M&A strategy - The real deal

With more than 70% of mergers and acquisitions failing to deliver the anticipated benefit, there is a very good reason why the likes of PricewaterhouseCoopers, KPMG and Deloitte & Touche are seeing growth in their post-merger divisions. The idea of professional firms having dedicated teams whose mission is to stop clients failing where others have failed before, is, at the very least, interesting. The real test, however, will come in a few years, when we get to see if their efforts have made a significant dent in the horrendous failure stats.

Angus Knowles-Cutler, partner responsible for post-merger integration services at Deloitte & Touche, has worked on 35 mergers and de-mergers in recent years, starting with the mid-1980s Guinness and Distillers deal.

He argues that a deal is already either a success or a failure the day it is signed. “Basically, if you get to this point without a coherent integration plan for the two businesses formulated in reasonably rich detail, with clear responsibility for delivering each phase, you will fail,” he says.

With this in mind, Knowles-Cutler suggests that possibly the single most potent cause of disappointing deals is that companies focus on achieving the deal and regard operational issues as something that can be sorted out after the celebrations. “Bringing a deal to fruition can be very demanding.

All too often, what one sees is that the principles heave a sigh of relief the day the deal is done and take a few weeks off to recuperate. By the time they get back, the opportunity to make the deal work is already irretrievably lost,” he says.

Knowles-Cutler points out that in most situations, companies set up one team to do the deal, and another, composed of operations people, who have responsibility for post-deal implementation. He argues that one of the best ways of ensuring the post-deal phase goes smoothly is to involve the integration team heavily during the deal-making cycle. “One of the main benefits you get is that the operations team will introduce a reality check into the due diligence. They are more likely to focus on where the real benefits will come from, and on the likely cost of achieving those benefits. They can also flag up problems,” he says.

Looking back on the mergers he has been involved with, Knowles-Cutler reckons they split roughly into equal thirds. One third delivered more than was anticipated, one third delivered roughly what was anticipated and the remaining third disappointed the parties involved. “The clear pattern on the success side of the equation has been this early involvement of the operations team. Serial integrators, companies whose growth strategy is predicated on acquisitions, tend to support this theory in that they always extend the scope of due diligence into the commercial and operational areas. Some also focus heavily on cultural due diligence and will walk away from deals where the cultures are too far apart,” he says.

One example of a deal that went ahead despite the two sides having very different cultures was the Cap Gemini Ernst & Young (CGEY) merger. On paper it must have looked like a very good deal in a number of directions.

It gave a strong systems integrator a solid consultancy core that was well respected in the North American market, where Cap Gemini was relatively unknown. It gave the accountancy side of Ernst & Young a way of parking its consultancy wing and getting it off the hook with the regulatory authorities.

And it appeared to give the consultants a ready-made bunch of systems integrators and a deeper set of technology solutions skills to draw on.

CGEY is understandably reluctant to discuss the results of the merger in public and declined an interview for this piece. But the word around the industry is that leading E&Y consultants found the strings were being pulled by CG systems folk and began looking for other places to go. In a merger of this sort, if the knowledge capital in the acquired party starts to walk, the deal can unravel very quickly.

An examination of its share price since the merger does not suggest the acquisition of E&Y brought CG all it hoped for. As one consultant, who preferred to remain anonymous, put it: “If you look at IBM or Accenture, CGEY is clearly still underperforming – the systems side was the heartland of CGEY, and this is the side that has won out in the merger.” In his view, the cure for CGEY now is to retrench to what it is good at, namely systems integration and outsourcing, and to focus on these activities, foregoing much of its consultancy ambition – which is hardly a ringing endorsement of CG’s decision to buy a consultancy practice.

These things are never clear cut, however, and CGEY could probably point to a number of US wins that it would never have got to pitch for without the US arm of E&Y opening doors. Nor is it particularly clear, from the outside, how the merger process could have been handled better. It is always risky when a company buys an outfit with lots of intellectual capital and highly marketable individuals. Unless the latter feel comfortable from day one, and are kept informed and feel their interests are taken care of before the deal is done, anything can happen. You can’t nail their feet to the floor.

Kenny Fraser, a director in PWC’s Global Risk Management division, argues that it is important for companies to think through the likely reaction of clients and suppliers to a merger. Clients, particularly, can be destabilised if a company merges with a rival. The rationale can be: “I’m not dealing with the same shop that deals with my hated rival, Bloggs & Co.” Fraser says: “The due diligence operation will need to look closely at whether there are perhaps break clauses in client contracts concerning mergers.” Conflicts of interest need to be recognised and require negotiation.

Then there is the impact of synergies on clients. If Client A’s account manager of ten years standing is on the post deal integration team’s “cut” list as you look for synergies, you will need to explore the likely disruption to ten years’ worth of good relations with that client.

There is also the question of how you go about communicating changes in technology roadmaps. Fraser cites the HP Compaq merger as an instance where there are likely to be plenty of technology programmes that do not see the light of day in the post merger world. “If you bought into a product on the basis of the company’s five-year roadmap, what does that say to your present position?” he asks.

The key to solving these and similar problems lies in communication with the client base. They need to know why you are planning what you are planning, and they need to feel you still have their interests at heart.

Ray Wilkinson is head of business consulting at Compass Management Consultants, which is called in to look at IT, people and process issues in M&As. “Once someone says they expect to achieve X in terms of benefits from a merger, we help them understand if and how they can make it so,” he says.

What makes Wilkinson’s work difficult is that many trade sales are now made by auction – and carried out at a pace that works against reasonable due diligence. Instead of access to a company, its staff and books, the potential acquirer only has access to a deal room, which has what the target company and its advisors claim are the relevant documents. Pressed for time, and circumscribed in its freedom of action, it is not surprising if, when it gets involved with the target, the acquirer discovers the benefits are not what it thought.

Wilkinson warns that problems can emerge extremely quickly. For example, if you merge two headquarters and end up with people from two organisations working side by side, and you have not harmonised their benefits packages, you are going to be in deep trouble. “You need to know what the key trouble indicators are in real time,” he says. “The last thing you want to do is to be steering by rear-view statistics. If you find your staff churn rate in the acquiring company has gone from 5% to 30%, in all likelihood the deal is already dead.”