Mergers and Acquisitions: (Power Transcript (podcast to follow)
This is the second of three podcasts prepared by Professor Power for the RRU Masters of Business Administration online strategy course (2010). Dr. Power topic for this podcast — Mergers and Acquisitions ….
I was engaged as consultant for BC credit Union. Their current CEO Shelley McDade headed the merger and acquisition team. As you learn today the success rate is remarkably small and she was successful in completing several acquisitions in a very short span of time. McDade is also the chair of the tier 2 credit unions for the province of BC.
My video interview with Shelley McDade is on the blog site. Good materials-lessons learned.
In this session we have spent time on complementary strategic options that strategists may consider in order to enhance one of the five generic strategies they have selected to compete in the marketplace. Having selected either a low cost provider- budget priced, best cost provider, broad differentiation, focused differentiation or focus low cost provider as the basic core strategy the opportunities now present themselves to consider 7 complementary strategic options.
The 7 strategies are to employ strategic alliances and collaborative partnerships, outsource selected portions of the organizations value chain activities, initiate offensive strategic moves, initiate defensive strategic moves, undertake selective backwards or forwards integration, exploit internet technology in order to enhance the distribution channel and finally to consider mergers and/or acquisitions with other companies.
I am of the opinion that mergers and acquisition are one of the most common complementary strategic options you are likely to encounter. For that reason as a practitioner who advises corporations in this area I thought it might be helpful to build upon materials in the text and provide you some applied and practical advice that will get you in the game should you be called upon to join a merger team within your organization.
On the course site is a small case study —- Sleeman’s Brewery. A small Canadian microbrewery. CEO John Sleeman and his team without many dollars were able to lever its competencies using a long series of mergers and acquisitions that resulted in a $407 million acquisition by a Japanese multinational firm. Truly remarkable. When you get a moment have a look at the case. Francis Hartman their vice president of HR and an RRU alumnus was kind enough to provide me a copy of her checklist that she developed through the course of these mergers and acquisitions to assist her in playing her role. For those of you interested and if the numbers making the request are not overwhelming I can make a copy of the checklist available.
So what is a Merger? Firms undertake analysis of the external and internal conditions in which they operate. This analysis identifies strengths and gaps that must be filled as well as clarify the strengths and gaps of the organization vis a vis its competitors. This identification is critical to maintaining a sustainable competitive advantage. One way to fill the gaps is to consider a merger or acquisition with another company that is strong in those areas your organization is lacking. To do this often a new company will be formed with the two merging companies jointly owning this new entity in the case of a merger. Mergers can also take place by one folding into the other. An example of this was the merger of Chrysler Daimler a decade or so ago. Interestingly in this case after being declared to be a merger of equals it became clear shortly after that it was really a takeover of the American firm. The term merger was used for optics to mitigate any negative feedback that might have been forthcoming from the American workers and public.
A good tool to apply when commencing an analysis as to whether or not the two proposed firms are good fit is to undertake a value chain analysis. We have discussed this tool in an earlier podcast. It can be used for both mergers and acquisitions. You should consider vertical integration both forward and backward as potential sources for new partners to merge with your organization. I will discuss these terms in a few moments.
You’ll want to look both upstream and downstream in the supply chain in order to identify appropriate activities for merger or acquisition consideration. Remember value chains differ from industry to industry. The chapter identifies advantages and disadvantages of vertical integration. The primary test must be: does it strengthen the company’s competitive position; does it add to the company’s access to resources; or will it provide access to prime suppliers? If so a merger may be a good thing.
Ask are the company’s prices and costs competitive? By segmenting both the primary and support value chain activities we can determine with relative accuracy where our strengths lie and where our weaknesses exist. By undertaking a similar analysis of our proposed partner we can identify areas of anticipated synergy. As you will learned in your finance course activity-based costing is a valuable approach to undertake costing in this analysis.
The value chain analysis may also disclose some the opportunity for vertical disintegration — that is for outsourcing. Again the advantages and disadvantages have been well set out in the text.
A number of you may be asking when you should integrate backwards or forwards thereby expanding your value chain. Recall your task as senior manager in charge of one of the primary or secondary activities in your firm’s value chain is to – wring the pennies out or to add value to the firm’s product or service – like the marketers in the emperor’s new clothes story.
A caveat–Backward integration can be difficult – often the firm lacks expertise in the operation of the new activity– firms may not have the economies of scale that at times necessary and as it can result new additional cost if you must buy from your internal suppliers rather than at market prices that are free to fluctuate.
On occasion firms such as McDonald’s in India when faced with poor quality inputs (other than beef) necessitates the firm entry into their supply chain. This integration into the value chain assured the multinational food organization a supply of quality inputs. Visit the class site if you wish to read a very well documented recent account of Mc Donald’s unique approach to vertical integration, See http://ojica.fiu.edu/index.php/ojica_journal/article/viewFile/19/18
Forward integration can improved access and market visibility, build brands building and increased confidence in product or service being represented properly.
