by StephaNe CoheN-GaNouNa aNd Natalia daNoN-boileau
the synergies publicised in the past were indeed true synergies, implying that the integration of these companies had actually produced a greater result than simply
adding these entities together. The other half consisted of savings that could have been made without the M&A operation.
Finally, value creation depends on how the merger preparation and post-merger integration process is managed. In fact, although the market is positive about value creation after five days in 54 percent of deals, the average rate of value creation decreases to reach only 40 percent one year after the announcement, reflecting, among other issues, integration failure or insufficient realisation of planned synergies.
Best practices and advanced approaches The key to efficient management of the M&A process is the optimum use of
‘traditional’ best practices: evaluation of the target’s strategic interest and of the potential synergies, retention of key people, preparation of an integration plan, massive use of internal and external communication and, obviously, speed of integration. In fact, it is imperative to keep the ongoing business under control during the integration period, as there may be one, two or even three years between the date of closing and the completion of the merger. While some teams are working on the establishment of the new group, other (different) teams must remain focused on sales and customers: this requires transitory management systems.
Some companies now go beyond those practices, improving their chances to create value. What are these advanced approaches to merger?
Better evaluation of the management and the human capital during the due diligence process. Another point of attention during the due diligence process is an in-depth evaluation of the management team and the human capital of the target. In fact, some groups start copying LBO practices and taking into account – from the due diligence phase – HR assets and cultural differences, as a valuable input to structure the forthcoming merger preparation and integration.
Realistic evaluation of the synergies and their efficient implementation by dedicated line people. In some companies, line people work together with the due diligence team to carry out evaluations of the expected operational synergies, thus producing a better evaluation of the target.
During the integration phase, devoted teams of dedicated line people follow up on the realisation of synergies and ensure their fast and full-scope implementation.
Efficient management of the antitrust notification process. The ongoing
consolidation process in many industries leads to an increasing number of large scale cross-border mergers. For these kinds of operations, winning the approval of antitrust regulatory bodies has become a critical issue. The companies’ M&A
capabilities will also depend on their ability to articulate structured and professional approaches to address antitrust issues;
e.g., analyse their need to notify, define their notification strategy, prepare their associated dossier and draw up contingency plans in case the operation fails (such as Schneider/Legrand, GE/Honeywell). Such an approach will help anticipate as much as possible how negotiations with authorities will evolve to better control the approval
process and its impact on the operation.
Preserving the value of human capital.
The staff’s motivation is indeed the most critical component in a merger’s success.
Maintaining staff’s dynamism will ensure continuity in the company’s management at a transitional time when the new group can be unstable operationally. Boosting motivation will require appointing the top-management very fast, within a few days, before or after the closing. In this matter, again speed prevails over perfection. Our survey shows that in 60 percent of cases, key managers are actually appointed within 30 days before or after the closing.
Adoption of standardised acquisition and integration processes. Some frequent acquirers have developed an extremely formalised process, a sort of ‘acquisition and integration machine’. Based on their
previous acquisition experience, these companies have defined and adopted a standardised M&A process helping to address all operation’ phases in a coherent and coordinated way. Also, they define tools, methods, checklists and a team to mobilise in case of a forthcoming M&A transaction.
The advanced practices mentioned above are only emerging. Even if the value creation remains highly unpredictable, the generalisation of those new practices should lead to better value creation and better value capturing in future mergers and acquisitions.
Stephane Cohen-Ganouna is a principal and Natalia Danon-Boileau is a senior manager at BearingPoint.
With the increasing globalisation of business coupled with the protracted weakness of the US dollar, M&A activity is now playing out on a much larger stage, creating new opportunities for international investors and growth-oriented companies in emerging market countries looking to penetrate Western markets. Unlike earlier periods, such as the 1980s, which saw a spike in international transactions, evidence suggests that recent activity is indicative of a more permanent global trend, with M&A targets of the past becoming the acquirers of today and tomorrow.
However, while market forces such as increasing access to global capital and favourable currency valuations are providing transactional tailwinds, inherent challenges remain. For new global business ventures to be successful over the long term, acquiring companies will need to find ways to not only leverage strengths, such as low cost manufacturing, but overcome relative inexperience managing complex global enterprises.
Driving forces The buyers
While worldwide M&A volume has plunged from the historic highs reached in recent years, deals continue to get done. Even as the US continues to see major declines, overall activity is down just over 6 percent compared to 2005’s January-February total, with international activity, particularly in
Asian markets, showing more stability, according to Dealogic. Buyers and sellers are still demonstrating an appetite for deals, with foreign buyers, buoyed by financial strengths, becoming more active participants in what they perceive to be a fertile environment for acquiring US assets.
Currency valuation is one driving factor. For the last several years, foreign currencies have been stronger against the US dollar.
Leading the pack is the euro, which hit a record high against the dollar in late February, exceeding for the first time $1.50.
Many economists predict further weakness ahead for the dollar, as a number of US economic factors, including declining home prices and waning consumer confidence, continue to pressure the greenback. With US assets now roughly 20-30 percent cheaper than they were a decade ago, foreign buyers see an opportunity to
bargain hunt. This is especially true of those in oil-rich nations which are flush with liquidity.
For companies in countries not enjoying
‘petro capital’, another important factor has been the increasing willingness of local banks to provide funding for deals.
With the balance sheets of many US and international banks suffering as a result of the subprime mortgage crisis, local banks in emerging markets, which had far less exposure than their US counterparts, are stepping up to provide debt financing for deals. The trend is likely to continue. At the same time, local governments, which in the