the merger process and outlining the key elements of success. Section Two focuses on the nuts & bolts of managing the integration process - from transition to full integration. Illustrated by a detailed case study of Articon Integralis AG, the leading supplier of IT Security Solutions and Services in Europe. The final section looks at the themes that can make or break mergers - creating the culture of the new organisation, communications, retention and the roles of line managers and HR. Each section is supported by checklists that should be helpful whether you are a novice at the merger game or an expert.

Part One

Mergers and Acquisitions – In Search of the Golden Fleece

DOI: 10.4324/9780080497990-1

Jason, who was in the vigour of youth, and of an ambitious soul, cheerfully undertook the expedition to obtain the Golden Fleece, and embarked with all the young princes of Greece in the ship Argo

Merger and Acquisition Strategy

Will the early years of the new century continue to witness the huge growth in merger and acquisition activity that marked the end of the twentieth century? The chances are that they will – witness the value of deals carried out by the top five investment banks in the first quarter of 2001 alone ($456.2 billion). The quest for the Golden Fleece is alive and well.

Will the vast majority of mergers and acquisitions (M&As) continue to fail to achieve their potential value? Again, the chances are that they will – have we learned nothing from the past? This book is about breaking out of the cycle of grand strategy, great prospects, poor implementation, lost opportunities. We do believe that it is possible for M&As to realize their value – and more.

But bringing home the Golden Fleece involves more than just setting sail in quest of riches. It’s about understanding the destination/end-game and working out the most appropriate route. This involves identifying the key ingredients of a successful journey which have to be managed. Latter-day Jasons need to be able to plan and implement intelligent approaches to managing the process of merger from start to finish. They need to learn how to avoid sea-monsters and make friends who can help them reach their desired destination. They need to evaluate their success and share the learning about how to succeed. Only then can they hope to realize value. Just setting sail is not enough.

Though mergers are increasingly common, managers are unlikely to be buying and selling businesses every day and therefore lack experience of handling the kinds of change involved in mergers and acquisitions. Managers are generally very influenced by their advisers and there is an entire industry of consultants willing to advise you on various aspects of M&As. We would not wish to play down the value of advice, especially from real experts in the field, but we aim to provide some of the information you need to make the most of any advice you receive. We shall be looking at what needs to happen before and after the deal to help realize its value.

No merger or acquisition is the same as another. That’s why no single blueprint for success will work in every case. So rather than go in for the ‘Ten Top Tips’ approach, our intention in writing this book is to provide a broad map of the territory, to highlight some common stumbling blocks and to suggest a framework which should be helpful for most M&As. The book does not aim to be comprehensive or specifically tailored to your organization’s merger – that’s for you to do. However, we believe that the tools we supply throughout this book will be helpful if applied at the right time in the way that’s right for your organization. Our aim is to prevent your organization becoming just another statistic in the merger failure category.

We’ll start by defining terms, looking at the various reasons why organizations embark on M&As and why they so often fail.

Mapping the Voyage

Defining Terms

So what are mergers and acquisitions? In our research into the human aspects of M&As we used a not-too-original distinction between mergers, acquisitions and joint ventures. M&As represented a ‘marriage’, while joint ventures meant ‘cohabiting’. Although mergers and acquisitions are generally treated as if they are one and the same thing, they are legally different transactions. In an acquisition, one company buys sufficient numbers of shares as to gain control of the other – the acquired company. Acquisitions may be welcomed by the acquired company or they may be vigorously contested.

A merger on the other hand is often agreed in cooperation between two partners. However, the degree of cooperation differs and mergers are not always a marriage of two equal partners. In either case, there will be degrees of integration. Integration refers to the combining of processes, markets and activities of the acquiring and acquired organizations. It can take place at a variety of levels – ranging from merging financial and management information systems alone to a complete integration of the brands, staffing and management.

Throughout this book, the terms ‘merger’ and ‘acquisition’ are used interchangeably. This is to some extent licence on our part reflecting common usage. The strange facts of the matter are that even in the case of a true merger, employees in one organization or another may feel that they have been taken over. In some cases, even when a company has been acquired, they refuse to act as if they lack power, prompting impressions of a ‘reverse takeover’. The ideal scenario is that even when one company has effectively acquired another, employees in each company feel empowered to give of their best and be valued for it. This aspiration is often reflected in the use of the term ‘merger’ by chief executives, even when this is not the case. The use of either term in any merger scenario will reflect not only the financial realities but also people’s assumptions and experience of the merger process.

How This Book Works

Because we believe that it is possible for mergers to succeed, we have written the book with practitioners in mind, suggesting tools and approaches that we have used ourselves as consultants or learned from companies through our research. We have tried to point out the classic merger pitfalls, while indicating what can be done to increase the chances of success. In Part One we provide an overview of the merger process and set out some of the key elements of success – getting the business strategy right and understanding what needs to be managed on the people side if you are to stand a chance of implementing your strategy.

