Digital Transformation » Systems & Software » Insight – The not so happy truth about mergers

Companies such as Guinness and Grand Metropolitan are likely to incurar from a bed of roses. Interesting timing, though. higher costs and fewer benefits than expected as a result of merging, according to research commissioned by KPMG Management Consulting.

A survey of 300 board members of large European companies found that M&As do not always deliver the promised benefits. But at the same time, companies are proclaiming success for their M&A deals without having measured the results.

In fact, more than half (55%) of the survey respondents were unable to place a value on restructuring costs following a merger. A similar number (53%) of companies did not carry out a post-transaction review to formally assess the combined organisation.

While more than 80% of companies claimed their M&A transaction was either “very” or “quite” successful, just 45% carried out a post-transaction review. Alan Reid, chairman of KPMG Management Consulting Europe says the overall impact of M&A activity is not really known. “Many respondents do not know the costs associated with their M&A deals. In the case of those that did, the costs were often higher than had been expected,” he said.

Of the companies that did review their M&A deals, the majority (54%) focused on the cost of completing the transaction. Staff and organisational structures – which includes redundancy, relocation and integrating employees and is generally thought to be the heaviest cost of an M&A – were reviewed by just 22% of those surveyed. Just over one in ten (11%) of respondents reviewed the IT aspects and corporate culture/management methods.

Timing was also an issue. In 43% of cases, the merger or acquisition took longer than expected, by definition adding to M&A costs. “Planning for the key elements of corporate culture, human resources and IT were left too late,” says Reid.

The survey also revealed that the majority of companies gauge the success of their transaction in terms of the process, but not in terms of measurable outcomes. Issues such as improved profit and shareholder value were neglected.

“In fact, probably half the deals done do not create shareholder value,” said Alan Clark, principal consultant at KPMG.

Other M&A objectives, which include gaining market share, making a strategic move into a new area and achieving economies of scale, were not fully achieved. While 41% of those surveyed said the purpose of their M&A activity had been to increase or protect market share, just 18% said they had achieved that goal. Respondents who aimed to achieve economies of scale were less likely to regard their M&A transaction as successful in achieving that target.

Another key hurdle was IT. In over a third of cases the IT systems of the two companies were integrated, in a quarter of cases the “acquired” company’s IT system was discarded and in 15% of the cases a new system was installed for both companies.

The respondents said the single biggest dilemma with IT was problems with software, followed by the systems costs (23%). Also, 18% of respondents said incompatibility was an obstacle to IT integration and 12% said the integration had proved to be the largest obstacle, followed by educating or retraining staff.

When asked about the outcome of their M&A activity, just 12% of respondents identified the IT strategy at the outset but it was left principally to the post-merger plan and implementation, which is too late.

Nick Griffin, a partner at KPMG, argues that information is the lifeblood of an organisation and, as such, requires careful planning in the early stages of an acquisition. “It’s rare for IT to be a deal-breaker,” he admits, “but when you bring two companies together there are a lot of practical issues that need to be addressed sooner.”

On reflection, many of those surveyed would change their approach to M&As in future. The respondents who said their transaction was not successful would seek better planning of the post-merger stage (21%), would carry out greater due diligence (12%) and act faster (12%). Those who considered their transaction to be very successful said they would seek external advice sooner (10%).The overall message is that planning for all the key issues arising from an M&A deal, especially IT integration, need to be addressed sooner.

One final note: when a company gets taken over, there’s a dangerously high chance that the FD’s days are numbered. The survey found that in more than one in three cases (34%), the finance director of the acquired company left the combined organisation following completion of the deal.

With eerily appropriate timing this research was published in the same week that KPMG announced its own merger with Ernst & Young. It will be interesting to see if KPMG experiences the same pitfalls found in its own research…

Colouring in the Map: Mergers & Acquisitions in Europe is available from KPMG Management Consulting on (0171) 311 8865.

by Jane Barber.