One danger of course of vertical integration is that you might be building your competitor… as Canadian Frank Stronach was able to do with his firm Magna Corporation. GM and other major auto manufactures now see this supplier in a different light.
Should you do it? … Yes if you can make a business case for it. Demonstrate in your business case: it will lower costs, build expertise, protects propriety now how, increase differentiation, or that the integration will enhance the firm’s value chain activities.
At times firms might also consider mergers and acquisitions with partners outside the same industry. We call this Horizontal Integration. The key word is ‘outside’ the same industry unlike vertical integration that takes place ‘with in’ the same industry.
For Horizontal Integration undertake an analysis and prepare a business case that demonstrates the following advantages: the potential for economies of scale; the synergy potential of the economies of scope; you are undertaking the initiative as a defence against substitutes; Horizontal Integration will to lead to a reduction in competition; It will help fulfilling customer expectations; And/or Horizontal Integration will increased negotiation power – they will have more leverage over powerful suppliers or customers.
The book does provide a brief overview of mergers and acquisitions however I felt it might be helpful to share with you a little more detail as I anticipation many of you already have or will experience early on in your careers as mid to senior managers the challenges faced when embarking on a merger or an acquisition.
First here are some statistics that will be of interest:
- 75% of mergers and acquisitions are outright failures (Business Week)
- 85% of failed or troubled mergers are due to differences in management style and practices (Coopers and Lybrand)
- 50% drop off in productivity in first 6-8 months (KPMG)
- 47% of top management leave within the first year (Accenture)
- 62% show 0 growth over three year period (McKinsey)
The message in these stats for you is — you’ll be undertaking a very serious challenge when you accept the role on the firm’s merger or acquisition management team to undertaking this complementary strategic option. I can be done successfully — Recall the John Sleeman case as to what a small motivate, well lead team were able to accomplish in a relatively short period of time using other people’s money and M and A strategy.
Many find unfortunately there is often a battle over control and the merger takes longer than planned. Indeed as you will note from the statistics it may never happen.
Here are some generic M and A Strategic Objectives you might consider. Remember to tailor them to your specific needs.
They are: To be more cost efficient; to expand quickly the geographical coverage; to quickly extend to new product lines; to access to new resources and competitive capabilities. At time Mergers and acquisitions will Invent a new industry –or—lead convergence due turbulence in the eco system e.g. nano-technology.
I approach undertaking a merger by viewing it as a three phase operation…
Phase 1- Assessment- Due diligence. The first phase requires the board of directors to be acutely aware at the strategic level of the why, and the direction of the merger or acquisition. It is anticipated indeed from it might even be negligence if the Board of Directors did not maintain an acute awareness at the strategic level of all of the activities being undertaken during the merger period. This is not to diminish the role of CEO who is responsible for crafting and implement strategy. Senior management – the directing minds of the organization, must carefully and reflectively select the best talent available to develop specialized comprehensive results driven merger or acquisition plans. It is anticipated most of these individuals will participate on the merger or acquisition team and take carriage of the initiative.
This team reports directly to the Board and to the CEO. It must have authority in all matters. As we have noted this is a highly dangerous period. The organization is exposed and will attract competitors to seek out your customers and attempt to woe them away at the first opportunity. It is also dangerous to your career as a member of the team should failure be the outcome. You’ll need to demonstrate strong strategic leadership skills.
The team must fully research and identify all the issues and tasks that will have to be addressed; prioritize and cost these activities: this will include undertaking risk assessments from all perspectives; the team must establish evidence base specific merger objectives as to what will be accomplished and how these objectives will be measured. Recall the SMART test for objectives.
This senior team will be an integrated cross functional team. It will represent all key functional areas; establish roles and responsibilities for the team and for its members; and the gaps on the team will be identified and sourced outside the organization to ensure the team has all of the resources necessary to undertake the assignment. Generally I recommend team insure they have available a high level of Project Management skills. These skills will be critical to the control of the operation. Indeed I believe is advisable to also contract an adviser (consultant) skilled in mergers and acquisitions to act as a sounding board as well is to provide a unbiased perspective on all aspects of the operation.
Phase 2 – Implementation. This is the most dangerous and longest phase. Phase 1 is planning and much of it can be kept low profile so as not to be disruptive to customers and staff, but during Phase 2 the organization will be fully exposed to attack by the competition on many fronts. It is not a comfortable place to be and you must move at the best possible speed to get to phase 3.
