?Most large acquisitions fail—in the sense that they generate little gain in shareholder value. What accounts for the winners? The answer is effective management of the integration of the two firms.


Corporations pursue acquisitions for many reasons, but one force drives virtually all M&A strategies: the pursuit of value. In seeking attractive candidates to acquire, managers aim for targets that will increase shareholder value. The widely held perception is that, if a transaction adds to existing cash flow, a good outcome is virtually guaranteed.


In reality, however, large acquisitions rarely lead to growth in shareholder value. Given the relatively poor shareholder return performance that follows many large acquisitions, managers might reassess how they design and execute M&A. Amid all the analyses and due-diligence meetings preceding a major acquisition, consider adding one more element: setting the stage for effective post-merger integration.

Shareholder value?
Most acquisitions valued at more than $500 million have produced meager gains in shareholder value, according to Mergers and Acquisitions magazine. Measured against industry peers, the consolidated companies that emerged after large-scale acquisitions in the 1980s and 1990s stood a 56% chance of losing ground against their competitors. Among more recent transactions, a comparable share of merged companies either underperformed their industry peers or yielded negative absolute returns.


Managers may be tempted to dismiss the data as evidence of the market’s distaste for strategic missteps, or buyer’s remorse about expensive premiums invested in hard-to-justify deals. But a careful review of the data suggests otherwise.


Management consulting firm Oliver Wyman analyzed three-year total returns (share-price appreciation plus dividends) for the largest M&A transactions completed between 2000 and 2004. Comparing acquirers’ returns with industry returns for the same period, one conclusion stands out: Acquisition price premiums paid have virtually no relationship to post-acquisition shareholder returns.


Similarly, the specific intent behind an acquisition—whether the company purchased represents a consolidation or a diversification—has been found statistically insignificant in affecting shareholder value.


By contrast, the evidence shows that one variable does matter: effective post-merger integration management. In one survey of managers who participated in more than 300 deals closed by 37 companies between 2002 and 2006, firms that judged themselves “successful integrators” enjoyed post-merger performances that exceeded expectations by nearly 10%—worth hundreds of millions of dollars in shareholder value.


As for the primary source of poor post-merger performance, “poor integration” topped the list at 44%, far more than “inaccurate valuations” and “strategy formulations,” each cited by 28% of respondents.


In addition, when Oliver Wyman consolidated 15 major studies of post-merger performance to identify the elements that executives see as sources of successful M&A outcomes, the consensus top choice is “merging culture and maintaining employee morale.” As one executive quoted in Harvard Business Review says, “You have to create a single organization, with common processes and standards, common values and a way of working.”


With the stakes so high and the evidence conclusive, it’s well worth the effort to master effective post-merger integration.

Building value
Experienced and savvy executives increasingly recognize that planning for effective integration before a major M&A deal can dramatically influence post-merger outcomes. But the challenge of putting that insight into practice can be daunting for executives who know they will soon be buried in the paperwork and long days that are certain to accompany any major transaction.


Even if the right people are available to handle integration-related tasks, they are typically the same ones who will be burdened with many other merger-related tasks. The independent Corporate Strategy Board recently noted how a record number of transactions are being completed within narrowing timeframes that constrain every ingredient that goes into a deal. The average number of days between announcement and closing decreased 38% between 2001 and 2005, with the average M&A team having only 68 days to completely map and execute a transaction.


Regardless of which resources a firm deploys to post-merger integration, focusing on six specific areas can substantially improve the odds of success.


Organizational structure and culture. There are two choices on how to approach organization design in an M&A situation. Typically, the acquirer integrates the acquired company into its existing structure and processes. Although widely used, this approach can limit the value creation that was the basis for the transaction, ignoring valuable organizational characteristics, systems and processes in the target company. Moreover, the people retained in the transition may be the most flexible employees, not necessarily the most valuable employees.


A better alternative, particularly with large transactions, recognizes that an M&A transaction results in a new company being formed. This approach requires actions that preserve the valued characteristics of both firms and combine them into a new entity that is better designed to exploit this new set of strategic competencies and talent. The new entity should include existing elements of both companies, as well as new elements needed to build competitive advantage. Effective organization design requires creating a clear, high-level vision of how the merged entity will operate and developing detailed operational blueprints and implementation plans to fulfill that vision.


Organizational culture must be a key component of both the vision and the operating plan. Thus, the acquiring company should conduct an in-depth assessment of its own culture, that of the target company and of the degree of fit between the two companies.
Project management and leadership. Name the integration coordinator at least a month prior to the deal announcement. This person is probably being groomed for a significant operations role in the eventual merged company, and he or she needs three skills to be successful: an exceptional ability to juggle multiple tasks at once; the confidence to make quick decisions; and adherence to the highest standards of accountability. Integration coordinators need to be able to make both long-term strategic choices and short-term tactical decisions—all the more reason to get them started early.


Communication and metrics. Communication is critical to integration success, and key constituents should include executives, the project team, employees and external stakeholders. In particular, the strategic vision behind the transaction needs to be communicated clearly, forcefully and regularly to employees at both companies. Along the way, it’s worth installing key performance metrics for post-merger integration, establishing objective assessments of how initial post-merger results will ultimately compare to the goals set early on.


Risk management. Every company has areas that deserve elevated priority during the run-up to the merger. Risk ownership should be assigned to appropriate subject-matter experts who may or may not be on the acquisition team. These experts will become conduits for information that senior executives need to track how risks are being managed during the integration process.


For example, oil companies merging their E&P businesses should have their subject-matter experts collaborate to continue with current drilling commitments, as a major amount of work has already occurred to design these wells. Without understanding underlying geoscience and drilling-engineering work, rig commitments, permit specifications and expiration dates and partner and other contractual commitments, it would not be prudent to immediately discontinue or alter current drilling programs. Such disruption can often lead to significant financial loss.


Continuous learning. Any single M&A transaction usually comes in the context of other major deals for a company, and it’s worth archiving the best practices that contribute to their success. Some of the business processes from the acquired company will deserve to be continued, or even implemented throughout other parts of the organization, and lessons learned from the current deal can benefit future transactions. In working with clients on their transactions, Oliver Wyman has seen a wide disparity across business processes that confirm the value of getting the processes right.


Tools and templates. A proven set of tools and templates should be made available to all major functional areas, such as human resources and finance, as the march toward merger begins. These elements help focus staff attention on specific tasks, and many of them include easy-to-understand dashboards that incorporate strategic goals, performance expectations and alignment tools.


Properly employed, these tools will help establish a stable and shared framework to guide senior managers to the ultimate goal: strong post-merger integration that melds two distinct teams into a cohesive force capable of generating maximum value.
A merger integration will usually involve more risks than can be mitigated early on. Large mergers and acquisitions live or die on how well the two organizations are integrated. The right level of resources, deployed early in the planning process to focus on these six areas, will raise the odds of sustained value creation once the union occurs.

Ryan Isherwood is an associate partner in the oil and gas practice in management-consulting firm Oliver Wyman’s Houston office. Bob Orr is a partner with Oliver Wyman and leads the oil and gas practice and Houston office. Isherwood can be reached at 713-276-2245; Orr, at 713-276-2187.