Two merger integration imperatives:

urgency and execution

Arthur Bert, Timothy MacDonald and Thomas Herd

Arthur Bert, Timothy MacDonald and
Thomas Herd are consultants specializing in
mergers, acquisitions, and alliances in the
consulting ®rm A.T. Kearney's strategy
practice. Art, based in Melbourne, Australia,
Managing acquisitions is one of the hardest jobs a CEO has ± and I'm talking
about friendly deals. It's amazing how fast things can fall apart (Norm Augustine,
retired CEO, Lockheed Martin, Fortune, September 2, 2002).

leads the ®rm's work in South Asia
(art.bert@atkearney.com). Tim, located in
Toronto, is President of A.T. Kearney
Canada (tim.macdonald@atkearney.com).
Tom, a ®rm principal based in Chicago,
specializes in merger integration
(thomas.herd@atkearney.com). More of the
®rm's insights on effective M&A practices is
available at their Web site
www.atkearney.com/thoughtleadership (see
two articles in the A.T. Kearney journal,
Executive Agenda: ``Merger integration/take
two'' in Vol. 5 No. 2, and ``Building a better
bridge'' in Vol. 6 No. 1). Additional M&A
integration advice by the ®rm can be obtained
from a recent book by three of its consultants:
Winning the Merger Endgame: A Playbook for
Pro®ting From Industry Consolidation
(McGraw-Hill, 2002) by Graeme K. Deans,
Fritz Kroeger and Stefan Zeisel.
F
or an acquisition to succeed, a company not only needs to select the right
target, but must also have a culture in place that accepts the acquisition as
quickly as possible. The operative word is quickly. A.T. Kearney study ®ndings
indicate that a company has just two years to make the deal work. After year two, the
window of opportunity for forging merger synergies has all but closed.
Consider, as an example, the top acquirers in our study. Among non-manufacturing
(and smaller ®rms) 85 percent of all merger synergies were realized within the ®rst 12
months after the merger closed (see Exhibit 1). These companies harnessed just
15 percent in the second year. Top acquirers among manufacturing companies and
larger ®rms had slightly different numbers ± most captured 70 percent of merger
synergies in the ®rst year, and 30 percent in year two.
Furthermore, companies that meet or exceed analyst's expectations within the ®rst
two years after change of control are more likely to earn positive total shareholder
returns. Depending on the industry, a top-performing merger can increase share-
holders' wealth anywhere from 4 to 65 percent above industry averages. For example,
a year after Telecom Italia purchased Pagine Gialle, an Italian directory assistance
business, the company had realized numerous synergies and was quick to integrate.
Its total shareholder returns (TSR) rose by 11 percent and the company boasted 47
percentage points above its industry index. Two years after the deal closed, its TSR
had dropped by 10 percent but the company was still a comfortable 39 percent above
its peers.

`` A.T. Kearney study ®ndings indicate that a

company has just two years to make the deal
work.
''

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 Exhibit 1 Key to achieving targeted bene®ts is speed and sense of urgency
with a two year timeframe

By comparison, companies that squabble over the details of integrating their

operations only frustrate customers and employees and delay the process. When
integration takes longer than two years, there is a distinct, quanti®able loss. Not only
do these companies not maximize the potential bene®ts of building synergies, they
often destroy shareholder value (see Exhibit 2).

Generally, those companies that achieve momentum early are more apt to produce
successful acquisitions ± creating value for both shareholders and customers. How to
do it? In our experience, momentum is gained as a natural byproduct of a sound
strategy and the personal energy and involvement of the executive team.

The art of execution

With the two-year time frame established, and a sound strategy communicated to all
stakeholders, leading acquirers turn their focus toward the execution. The way in
which a merger or acquisition is executed can make or break the deal. In fact, our
study ®ndings indicate that the overwhelming reason for failed mergers lies in ¯awed
executions (see Exhibit 3). The reasons are as diverse as the players.