In this phase the management team appoints the cross functional team and team leaders; they establish firm regular meeting dates as well as ad hoc meetings as required; the cross functional team is held accountable; all barriers to the merger are identified and quickly removed; the cross functional team must provide at least weekly updates to senior management and to the Board as requested. They present all critical issues that may impact on the success of the implementation immediately. Often senior management will be required to make unforeseen strategic decisions to keep the initiative moving forward. The Team and CEO must have open door polices for each other. Time is of the essence in Phase 2. Knowledge management to include facilitating multidirectional knowledge transfer and organizational learning within the new entity must get underway. The latest control technology must be utilized to establish dashboards and other measures to provide real-time information to decision makers throughout the organization.
Phase 3. Continuous Improvement. Basically the merger is now complete and now it’s time for the mopping up exercise. Here senior management wants to exploit the opportunity for retail and wholesale changes throughout the organization’s strategy; they will want a benchmark and adopt the best practices in the industry for the new emerging strategies; they will want to lever the core competencies of the merged entities; and they will want to harvest the advantages that gave rise to the merger in the initial business case.
Where you will fail. As we noted earlier in the podcast failure rates for mergers is significant, but done properly the rewards justify the exposure as evidence in the Sleeman’s’ case. Mergers fail as indeed all strategies fail not because the strategy was wrong but because of poor execution and poor strategic leadership. The most likely areas for failure will be in IT integration, management and leadership, cultural integration and resistance to change. These are areas that you as a strategic leader must monitor closely. 31% of the time the failure will be traced back to IT operations. The critical success factors for IT are set out in the pie chart in the session. Take a moment and scan it.
All functional areas require a well-thought-out action plan. I must be monitored real time. Here are the first steps in IT integration. Have you made the key business decisions about strategy, the operating model or processes? Have you made decisions about the structure of the new organization? Has the appropriate budget been put in place to support the IT integration? Does the organization have available sufficient IT staff and resources to undertake the merger and acquisition? Has management undertaken an IT operations rationalization? Have all challenges been identified and resolve that relate to infrastructure integration? Is the action plan supported by a project management approach to implementation to include control mechanisms?
This tasks a generally the same for al functional areas.
As noted mergers fail due to the lack of strategic leadership. It is important that you demonstrate an interest in the common good—the well-being of the whole rather than simply focusing on your needs within the new organization. Inspire others. When you play a leadership role in a merger or acquisition ensure that you provide certainty and assurances. Be an advocate to carry the message that the merger was the right strategy. Remember my earlier story about my daughter Victoria and sailing back across the lake. The importance of the message be communicated properly will be critical to your success. Make sure as a leader you demonstrate optimism and a positive attitude towards the merger and the changes they will bring about.
Don’t ‘tip toe past the graveyard’. Be prepared to deal with crisis and staff resistance. Make difficult decisions and communicate them with certainty. Be prepared to deal with the fall out. Be fair, firm and friendly. I call these the three F’s. Know them well.
Champion the process, Bring the corporate cultures together… Maintain the aim. Focus on the mission. Have you established a dashboard? Acknowledge that your staff are concerned and have many questions. Your employees (your assets) are on a tipping point — this represents a significant danger. Your competitors want your key people. Acknowledge your employees emotions, show empathy, appreciate them and communicate-communicate-communicate. It requires a steady hand on the tiller. Engage in the symbolic acts. Demonstrate commitment to the process and respect for the individuals. Be the first for example to wear the new uniform—polo shirt of the new merger entity.
The required flawless execution will require you to effectively manage four key processes. First establish an end-state vision; second capture synergies you have identified; third create “Day One” readiness—don’t try to build the plane while flying it; and finally develop action plans for all functional areas and their departments. (E.g. HR, communications, etc.) . Make sure they align with the corporate plan.
Now some guidance on communications strategy. When faced with change, communications will be critical to the success of the enterprise.
You will:
- Need a set of guiding principles for those charges with this task- The must be grounded in the organizations value statements.
- Reflect a high standard in communications…e.g. must be courteous and respectful; ensure staff changes are communicated to staff prior to external stakeholders; sharing of information will be encouraged; and that people have the info they need to get the job done. They must from the front desk up feel they are in the loop!
- Consider all aspects of communications from the perspective of HR, marketing, public relations etc.
- The communications team must work with management in crafting the “messages”. You cannot afford conflicting messages at this time.
- Have clear frequent, two way communications to reduce stress – it is one of the most major and dangerous changes an organization can undertake.
- Maintain a FAQ site- submit questions. Customer and employees can raise questions under their name or an anonymously.
- Have a means to obtain internal stakeholders input to gauge the progress and to identify choke points. Have 2 newsletters, one for internal consumption and the other external… They can be electronic. But don’t forget the importance of F2F interaction by senior management with the front office folks…Are we ok Dad? You need to keep the messages flowing.
