RSS feedsDespite a drop in deal volume prompted by fallout from the debt markets, M &A deal value still reached almost $4 trillion worldwide in 2007. As investor anxiety increases and deal funding becomes more difficult to obtain, it is more important than ever to generate as much value as possible from M&A deals.
Yet, research into European M&As conducted by Hay Group and the Sorbonne revealed just 30% of business executives believe their post-deal integration efforts created significant new value.
So how can companies ensure their merger or acquisition delivers the shareholder return anticipated as quickly as possible?
Getting ‘hitched’ is not easy, and business leaders are famously flirtatious. Once a deal is done, the lure of bigger, better and newer deals can distract executives’ attention when it is needed most.
Typically, post-deal integration activities start with accounting and finance, IT systems and management processes activities that can easily and effectively be delegated to competent managers. CEOs need to focus their time and energy on what matters most to gaining competitive advantage people. The trick is to balance efforts to integrate tangible assets - product portfolios and financial systems with the task of securing the intangible assets of the new enterprise, such as key customer relationships, effective decision-making, organisational agility and human capital.
Our research demonstrates that executives who sustain their focus on alignment activities after the deal is closed, and who lead from the front are more likely to achieve their merger objectives.
Dream team
It takes more that just a willing chief executive to create a happy merger. Having an effective executive team and capable leaders throughout the organisation increases the speed and ease of post-deal integration and reduces disruption.
Assessing leadership as early in the M&A process as possible is a key ind icator for eventual success. Business leaders who review leadership capability as part of due diligence are more likely to receive visible support for the merger throughout the new organisation. Leaders are more likely to describe the new enterprise as an ‘opportunity’, while levels of employee motivation improve.
The bottom line is that these executives are up to four times more successful in delivering on the business objectives that drove the deal and increasing shareholder value above market expectations.
CEOs who fail to assess leadership capability are more likely to create a post-merger culture that destroys value, with employees describing their new culture as ‘trench warfare’.
Shake-up or break-up
In the aftermath of a merger or acquisition, ‘business as usual’ does not deliver new growth or add shareholder value quickly. By the same token, the full benefits of a merger or acquisition cannot be achieved if employees keep pre-conceived notions about their new colleagues or maintain an arm’s length relationship.
It is often easier to overcome these particular challenges by creating a new team at the top, drawing from the talent available across both organisations. Whether to replace the top management team is a crucial decision buyers need to face, either during due diligence or in the pre-closure phase.
Chief executives who appoint a new management team as early as the due diligence stage are twice as likely to reach full integration within 12 months. This reduces disruption time, helping companies to move into value creation up to six to 12 months earlier.
A new leadership team is also more likely to deliver increased shareholder value.
Around 30% of buyers who appoint a new top team claim that their integration increased share price ‘a great deal’. In contrast, only 5% of those who retain the acquired firms’ management teams report the same performance.
Replacing the top tier may appear to be a high-risk strategy, but the pay-off in terms of results more than justifies the means. The message for CEOs is clear. For companies acquiring star performers or making portfolio acquisitions in unfamiliar territory, retaining the existing management team will deliver business as usual. For buyers aiming to drive significant new value, or achieve economies of scale by integrating companies, a new management team is three times more likely to deliver results.
Deborah Allday is director of the M&A practice at global management consultancy Hay Group