In Part Two we focus on the nuts and bolts of managing the integration process – from transition to full integration. We illustrate the integration process through a detailed case study of Articon-Integralis AG, the leading supplier of IT Security Solutions and Services in Europe. In Part Three we look at some of the themes which can make or break mergers – creating the culture of the new organization, communications, retention and the roles of line managers and HR. Each section contains checklists which should be helpful whether you are a novice at the merger game or an expert.

The Boom in Merger Activity

M&A activity appears to be on the increase, especially in mature sectors such as manufacturing and financial services which are ripe for consolidation. The late 1990s and early 2000s has seen the whole field of M&As becoming more focused and strategically driven. Mega-deals are on the increase, with Goldman Sachs reporting on being instrumental in 55 deals in the UK alone, worth in total £311 billion in 1999. Industry-specific restructurings in sectors such as telecommunications, media and technology, banking, pharmaceuticals and chemicals reflect the ongoing quest for consolidation, growth and global reach. The Glaxo Wellcome and Smith-Kline Beecham merger alone was worth $78 billion.

The slow-down in merger markets, combined with lower trading volumes following the rout of the UK stock market in April 2000, left many investors worried about the impact on profits at top banks, investment houses and on-line brokers. However, it looks as if some of these fears were overdone. Financial soothsayers predict that the fall in the spectacular number of deals which took place in the first quarter of 2000 ($1172 billion) is no more than a temporary blip.

It is notable that many companies continue to consolidate within their domestic markets before they look for partners in other European countries. According to JP Morgan’s head of M&A research, Paul Gibbs, ‘Regulatory intervention is becoming an increasingly common obstacle to M&A deals in Europe, although the number of deals that fail to proceed due to European Commission intervention is still small’.¹ Indeed, cross-border European deals are on the increase since the landmark Vodafone acquisition of the German firm Mannesmann in 2000.

Gone are the bad old days when acquisitions looked like a needless exercise in debt creation. This was an image brought about by many over-inflated deals and some spectacular failures. There appears to be a general consensus among M&A experts that deals in the heady days of the 1980s, when the whole business world appeared to be involved in merger activity, were often unrelated acquisitions, whereby conglomerates simply expanded their portfolio of activities.

Gone, too, are the days when acquisitions seemed at times to be driven by pure greed. In the 1980s and early 1990s, many a struggling company became easy prey for asset strippers. Some of course still are and arguably rightly so. The acid test seems to be – if the parts are worth more than the whole then sell them off. If the whole is worth more than the sum of its parts, this organization is being well or strategically managed and may be worth acquiring for its expertise and brand strength.

Now, mergers and acquisitions are viewed as a respectable and legitimate tool for effecting change. Today’s deals are more complex and teams of advisers are likely to include experts in the New Economy such as Internet strategists. Management teams are spending more time analysing suitable targets and generally thinking about strategic and cultural fit. They are making greater efforts than ever before to explain and justify their decisions to key stakeholders – not just financial analysts and institutions, but shareholders, customers and employees.

Why Acquire? The Strategic Drivers of M&As

Investment Dealers Digest speaks of the increasing waves of ‘strategic deal making’ which have ‘reaffirmed the role of mergers and acquisitions – regardless of size – as the preferred device of the 1990s for positioning businesses to handle the concurrent challenges of competition and ensure their survival in an often uncertain future’.²

The dominant logic of European mergers and acquisitions since the mid-1990s is strategic focus. Whether buying or selling, businesses are clarifying or re-defining their core capabilities and key markets. Public companies are looking at all their operations and reassessing their value in strategic terms. They are growing in confidence to restructure themselves and sell-off significant chunks of their portfolios. Nothing is sacrosanct. Analysis of deals by a number of specialist research organizations reveals that the majority of today’s transactions are related or horizontal acquisitions, by which companies refocus on their core business. Leading companies in sectors such as the automotive, chemical, and pharmaceutical industries, manufacturing, telecommunications, insurance and banking have either shed non-core businesses, or bought related businesses. There is an increasing blurring between public and private markets for deals.

The classic reasons for acquiring other businesses include being able to rapidly add scale and so achieve greater economies and market reach; gain access to new markets and distribution networks; capture new product technologies and innovations; wipe out competition and emerging competitive threats; provide long-term ownership and control over value created.

Another common driver of merger activity is the desire to achieve scope, where companies such as domestic gas providers also seek to provide electricity and water to the same customers. In today’s knowledge economy, a key driver of M&A activity is acquiring intellectual property and talent. Ironically, while these are potentially an organization’s most valuable assets, they are also the most fragile and difficult to control since they depend on the goodwill and commitment of people.

In the UK public sector, there is government pressure on local authorities and other public sector bodies to achieve ‘joined up’ outcomes. This is currently leading to reshaping central government bodies such as the Employment Service through merger. Local Authority Social Services divisions are being encouraged to merge with local NHS Tr...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Contents
• Acknowledgements
• Figures
• Part One
• Part Two
• Part Three
• Glossary of terms
• Index