Here are some rules for effective communication. As senior managers you’ll have an important role to play in explaining to your colleagues and to your employees why you have chosen to merge or to participate in an acquisition. We have stated communication is critical. Consider these rules to guide you in your communications:
Simplicity – use small words. Wordsworth said if you want to communicate with the common man use the common man’s language – don’t force people to reach the dictionary – they won’t.
Brevity – use short sentences. Never use a sentence when a phrase will do; and never use four words when three words will communicate the message.
Credibility is as important as philosophy. People have to believe it, in order to buy in – Dizzy Gillespie said if you can’t feel it you can’t play it. If your words lack sincerity or they are contradictory they will lack impact—indeed could damage the initiative.
Consistency matters. Repetition, repetition, repetition. Good language is like the energy bunny it just keeps on going- and going –and going. Remember the heart moving speeches and the repletion of Martin Luther King and John F. Kennedy
Novelty – offer something new. Often effective communication involves words that provided new definition of an old idea. The Canadian tax department defines death tax as estate tax; oil companies referring to exploring for energy rather than drilling for oil; the title sanitary engineer rather than janitor id preferred by many.
Sound and texture matters. Should be memorable– ‘I have a dream’… ‘Asked not what your country can do for you…’
Speak inspirationally. Personalize and humanize your message to trigger an emotional remembrance – you need to say what your people want to hear. It was Mao Tse Tung who said anyone can be a leader just find a parade and get it in front of it.
Visualize. Paint a vivid picture. ‘M&M candies – melt in your mouth’, not in your hand. ‘Where’s the beef’… slogans we can remember for almost a lifetime have a strong visual component —something we can see and almost feel.
Ask a question. Remember the TV ad, “Got milk?”– a very memorable print ad campaign during the past 10 years. Far greater impact than a plain assertion to drink milk.
Provide context and explain relevance. Explain to your workers why the message before you tell them the details of the merger and the ‘so what’s’ they need to understand the relevance of the message to them and to the firm.
What Drives Successful Integration? The first driver is to maintain an unwavering focus on the specific merger business objectives; second the need for increased attention to the soft issues (impacts on people, morale, and corporate reputation) rather than the “hard issues (direct impact on financial measures). You will find this difficult to do. Your people are probably working at 100% prior to the merger. The additional requirements of undertaking a merger will require a far greater effort than already committed. Danger of course is at this pace after awhile your employees will lose their sense of humour and morale will plummet. Move quickly through the three Phases.
I trust you are commencing to realize the importance of strategic leadership in mergers and acquisition. You must focus on the soft skills required to keep your people engaged and motivated. However having said that must maintain the hard skills and attend to the practical matters of dealing daily with your customers. They must feel comfortable with the change. Recall in Phase 2 you are completely exposed to attack from competitors. Another driver is ensuring you priorize your actions; and finally I underscore yet again the importance of speed— move across this ground quickly. Know where you are going and how you are going to get there.
I have identified fourteen pit falls. Watch for them.
They are:
- Research indicates a failure to understand the ‘culture” before merger-
- Ineffective and poor communications
- Poorly conceived and / or executed strategy for employee retention
- Private agendas during the reassignment of personnel
- Weak planning and slow decision making (regarding integration matters)
- Inattention to short term realities of loss of individual productivity and performance
- Management denial of the significance of the impact on individual employees
- Overzealous attention to internet issues at the expense of maintaining or improving levels of customer service and confidence. There will be tension here.
- Visible lack of alignment on the senior management team regarding post- merger strategy and / or operations
- Visible lack of focused ownership of the success of the business integration process.
- Resistance from rank and file within the organizations
- Hard to resolve conflicts in management styles
- Clash of corporate cultures; and
- As we have discussed Integration difficulties.
Keep these 5 critical principles in mind as you undertake your merger.
- Aggressive Planning – be quick, decisive, adhering to critical principals -do the right things first
- Undertake a comprehensive analysis – make it a Value based initiative-focus on specific areas (such as IT, workforce retention)
- Enable Self Attainment. – strive for the highest levels of workers buy in. Use companywide comms, and foster collaboration
- Competent, effective team management – Successful integration requires highest level skills in: PM, facilitation, team building, subject matter exerts, and outside exerts. They must be competent, trusted, demonstrate objectivity, and have the know-how to implement…
- Entitlement – Remember the stakeholders are entitled to a high level of success. Therefore this principle demands highest level of planning, prioritization, and follow through in operational implementation…
Finally a few Closing Thoughts regarding Merger and Acquisitions.
- Do not take your eyes off your core business – Maintain focus on running your business.
- Remember why you undertook the merger especially while undertaking the implementation.
- Consider outside professional help to organize and execute parts of the integration process.
Remember Sun Tzu advice….. when in foreign lands use local guides.
You have been listening to Professor Power speaking today on a strategist perspective. This is #2 from Royal Roads University.
