Feb 28, 2005 12:00 PM,

Now comes the hard part

By John Hanson

Numerous studies have shown that many acquisitions fail to fulfill management's expectations or generate economic value for the buyer. So what is the best way for companies like SBC Communications and AT&T — as well as Verizon, Qwest, MCI and others contemplating major mergers — to guarantee that they succeed?

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The key is acting purposefully in the months following an acquisition. Growth and prosperity hinges on its prowess at integrating an acquisition into existing operations. The way management addresses the issues involved in merging two firms into a single new entity — from structure to culture — often determines whether an acquisition creates or destroys shareholder value.

Several factors can help ensure successful integration:

Focus
Many companies get lost in the details of integrating operations. The secret is to focus on a small number of individual initiatives. Management must quickly identify high-payoff actions and carry them out. In many cases, 75% of a merger's value can be derived through a half dozen initiatives.
Do it fast
Delays can be costly. Given a capital cost of 15%, for example, any productivity improvement delayed by three years is worth half of what it would have been worth at the time of the merger. Disposing of assets is an effective way to narrow the focus and speed the integration process. Moving fast also allows companies to score quick wins, which can have a positive affect on morale.
Differentiate and de-average
The aim of an acquisition is to enhance profitability and bolster growth, not to integrate at any cost. Different areas of the company should be handled differently, depending on whether full integration is necessary or whether pooling resources can offer equal or near-equal value.
Build on best practices
Best-practice analysis is an important complement to value-based planning. Pinpoint the best performer on each business activity and introduce those practices throughout the merged entity. External best-practice analysis — both of competitors and companies in other industries — often provides insights on how to reach new levels of performance.
Rethink incentives
It is pointless to hope managers will initiate and execute ambitious plans without fundamental changes in their incentives. Establish well-defined transitional objectives in addition to longer-term business goals.

Any firm hoping to enhance profitability through acquisition must develop a clear knowledge of where the firm's value lies, then focus energy on realizing that value. To make the program work, take a common sense approach to post-acquisition management.