Why mergers fail

Survey uncovers integration hot spots Given the level of competition and the pace of technology development, executives have little choice: If a business is going to grow, it must maintain and even increase the extent of its merger and acquisition activity, according to a recent Arthur Andersen study that surveyed 43 executives from 31 of the largest companies in technology, media and entertainment, and communications.

Seventy-five percent of the respondents said they expected their companies to increase their M&A activities in the next year, citing technology enhancement, acquisition of talent and intellectual property, and enhanced brand value as key drivers. Indeed, when deals are successfully completed, they can bring those benefits, as well as economies of scale and increased global presence. And while a full 89% of announced deals proceed to completion, according to the executives surveyed, and a vast majority of deals meet their strategic and financial objectives, there is a darker side to the sweetness and light.

Sixty-three percent of those surveyed said M&A deals caused a variety of "negative impacts," ranging from management difficulties and the diversion of management's attention from other business issues to decreased shareholder value and overstretched systems.

So where are companies failing in the M&A process? The big trouble spot is after the merger is signed and approved, said Paul Gladen, a partner in Arthur Andersen's U.K. office. Indeed, survey respondents reported only a 50% success rate at integrating cultures, information systems and organizational structures, and 42% said their companies' handling of the integration process and issues was less than optimal.

"The road's littered with folks that haven't done a good job at integration," said Peter Horoszko, partner in the Transaction Services Group at PricewaterhouseCoopers.

According to the survey, the most critical barrier to a successful combination was the lack of an executive champion and focus. "[Many top execs] delegate expectations for integration inside the organization," Gladen said."They're pushing down to the next layer of management to push through the integration." But the top executives still need to keep their attention on seeing the deal through the integration stage, Gladen said.

The lack of a clear plan and strategy for integration is also a major stumbling block. While two-thirds of those surveyed had a systematic approach to sniffing out potential M&A targets, three-quarters of the respondents had no clear process for the integration phase once the merger was consummated. "Every merger is different in detail, but they need to have an overall road map they're working to," Gladen said.

What also makes a plan necessary is that speed of execution is critical, especially in an industry changing as rapidly as telecommunications, Gladen said. "The market expects management to deliver on their plans and strategies quickly," he said.

The key risks in the integration phase center around people, Gladen said. Can the merged entity retain and continue to motivate the skilled people it is buying as part of the deal, especially when the top people in the acquired company are likely to see the acquisition as a threat to their organizational roles? How can the combined company blend the best of both organizations' cultures or at least avoid trampling on the culture of the smaller company? And perhaps most important, how should the company communicate the change to customers without alienating them?

"The worst mistake is to leave employees without a sense of the goals and objectives of the merger," writes L. Dennis Kozlowski, Chairman and CEO of Tyco International, in a foreword to "After the Merger," a new book authored by three A.T. Kearney consultants. "Employee understanding and buy-in are particularly necessary to achieve the early-on reductions, as well as growth."

Of course, in the telecom space, the challenges of integrating information systems can be just as acute. Combining customer relationship management systems, databases and billing systems is expensive and requires much forethought, Gladen said.

Although it sounds daunting, establishing a framework for integration is the only way a company can be consistently successful at the M&A game, Gladen said. Companies must ask, "How are we going to integrate the companies as quickly as possible once the deal is done?" he said. "Then they have to develop a process and structure for extracting that value, and it absolutely has to come from the top."