Action During First 100 Days Determines Merger Success

More than half of corporate mergers fail to create substantial returns for shareholders, according to a study by management consultants A.T. Kearney. The study also found that the first 100 days after the merger are the most critical for success. It shows that the process is often derailed by lack of speed in appointing the top management, lack of specific goals for the company's future and poor communication.

The A.T. Kearney study examined 115 multi-billion dollar mergers throughout the world and across all major industries between 1993 and 1996. The research determined that 58 percent of mergers fail to create substantial returns for shareholders. Total shareholder return is defined as tangible returns that investors receive through dividends and stock price appreciation. The research also found that mergers of equals are less successful than acquisitions of smaller companies.

"Despite good intentions, the majority of mergers fail," said Michael Traem, vice president of A.T. Kearney and author of the study. "Companies know what they are supposed to do to make the merger a success, but they often don't follow through with key steps," Traem said. "Why not? Managers may not have the power to make decisions or they don't have the capacity or time to execute decisions properly," Traem said.

For example, the study found only 39 percent of companies set up the management team within the first 100 days; only 28 percent had a clear vision of corporate goals during merger activities; only 32 percent applied active risk management during merger activities; and only 14 percent communicated the new alliance sufficiently.

Traem also said that companies too often focus solely on cutting costs to achieve synergies and overlook opportunities for market synergies. "We found that a year after the merger was complete, companies had failed to integrate their sales teams and take advantage of cross selling," he said.

Nevertheless, mergers represent a powerful vehicle for creating value. Of the mergers in the study that created value to shareholders, the top performers increased shareholder returns by an average of 25 percent.

A.T. Kearney has identified the seven key steps for merger success:

• Create a clear vision and strategy
• Determine management responsibility
• Evaluate and develop synergies realistically
• Aim for "early wins"
• Limit risks
• Break down cultural barriers
• Communicate effectively

Among the other findings:

• Seventy-four percent of the top performing acquirers carried out more than three mergers in the previous five years
• Eighty percent of the top performing deals are between companies in related businesses
• Acquirers with a strong core business show a high track record of merger success
• Acquirers mainly try to impose their own culture instead of creating a new combined culture

The industries represented by the mergers in the study are: consumer goods and retail; chemicals, healthcare and pharmaceuticals; metals and mining; automotive and transportation; banking; aerospace and defense; telecom and electronics; utilities; construction and machinery; and media and entertainment. In each industry, there were stories of success and failure.

The countries represented in the study include: Australia, Belgium, Canada, Finland, France, Germany, Italy, Netherlands, Norway, Sweden, Switzerland, Japan, the United States and the United Kingdom.