Some companies are overly ambitious. They buy a company, close the deal, and then
rather than focus on the implementation, begin plotting the next big win. What is the
next company to acquire? What is the next product to roll out? For others, the trouble
begins when the merger or the acquisition is not piloted from the executive level ±
when the integration is deemed an operational issue to be handled by the operations
team.

To an even greater extent, problems are due to a clash of cultures and different
management styles. An acquirer that takes a hands-off approach with an acquired
company that is more accustomed to hands-on management, or vice versa.

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Exhibit 2 Few mergers actually create shareholder value . . .

Deutsche Telecom, for example, has suffered its share of culture clashes. Its joint
ventures with France Telecom and Italy Telecom collapsed and when it ®nally
purchased its ®rst US company, VoiceStream, the critics charged that the root cause
for failure was Deutsche Telekom's top management's inability to bridge cultural
divides, skills essential to making cross-border mergers work. Now, VoiceStream is
valued at less than half the e 33 billion Deutsche Telekom paid for it.

A solid execution depends on management's priorities ± how they are balanced,

delivered and communicated. Generally speaking, the leaders in merger or acquisition
integrations, companies such as NestleÂ, Cisco Systems, Nations Bank and GE, abide
by seven ground rules.

Seven rules of M&A execution

1. Select leadership quickly

Establishing the guiding principles for the merger early on, as well as the leadership,
helps to manage the expectations of key stakeholders. The faster the merged
company solidi®es management the sooner it can exploit growth opportunities.

Yet, nearly 40 percent of all companies in an A.T. Kearney study faced a leadership
vacuum because they failed to put the establishment of leadership at the top of their
priority list. With no one to secure buy-in or provide a clear direction, con¯icts simmer,
decisions go unmade, and constituencies ± from employees to customers to market
analysts ± lose patience.

Top acquirers, by comparison, set their watches according to a tight timeline: the
top three layers of senior management are selected, and most management

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Exhibit 3 Mergers typically fail due to poor execution, not strategic rationale

Problems Identified in Percent of Respondents

Post Merger Integration

Under-communication 58%

Financial/synergy Expectations Unrealistic/unclear 47%

New Org. Structure With Too Many Compromises 47%

“Master Plan” Missing 37%

Missing Momentum 37%

Missing Top Management Commitment 32%

Unclear Strategic Concept 26%

Missing Pace of Project 26%

IT Issues Addressed Too Late 21%

Source: A.T. Kearney’s Global PMI Survey 1998/99

responsibilities allocated within the ®rst seven days. Within two to four weeks, the next
management levels are appointed, and so on until all subsequent levels are set. By the
end of the third month, the entire organizational structure is established and people
are slotted according to speci®c tasks and divisions.

2. Establish clear goals and manage expectations

Because the market tends to trust mergers that demonstrate progress, companies
can build market con®dence by linking their merger cost and revenue targets to
recognizable management actions, delineated in a high-level integration plan (see
Exhibit 4).

The best integrators create a sense of urgency by immediately rolling out the highest
priority projects and quick-win synergy projects. Quick wins demonstrate to investors
and analysts that value is being created. Achieving sales pull-through of key product
lines is a standard quick win strategy. Another is to close a greatly underused facility,
or to rationalize redundant R&D programs. By ticking off the quick wins, the company
sends out a clear message: it is up to the challenge of tackling the longer-term synergy
issues that will arise over the next 12 to 24 months.

`` The best integrators create a sense of urgency by

immediately rolling out the highest priority
projects and quick-win synergy projects.
''

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 Exhibit 4 Internal targets and efforts should drive to accelerated
shareholder value creation

Once the merger or acquisition is announced, analysts will want to know the cost,
the anticipated timing for realizing merger synergies, and the expected return on
investment. It is important to establish goals early and manage expectations skillfully.
Beating the market's expectations is perhaps the CEO's best opportunity to create
positive shareholder value.

Rajiv Gupta, chairman of Rohm and Haas (R&H), expertly handled market
expectations during the company's integration with Morton International. To the
analysts, Mr. Gupta was conservative in his estimates of the cost savings and the
timing, while internally he drove the organization toward aggressive targets and
schedules. When the actual numbers outpaced the estimates ± and did so three
months ahead of schedule ± R&H's stock climbed.

