Why Good Deals Miss the Bull’s-Eye: Slow Integration, Poor Communication Torpedo Prospects for Creating Value

Like the successful surgery that proves fatal to the patient, an uncomfortably large number of acquirers still do good deals that fail miserably at least when measured by creation of shareholder value. Fresh evidence on whether deals work for the stock market was delivered by a trio of well-known consulting firms which found that high proportions of acquirers lost value or generated sub-par returns for shareholders after executing major transactions. While there were some differences in the deal samples, the time frames, and the way stock price performance was used as a proxy for gauging outcomes, the consultants agreed that the biggest causes of merger flameout were fouled and snail-paced integration plans. There was also a suggestion that the stock market inherently is not merger-friendly and that acquirers must plug their deals to analysts and investors as value-creating from the get-go. The latest clinical analyses included: A.T. Kearney 115 multi-billion-dollar mergers on a global basis between 1993 and 1996; 58% failed to create “substantial returns for shareholders,” measured by tangible returns in the form of dividends and stock-price appreciation. Mercer Management Consulting All mergers from 1990 to 1996; nearly half “destroyed” shareholder value. PricewaterhouseCoopers 97 acquirers that completed deals worth $500 million or more from 1994 to 1997; two-thirds of the buyers’ stocks dropped on announcement of the transactions and “a year later,” a third of the losers still were lagging the levels of peer-company shares or the stock market in general. There was nothing magic or particularly novel in most of the solutions proffered by the consultants get a clear strategic vision in place, communicate it hard to people in both companies, get the word out to the investing public, integrate as quickly as possible and with implementation of strategic goals in mind, score “early wins.” But it was remarkable that a large proportion of acquirers still haven’t gotten the message. Kearney, for example, found that only 39% of the firms in its sample had set up the management team in the first 100 days after closing; 28% had a clear vision of corporate goals when acquiring; 32% applied risk management techniques; and a mere 14% sufficiently communicated the new alliance. Michael Tream, a Kearney vice president, said acquirers know “what they are supposed to do” but “often don’t follow through with key steps.” Managers, he said, “may not have the power to make decisions” or “lack the capacity or time to execute decisions properly.” Kersten Lanes, a partner in the PricewaterhouseCoopers merger services group, fingered the importance of selling the deal to investors by noting that “claims of synergy are not enough.” The acquirer, she said, not only must “precisely define” its strategy but “be able to demonstrate to a skeptical market the strategic imperative of individual transactions.” The acquirer also must continue to communicate on key aspects of the deal and “manage market expectations by explaining the benefits of the transaction in terms of increased shareholder value the language analysts and investors understand best.” “Early wins” in the form of increased business, new products, innovative marketing can be used to reinforce the viability of the deal and the commitment of the merger partners to a successful transaction for both insiders and such external publics as analysts and investors. Communicators and executives assigned to publicize the benefits of a merger may get a boost from Securities and Exchange Commission (SEC) proposals that would open the door to more creative communications about transactions (see page 8). In their current form, the proposed rules affect both the content and timing of merger communications.