Embody --
Mergers and acquisitions are done for a variety of reasons, with the
premiums usually paid during the process coming back to the investor
in the form of performance improvements:
QuickMBA
"Mergers & Acquisitions" (undated)
http://www.quickmba.com/finance/mergers-acquisitions/
Wall Street looks at it as a normal process of rationalizing an
industry -- one where a large number of competitors shake out to
between two and four large firms. At any time you can read articles
like this one in Boston.com predicting industry rationalization:
The Boston Globe
"Mobile Matchmaking" (Howe, Dec. 29, 2003)
http://www.boston.com/business/technology/articles/2003/12/29/mobile_matchmaking/
However, mergers can fail. The Boston Globe article was spurred by
AT&T Cellular going up for sale. AT&T Cellular was the product of a
merger between AT&T and McCaw Cellular, one which ran into serious
difficulties in the last 5 years as the company failed to deliver on
customer service and had the lowest retention rate of cellphone
customers.
MEASURES
===========
The measures used for a successful business combination depend on what
the objectives are. Different studies have cited different core
reasons for the phenomenon.
Wharton's Harbir Singh has done a series of studies on banks and
insurance companies and ascribes three reasons:
1. cost savings and efficiencies. These would be measured by the
cost controls, workforce reductions, sales of assets, and reduction in
capital required.
2. increased market dominance. These would be measured by increase
in profit margins.
3. response to a changed competitive environment. AT&T acquired
McCaw Cellular because it was a key sector in the telephone
communications business. It also acquired TCI Cable as part of a
grand strategy to build a communications network company, a strategy
that was later reversed as the company spun out 4 separate businesses.
This "strategic" action is likely measured by market share in the new
target markets:
Motley Fool
"Understanding AT&T's Cable Buys" (Lebor, June 22, 2001)
http://www.fool.com/news/foolplate/2001/foolplate010622.htm
Wharton School of Business
"Pursuing Merger Value in Financial Services"
http://fic.wharton.upenn.edu/fic/m&a.html
Two Rutgers researchers, Randall S. Schuler and Susan E. Jackson, in
an article that appeared in European Management Journal, cited a much
larger number of inspirations to merge, and even said that the last on
the list appears to be increasing rapidly:
? Horizontal mergers for market dominance; economies of scale
? Vertical mergers for channel control
? Hybrid mergers for risk spreading, cost cutting, synergies, defensive drivers
? Growth for world class leadership and global reach
? Survival; critical mass; sales maximization
? Acquisition of cash, deferred taxes, and excess debt capacity
? Move quickly and inexpensively
? Flexibility; leverage
? Bigger asset base to leverage borrowing
? Adopt potentially disruptive technologies
? Financial gain and personal power
? Gaining a core competence to do more combinations
? Talent, knowledge, and technology today
European Management Journal
"HR Issues in Mergers & Acquisitions" (June, 2001)
http://www.cba.uh.edu/ihrmc/workingpapers/Schuler5.doc
And, Bryan Burrough and John Helyar described the acquisition of RJR
Nabisco in a leveraged buyout in their best-seller, "Barbarians at the
Gate." In this instance, it shows the business model of leveraged
buyout firms like Kohlberg, Kravis, Roberts or Forstmann, Little. The
key measure? Increasing cash flow to retire debt -- by any means
necessary from cost-cutting; to deferring capital expenditures; to
sales of business units:
Amazon.com
"Barbarians at the Gate" (January, 1990)
http://www.amazon.com/exec/obidos/ASIN/0060536357/qid=1082740214/sr=2-1/ref=sr_2_1/103-5148680-6060644#product-details
FAILURES IN PERFORMANCE IMPROVEMENTS
========================================
As different as M&A measures are, explanations for the failure of
planned increases in value are very different as well.
Harbir Singh, in his studies, finds that:
? experience in mergers makes firms more successful
? replacing management at the acquired company is a negative
? in the financial industry that was studied, acting to standardize
processes and procedures is a positive
? integration of operations is a positive
Maria Kouli, deputy director of the National Bank of Greece, blames
failures not on poor strategy or financial analysis but on the poor
management of people:
Failures
Management Centre Europe
"Why Do Mergers & Acquisitions Fail to Create Synergy?" (Kouli, August, 2001)
http://www.mce.be/knowledge/162/37
My own experience in a major acquisition -- of Zenith Data Systems
(then the #2 PC supplier in the world) by Groupe Bull -- lends
credence to Kouli's analysis. The acquirer was a company devoted to
mainframe/minicomputer Unix architectures, sold via a direct sales
force.
The target was a company that had built a close relationship with
Intel and Microsoft -- and was a key force in the development of
Windows. In addition, much of Zenith Data Systems sales were not
direct -- but through resellers.
Despite investing billions of dollars in the PC business, Bull lost
hundreds of millions of dollars. Within a year of the acquisition,
Bull management had so alienated Microsoft that it removed Zenith Data
Systems from its strategic partners list:
Groupe Bull Chronology
http://perso.club-internet.fr/febcm/english/chronoa13.htm
http://perso.club-internet.fr/febcm/english/chronoa14.htm
Kouli cites Mark Sirower's analysis of 167 mergers and the conclusion
that two-thirds of them fail deliver the economic results intended.
Sirower's book (which I haven't read) is a detailed description of
performance improvements that companies in his study used:
Amazon.com
"The Synergy Trap"
http://www.amazon.com/exec/obidos/tg/detail/-/0684832550/qid=1082741215/sr=1-1/ref=sr_1_1/103-5148680-6060644?v=glance&s=books#product-details
You may also find Prof. Paul Godfrey's survey of "How Mergers Go
Wrong" to be useful, as he summarizes the 21 studies that have been
done on the topic, including KPMG and Booz Allen studies:
Marriott School of Business, Brigham Young University
"How Mergers Go Wrong" (Godfrey, undated)
http://marriottschool.byu.edu/teacher/mba680/godfrey/1
ACTIONS TO INCREASE SUCCESS RATES
===================================
Recent literature has many recommendations for going beyond financial
measures to include customer, process and internal assessments. This
consulting group's recommendation is to go beyond the strategic plans
and financial plans that were developed as tools during the 1970's and
1980's to using a "balanced scorecard" to get the opinions of
employees, customers and even suppliers:
Orion Development Group
"Conducting a Scorecard"
http://www.odgroup.com/articles/mergers1b.html
Orion Development's approach is supported in Kouli's recommendations
as well, which are:
? Conduct a cultural "due diligence"
? Ensure organizational capability
? Implement systems and procedures to support the goals of the business combination
? Manage the culture
? Manage the transition quickly
? Monitoring information flow
Paul Godfrey, the Brigham Young business professor, says that
acquisition integration should start before the deal closes and be a
continual process. In addition, his recommendations include:
? integrate technical and cultural aspects of the firm
? put both measures and communication in place
? remove "guerrillas" who oppose change
KPMG International, the consulting and accounting firm, looked at more
than 700 deals and interviewed executives from more than 100 of the
companies involved. In 1999, it cited 6 factors in making mergers or
takeovers successful. Three were quantifiable:
-- synergy evaluation (business fit),
-- integration planning
-- due diligence.
And 3 were people-related issues that KPMG felt needed be evaluated
BEFORE the conclusion of a deal:
-- management team
-- cultural issues
-- communications with employees, shareholders and vendors
PRNewswire
"KPMG Identifies 6 Key Factors for Successful Mergers & Acquisitions"
http://www.riskworld.com/PressRel/1999/PR99a214.htm
Google search strategies:
"likely mergers"
mergers + acquisitions + "performance measures"
Best regards,
Omnivorous-GA |
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