Be careful, though. There is a ®ne line between setting easy goals and setting
conservative, but realistic expectations. And failure to meet appropriate goals will
garner swift consequences. Examples of such market reprimands are common: Tyco
International's stock plummeted on the perception of lost management con®dence.
Tyco became so big and diversi®ed it was unable to extract synergies from its far-¯ung
portfolio of acquisitions. Wells Fargo was plagued with employee defections when it
brought First Interstate into its fold. When faith in the judgment of management falters,
lower stock prices and lost investment dollars are not far behind.

Even the perception of uncertainty can do damage. Consider the case of John Roth,
CEO of Nortel when it acquired Bay Networks. On a conference call with analysts
following the acquisition, Mr. Roth hesitated when someone asked about the progress
of the integration. Minus a clear, con®dent message, analysts suspected the worst.
The next day the stock plummeted.

3. Build a strong integration structure

Top acquirers establish a merger steering committee made up of the company's

senior executives. The executives delegate the integration efforts to individual,
decentralized teams in the various business units and functions. And they stay

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involved to make certain that the company's guiding principles and general strategy
translate into clearly identi®able and measurable targets.

Support for the steering committee comes from a program management of®ce, which
becomes the center of the integration and is used to maintain consistent processes,
monitor progress and coordinate teams. A master project plan and Web-based
management tools will help to identify potential problems and manage risks.

Hugh McColl, the CEO of NCNB before it became NationsBank and then Bank
of America, aggressively integrated acquisitions to ®t his core business model.
Integration teams developed an integration template for each core function and
process of the business and deluged a newly acquired company on day one with
integration specialists. These specialists completely integrated the new company in all
areas, from IT to lending systems and processes, to credit scoring systems.

In mega mergers, leaders must be prepared for legal or regulatory matters that
can hamper the integration process and delay the blending of the companies.
Government regulators will force companies to achieve their merger integration goals
while maintaining con®dentiality and independence. In these situations, companies
bring in a third party to act as a ``clean team''.

4. Establish open, frequent and timely communications

For every acquisition, there are hundreds or thousands of employees who will be
concerned about the number of jobs being cut, which facilities might be closed, and
wonder how ± or if ± they will ®t into the new organization. For most companies, the
biggest barrier to merger integration is failure to achieve employee commitment. Some
37 percent of respondents to an A.T. Kearney survey listed this as their primary
challenge, well ahead of obstructive behavior and cultural barriers.

Managers who can convince their people to believe in a vision fare much better in a
merger integration. Yet despite a vast array of communication technologies
and capabilities, inadequate communication continues to bring down otherwise
successful deals, although this may appear to be the easiest aspect of merger
integration. It is not.

Communication does not just happen; managers must take responsibility, plan it
carefully and then control it over time. If customers, suppliers and key employees do
not fully understand the strategic intent of the merger, they will leave for greener
pastures.

Attentive managers should watch for defections and carefully monitor key staff losses
to preserve the organization's ability to manage the transition and conduct business.
Recruitment agencies will be actively seeking to entice highly quali®ed staff to transfer
to competitors. In our experience, when executives are honest and clearly express
their future vision for the organization and its growth potential, valuable team members
may be persuaded to stay.

Communication is critical even if it becomes clear that synergies do not exist. Whether
the plan is to re-integrate or, in rare cases, to isolate and potentially divest the target
company, the company should move quickly to communicate the problems. William
Smithburg, the former executive who oversaw both good and bad acquisitions for
Quaker Oats, talked to the Chicago Tribune about the devastating acquisition of the
Snapple beverage line: ``We had one deal that just didn't make it. But once we
realized we had a problem we isolated it by itself, even though we had hoped to
integrate it into the business''.

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 5. Actively address cultural issues

Maintaining the wellspring of future company growth depends on attracting and

retaining capable people, sustaining a dynamic knowledge base and promoting an
open culture. Bringing the best people on board, fostering their development and
ensuring that they stay for the long haul ± not just for the two to ®ve years strategic
planning horizon ± is key. The culture must be both satisfying and challenging to
attract top people.

