Are chief executives and corporate boards getting better at mergers and acquisitions? Accenture research and subsequent work with clients show that half of large corporate mergers create at least marginal returnsan improvement from a decade ago, when many studies concluded that as many as three-quarters of all mergers destroyed shareholder value as measured two years after the merger announcement.
Of course, even with this progress, CEOs betting their careers on a merger's success may still find better odds at the tables in Vegas. Senior management teams continue to face immense challenges when attempting to integrate two organizations joined through a merger or acquisition. Some past dealmakers, such as those behind the AOL/Time Warner and DaimlerChrysler mergers, have discovered this the hard way. We can only hope that the executives behind more recent M&A announcementssuch as Kraft/Cadbury, CenturyLink/Qwest, and United/Continentalhave begun to learn the hard lessons of successful M&A.
Overall, we see two main drivers of more successful M&A. First, CEOs and boards have become more focused on using shareholder-value creation as a yardstick of success, the measure Accenture used in the study cited above. CEOs are talking less about mergers succeeding solely because market share was gained or capabilities were embedded into a broader organization. These leading indicators are important, but the don't tell the whole story demanded by the market.
Some Basic Questions Second, leading companies have institutionalized a life-cycle approach to M&A. They are starting with the end in mind, asking such fundamental questions as: What will the new company look like? How will we implement this vision? How will value be created? More often, they are rewarding deal owners and their key lieutenants to see a deal through from beginning to end. And they are deploying playbooks of proven approaches, tools, and best practices that cover and link each stage in the M&A process.
As value-creating acquirers have begun to deploy this life-cycle approach to M&A, they've become more attuned to the importance of actually capturing the value of their deals during implementation. In 2006, Accenture and the Economist Intelligence Unit surveyed more than 600 C-suite executives who had recently been involved in a large merger or acquisition. These executives attributed success to mastering three stages of the M&A life cycle: conducting due diligence, understanding cultural integration issues, and most critically, planning and executing the merger integration process.
Of these three stages, the merger integration process was seen as presenting the most challenges, caused by a mix of unrealistic expectations, insufficient up-front planning, inadequate resources to manage the integration process, and poor communications. Breakdowns in any of these areas can have a far-ranging impact on a merger's success, because they can disrupt processes, distract from the day-to-day business, damage employee morale, and most importantly, erode the merger's promised synergies.
There is hope. By studying the approaches of organizations that consistently create value from M&A, we can develop blueprints for future success.
Our client work and research have helped us to identify five key drivers of a successful merger integration process.
1. Don't just integratecreate value.
It's easy to get lost in a multitude of integration checklists and activities. Value-creating acquirers will focus scarce resources and management attention on a few core activities that create synergies and value. Start with the end goal in mind; a clear vision of the merger's rationale and the integration strategy to achieve it will help teams prioritize the key activities instead of managing the process at the most micro of levels.
2. Set clear aspirations.
Leadership teams need to underpromise and overdeliver on their synergy targets to investors and analysts. The targets must be realisticthe Street will see through any attempted sandbagging and will punish the offenders. Internally, however, management should set stretch targets that are at least 25 percent to 50 percent higher than the synergy targets shared publicly. This creates the equivalent of a "rainy day fund:" If one team can't find enough synergies to hit its target, there's still room to beat the Street. And if all the synergies come through, well, you're a hero in shareholders' eyes.
3. Don't underestimate resource requirements.
Merger integration is demanding work, so make sure it is resourced with a team of "A" players and a strong supporting cast. Many organizations fall into the trap of keeping their best managers focused on day-to-day business while assigning integration responsibilities to bench players. But if this second-tier talent comes to believe they won't get a chance to run what they design, they are not likely to display the passion and ownership to deliver the plans and results you need. Instead, get your A-teamers focused on the core integration issues, equip them with the proper financial and career incentives to focus on integration activities, and support them with additional resourcestemporary workers, consultants, even corporate retirees who know the businessto keep the integration on track.
4. Help ensure comprehensive, frequent communications.
During a merger integration, silence adds stress to an already jittery workforce. Leadership that hesitates to communicate with stakeholders about layoffs or other organizational changes is asking for trouble. Even if you can't provide specific answers, you can and should communicate a process that will lead to those answers. It's far more powerful to say, "We don't know, but here's how and when we're going to find out," than to say nothing. And it's also more powerful to say, "I'm sorry, I can't disclose the answer to that," than to mislead people. Smart employees will sniff out dissembling among their leaders.
5. Take advantage of this unprecedented opportunity for change.
Mergers are big eventsconstituents expect changes in capabilities, organization structure, and key processes. They also expect changes in the way success is measured and rewarded. Since they are expecting change, you should deliver it. Take advantage of the opportunity to challenge all components of what we call the "operating model:" end-to-end capabilities such as "design, market, and sell," execution elements such as talent and business processes, and performance measures needed to deliver a business strategy. Integration teams that try too hard to maintain "business as usual" will actually lose credibility and the opportunity to implement major changes after the merger is consummated.
These practices work. Our research shows that companies following these principles as part of their merger integration process outperformed the S&P 500 by approximately 12 percent at the two-year mark following a merger announcement.
Clearly, the merger integration process is a critical component of successful M&A. But it is just one important phase of the M&A life cycle. Merger integration must mesh seamlessly with other key stages, such as due diligence and cultural alignment. A merger is not a series of discrete hand-offs from one phase to the nextsuccessful mergers are enabled by a highly skilled, proactive integration team that owns the entire process from beginning to end. Getting all the pieces to align is not easy, but doing so can dramatically improve the odds for success.