Mergers & acquisitions: culture shock

British companies have gone on the acquisition trail this year, striking
deals worth more than £31bn in the first quarter of 2007 alone. At the same
time, foreign companies have spent even more to acquire UK firms.

In Europe too, the overall total deal value for 2006 was more than ¤1.3bn
(£0.88bn). Including private equity opportunities, total deal volumes – and
values – on the continent for 2007 are expected to be even higher.

This means that business leaders in the UK, Europe and beyond are under
increasing pressure to get the strategic focus of post-M&A integration right
– before, during and after a deal. All of which begs the question: what are
those who succeed in this highly lucrative game doing right?

Intangible assets

New Hay Group research into European M&As – interviewing more than 200
business leaders and employees in 300 companies and assessing 100 of the biggest
deals – suggests that successful mergers tend to focus on both the intangible as
well as tangible assets of the companies to be combined when addressing
integration strategy.

The tangible assets of a business are the ‘hard’ measurables which can be
easily valued, such as property portfolios and IT and financial systems. The
intangible assets, on the other hand, are more difficult to evaluate, and
include such elements as client relationships, the

business culture, and the leadership qualities of its managers.

Integrating tangible assets after a successful acquisition is tricky enough
itself, regardless of whether the deal is a match made in heaven or a shotgun
wedding. But it is even more critical to understand and align an enterprise’s
intangible assets, despite the difficulties inherent in identifying and
assessing them.

Intangible assets are a class of business assets that include corporate
governance processes and procedures, the organisational structures of each
company, relational capital (that is, the strength of the relationships with
clients and suppliers), the value of the brand, the business culture of the
organisation and human capital.

Failure to deliver

It is no more than conventional wisdom that a high proportion of mergers fail
to deliver. But the true picture is more complex. Just 9% of the 200 business
leaders interviewed considered their M&A ‘completely successful’ in
achieving its goals. Most (75%) reported that the economic performance of the
integrated company had not met investors’ expectations.

Yet those who manage to get integration strategy right report significant and
sustained reward. Of those business leaders whose acquisitions had succeeded,
nearly three-quarters said they had generated value that would prove sustainable
in the long term.

So what are the secrets of success? There are strategic pitfalls and critical
success factors when it comes to integrating operations and creating an
effective new organisation focused on generating greater value.

A key element in successful M&A integration is to strike the right
balance between the alignment of tangible assets and the integration of the
intangible elements. Business leaders should focus on three core issues during
the first 90 days post-deal to maximise the chances of M&A success.

First, they should promote employee engagement by measuring levels of
engagement, ensuring clear and open communications and taking steps to secure
the right levels of compensation for key people.

Second, it is important to engage leadership teams at all levels around the
new corporate strategy. Involving key leaders early on in developing integrated
management processes and re-aligning performance objectives and reward systems
will help drive a rapid and smooth integration.

Integrating business cultures is the third critical element in the immediate
post-deal strategy. The first step here is to define the different company
cultures in order to understand the gap between them, but it is also important
to organise formal and informal integration activities, so that staff on both
sides and at all organisational levels get to know each other and work together
better. But because companies generally find it difficult to get under the skin
of the intangibles, priority is usually given to hard measurables from the very
beginning – even during the due diligence phase. More than 90% of the business
leaders surveyed said they had focused solely on tangible assets.

Preparation is best

It is during this initial period – from when the deal is announced to when it
closes – that companies must start planning how best to identify, measure and
align intangible assets, as neglecting these intensifies the risk of failure.
More than half the business leaders surveyed said failure to audit intangible
assets increased the danger of making the wrong acquisition.

Auditing these early on in the process helps companies manage the business
risk involved in integration, and ultimately impacts on how quickly the newly
formed organisation is able to generate return on investment.

Reviewing and integrating intangible assets is a tough challenge: 70% of
those who acquire businesses believe that access to the necessary human capital
data and business culture intelligence on target companies is too difficult to
obtain. In addition, half the business leaders surveyed wanted a more robust
form of reporting on human capital and other non-financial assets. Two-thirds
said that internal performance indicators, such as workforce performance, were
more reliable predictors of future success than financials.

Secrets of a successful M&A

  • Conduct an up-front audit to evaluate the intangible assets of the firms to
    be brought together and develop the merger strategy accordingly.
  • Clarify and align top teams around the merger strategy.
  • Clarify organisational structures and governance processes, such as role
    assignment, executive management structures and communications.
  • Undertake an audit of operational business culture to manage risk and focus
    on combining the two organisations.
  • Create transitional management, leadership and synergy teams to speed up the
  • Conduct audits on the alignment of senior management to manage and enhance
    the value of the intangible assets.

Source: Hay Group

Deborah Allday is associate director at Hay Group

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