Ensuring stability and openness within employee ranks ± from both organizations ± is
particularly critical. Companies with a closed and uniform culture often experience
dif®culties in taking over other companies or even managing employees that have
worked outside their own company for some time. Although a strict culture can be a
strength in its own right, it may also have severe limitations when the company
experiences a growth spurt.

Consider Wal-Mart's overestimation of its capability in Germany. Wal-Mart tried to

enter the market and grow through acquisitions. In 1998 it bought 21 Wertkauf stores
and added 74 Interspar units in 1999. But its culture turned out to be incompatible
to the beliefs and convictions of the management team of the acquired stores.
Wal-Mart's culture is built on strong cost controls. Managers on business journeys
traditionally share a common hotel room to keep expenses low. This was
unacceptable to German managers. Furthermore, the Germans perceived the
motivation exercises at the beginning of a normal working day as silly. Most members
of the German management team quit their jobs shortly after the acquisition leaving
Wal-Mart with insuf®cient knowledge about the German way of doing business.

6. Focus on customers explicitly

Internal preoccupation with merger activities is bound to pull employees' and

management's attention away from customers. At the same time, competitors will
view the merger as an opportunity to steal away customers, and reinforce their front
lines. Even a small drop in customer satisfaction can signi®cantly affect the value of the
deal.

The top acquirers launch high-level plans for customer retention, make sure that the
appropriate integration team is developing and implementing those plans, and enforce
the use of metrics to determine customer service and satisfaction levels, as well as
customer defections. The plan can be as simple as a letter from the CEO to key
customers, followed up with a face-to-face meeting. Or it can be more intricate. When
International Flavors & Fragrances' (IFF) acquired Bush Boake and Allen, the company
established market-facing geographic teams to make sure that cost-cutting initiatives
did not degrade product quality or damage relationships with customers.

Whatever means a company uses to stem the loss of customers, it is vital to move
beyond promises to put accomplishments behind the words. Make it a practice,
for example, to alert customers to potential problems while those problems are
comparatively small and manageable. Finally, in the event that customers are lost, be
prepared with a competitive reaction plan (customer relationship management) to win
them back.

7. Rigorously manage risks

Any endeavor that promises high returns and strong growth is bound to come with
comparably high risks. Companies that recognize and confront these risks rather than
ducking them, will maximize the returns on the merger.

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First on the agenda is to establish a ``merger integration dashboard'' ± preferably one
with four main metric categories: economic (bene®ts), project risks, customers and
employees. Such ``dashboards'' allow managers to quickly identify problems and to
agree on the appropriate actions to take. Interland, a leading Web-services provider,
used a dashboard to manage its integration with Micron Electronics in 2001.
Managers sent out bi-weekly updates to show the merger's progress, highlighting
gaps between ®nancial commitments and achievements, and product development
versus product launch timetables. Each initiative owner submitted a detailed synergy
plan, or ``project blueprint'', that outlined the milestones and potential risks.
Integration leaders received regular progress reports, while top executives received
®nancial reports, risk reports and summary status updates for all teams and initiatives.

Although more companies today are making efforts to actively face their risks, the
majority still does not pursue formal risk management. In the future, it will be far more
important to recognize the need for risk management. The complexity of risk will grow
in proportion with the opportunities large deals have to offer.

Perspectives
History reminds us that business consolidation is inevitable ± though the pace of
mergers will ¯uctuate. The best acquirers have learned to ride the wave of history and
quickly create value from M&A opportunities.

Businesses that are most successful at acquiring and assimilating other companies
into their own organizations have developed this capability by working hard and
learning until they get it right. Successful acquisitions require leaders who can inspire
and mold individuals to become team players. If the right managers are selected, and
their capabilities joined, the process produces synergy that increases the company's
value and has the capacity to endure for the long term. Over time, those CEOs who
choose sound companies and execute solid deals will win over investor con®dence
and obtain the latitude to craft future deals.

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