2000
M&A study overturns wisdom on why mergers succeed or fail - research from PA Consulting measures the cost to shareholders
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12 June 2000
A number of the findings of new research into approaches to post-merger integration run counter to received wisdom on why some mergers deliver increased shareholder value and why others fail. The research, carried out by PA Consulting, found that:
- Corporate mergers where the acquirer recognises that cultural differences exist, regardless of how similar the businesses may appear, deliver significantly greater shareholder value than those where the acquirer believes no cultural differences exist (returns are 2.7%* higher than if the merger had not taken place)
- Over integration of the merger target can damage shareholder value - highly integrated mergers are generally less successful than those which aim for a medium level of integration (these see improved returns of 3.1%)the returns are 5.9% for medium level and 2.8% for high level)
- Cross-party integration teams improve returns: where 40% or more of the integration team are from the target organisation, returns increase by 6.5%
- The motive for the merger affects the final return: acquiring to obtain new technology is the most rewarding, with returns of 6.1% higher than expected.
The study, conducted jointly by PA Consulting Group and The University of Edinburgh Management School, covered 85 M&A deals worth over £50 million each. The researchers used short-term share price returns to evaluate the success of different approaches to post-merger integration, and identify the factors making up ‘best practice’ in terms of maximising value for shareholders.
Jeremy Stanyard, a member of PA’s management group, commented:
‘’Our findings suggest that organisations that anticipate problems in the integration process, and are more critical of the results achieved, are more likely to produce higher returns for shareholders. A measured and selective approach to post merger integration, coupled with a recognition that different
companies have different cultures - no matter how similar the businesses appear - are two determinants of success."
Executives who took part in the research voiced similar concerns. John McGrath of Diageo, comments:
"There can be dangers in over-integration, or in moving too fast in an attempt to realise all your synergies at once. It’s a question of identifying where value is being created, and then making sure you protect it during the integration process. You have to be selective when deciding exactly what to integrate, and how quickly."
Jeremy Stanyard added:
"This research gives a clear message: certain approaches to post-merger implementation give higher returns than others. The biggest returns come from detailed advance planning, rigorous cash based progress reporting, and, of course, from getting the people issues right – which means involving people from the target organisation as early as possible."
The proven success factors identified by the report include:
Planning and control factors:
- Plan in detail – companies that planned to a high level of detail achieved returns of 4.5% over those with lower levels of planning – for risk management, budgeting and cost control and tracking benefits
- Get the level of integration right to preserve the intrinsic value of the target – companies improved their returns bymedium level integration achieved 3.13.1% higher return than high level integrationby medium level integration
- Incorporate shareholder value measures into the planning and implementation – companies that used weekly or monthly reporting of progress using a cash measure saw returns improve by 2.8%
- Create an integration and communications plan before deal completion – companies that did this improved their return by 2.3%.
People factors:
- Importance of human resources - returns were 3.12.5% higher where HR issues were seen as ‘important’
- Reward the integration team – where explicit bonuses were offered to the integration team, returns increased by were 4.7%
- Form the integration team early and with staff from the target organisation – which increasproduced returns ofby 6.5%.
Copies of the PA report Creating shareholder value from acquisition integration are available from Sheonagh Friend 020 7333 5260 or via PA’s website www.pa-consulting.com/m-a or by email m-a@pa-consulting.com
For more information, please contact:
Notes to editors
- A copy of the M&A report Creating shareholder value from acquisition integration is attached, together with a chart showing sample group and best practice returns after the acquisition announcement.
- About the research
The aim of this research was to establish objectively how corporate acquirers can maximise their chances of success and reduce the risks during post-deal integration.
- Survey methodology
The study was conducted jointly with The University of Edinburgh Management School and covered 85 M&A deals worth over £50 million each. Face to face interviews with 10% of the respondents provided further depth to the survey questions and validated the findings. The acquisitions that PA investigated were announced between the beginning of 1997 and the middle of 1999. PA targeted companies from a variety of industry sectors with most of the respondents coming from finance, manufacturing, information industries, energy and utility sectors. US and UK companies predominated but other countries represented were Australia, Belgium, Canada, Finland, Ireland and the Netherlands, where companies were acquirer of a UK based company.
- About the returns statistics
Success evaluation was based on the difference between the short-term share return figures (following the acquisition) and a predicted value based on its historical performance relative to a market index (as if the acquisition had not taken place).
PA’s method relies on an efficient stock market and, as with all predictive techniques, is fallible. To reduce any potential errors, the success evaluation was only attempted for a group of companies with certain survey response characteristics. The group of companies permits a statistical certainty to be associated with each result. Except where indicated, all figures quoted in this report have a certainty level of 90% or greater.
In addition, academic research has found strong correlation between short-term share price movements following an announcement and increases in long-term cash flows.
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