Merger & Acquisitions

There is good news and bad news to be found in the recent worldwide M&A boom. On the bright side, it has helped many thousands of merging and acquiring companies to jumpstart increased growth, and this phenomenon has invariably benefited shareholders of the acquired firms. The bad news is that there is no evidence that the long-term success rate of these deals is likely to be any better than the dismal record of the past. The wreckage of failed mergers in the 1990s is to be found all over the business landscape. Among companies with M&A horror stories are to be found AT&T, Quaker Oats, Mattel, Disney, Sony, Compaq, Lockheed, Raytheon, Bank of America, General Electric (yes, GE) and BMW, to name but just a few. Several authoritative studies have found that a merger has no better than a 50-50 chance of creating value for the acquirer - some suggest less. If true, then in 1999, when the worldwide value of M&A deals was a staggering $2.3 trillion, there will be at least $1.15 trillion of value eventually destroyed.

There are of course many reasons why mergers go sour: poor strategic concepts, personality problems at the top, cultural differences, poor employee morale, incompatible information systems, etc. But probably the most ubiquitous cause of disaster is the failure, in one way or another, to integrate the two entities successfully. After the ink dries when the companies complete the deal, unity proves elusive, and instead of coming together things fly apart. "A whole consulting industry thrives by advising companies on post-merger integration, a salvage operation to recover something from the wreckage of impossible promises and ill-considered goals," said The Economist (1999), adding prescriptively that "companies that agree on a clear strategy and management structure before they tie the knot stand a better chance of living happily ever after." Integrating two firms requires advance planning.

But there is the rub. Intelligent planning seems to be in short supply when M&A deals are done. The thrill of the deal stimulates poor strategy execution and slapdash plans for integration. A number of surveys have revealed that companies generally receive high ratings for their deal-making skills, but low marks in the areas of post-merger planning and integration. Even where basic planning does occur, the lengthy integration effort often distracts key executives while competitors take advantage.

We are convinced that the adoption of effective post-merger integration (PMI) tracking and measurement systems would, if adopted on a wide scale, greatly improve the economic value that is derived from mergers and acquisitions. The old adage "you get what you measure" has a flip side: "what you don't measure you'll never know" - until it's too late, that is. This article, therefore, will focus on: how to create a meaningful business performance model and measurement system for the PMI environment.

The performance prism

There exists a ready framework that is sometimes adapted to merger situations, the well-known balanced scorecard, developed almost a decade ago by Kaplan and Norton. However, the balanced scorecard has a number of shortcomings that make it unsuitable for most PMI situations. In order to overcome some of these defects, we launched a two-year research and development effort which led to the performance prism (see Figure 1). The key characteristic of this framework is that it is designed to embrace all the critical factors on which a successful performance measurement system depends. This makes it particularly suitable for PMI.

Like the balanced scorecard, the performance prism looks at the needs of stakeholders. But while the former addresses two stakeholders - shareholders and customers - the performance prism goes much further and counts employees, suppliers, intermediaries, regulators and communities as stakeholders. With the performance prism all of these different stakeholders are the focal point for PMI measurement design. The result, we believe, is a much more realistic picture of the drivers of merger success. More than that, the performance prism addresses what all stakeholders want and need from the newly-merged enterprise, and also (this is critical) what the company reciprocally wants and needs from them. That is to say, for example, where employees are concerned, they will likely have a stake in obtaining satisfaction from the merger outcomes in terms of employment conditions and job responsibilities, but should also have to contribute to its success in relation to revamped organization structures and functional roles.

Managing PMI is different from managing the enterprise on a day-to-day basis. Strategy has to be crystal clear, implementation razor sharp against very tight deadlines. Alternative process redesign options need to be considered and difficult decisions taken as to what capabilities will be terminated, retained, transferred or built. The performance prism takes into account those critical strategies, processes and capabilities that business combinations need in order to achieve both short- and longer-term success.

Because it drills down from strategies to processes and to capabilities, the performance prism achieves a comprehensiveness and wide-angle view that other business performance measurement frameworks lack. It also yields a superior measurement system that tracks all the facets of PMI at the appropriate level of detail. The comprehensiveness factor is particularly important in merger situations, where Murphy's Law seems to frequently operate, i.e. everything that can go wrong does go wrong. More seriously, integration of two businesses often involves complex trade-offs and unique interdependencies.

There are five interrelated aspects of the performance prism:

(1) stakeholder satisfaction;

(2) strategies;

(3) processes;

(4) capabilities; and

(5) stakeholder contribution (see Figure 1).

Each of these categories has a number of ingredients, or sub-categories. For example, strategies can be studied at the corporate level, business unit level, at the level of brands, products and services, and also at the operating level. Likewise, processes can be refined into developing new products or services, generating demand, fulfilling demand, plus planning and managing the enterprise. Finally, capabilities can be reckoned in terms of people, practices, technologies and physical infrastructure.

The ranking of these factors will depend on management's choices and the circumstances of the merger. Note that the performance prism is not a formula.