NEW YORK-“Ready! Fire! Aim!” could well be the operative slogan for a hindsight assessment of a notable number of recent mergers and acquisitions, according to a new PricewaterhouseCoopers report.
Companies may be forced to fly blind. During the reality check of the post-purchase period, the buyer sometimes discovers it has bought a pig in a poke and must struggle to make the best of it.
On balance, nevertheless, companies can and do attain some or all of their long-term priorities by taking risks on acquisitions and playing the percentages. These objectives include: gains in market share; reduction in the number of competitors; enhancement of reputation; and access to new markets, products, technologies, employee and managerial talent, brands and distribution channels.
However, the most common and telling revelation in the PWC report is that acquirers stumble in their efforts to execute a quick and smooth transition after the transactions close. Delay can be a costly drag that diminishes expected returns.
“Speed Makes the Difference: A Survey of Mergers and Acquisitions” interprets responses from executives at 125 large companies in various sectors worldwide that engaged in mergers and acquisitions last year. Of the participants, 79 percent said they should have managed the post-merger transition process faster.
The report also cites a 1998 PWC study, which concluded that the price of the average acquiring company’s stock was 3.7-percent lower than that of its peers a year after the deal it engaged in was completed.
“No one goes into a deal believing it won’t return the cost of capital, but a vast majority don’t. … Twenty percent of actions drive 80 percent of value,” said Peter Horoszko, a New York-based telecommunications industry acquisition specialist for PWC.
“There are many examples of companies that have gone through the process and really had a flawed strategy. In the process, they may find the go-in value driver, for one reason or another, is not achievable. But they are already in the water and must make the best of it.”
Publicly traded companies, in particular, are loath to reveal more about themselves than the Securities and Exchange Commission already requires, in part because suitors typically are competitors, said Greg Peterson, a partner in PWC’s New York-based Accelerated Transaction Practice.
“If I were a (securities) analyst, I would want to know (things like) how much access the two sides had to each other’s information, what is the program and process for accessing value and how do (corporate) cultures and processes differ,” Peterson said.
A disproportionate amount of attention is focused on synergies, which are the cost savings companies expect to achieve as the result of their merger, Horoszko said.
“A 1-percent increase in (anticipated) growth is much more important than 2 (percent) to 3 percent in cost savings,” he said.
Furthermore, the PWC reported that 60 percent of the 125 companies surveyed said they failed to achieve the expected cost savings. Improved transition speed and a greater focus on post-integration revenue gain potential are the most appropriate responses to this fact, the report said.
In their headlong rush to estimate savings and gains during the due diligence period preceding a merger or acquisition, companies involved often neglect to figure out the processes by which they will achieve those goals, Peterson said.
Delay creates uncertainty and confusion, particularly because projected synergies typically include annual savings estimates based on work force reductions, closure of facilities and lower administrative costs.
“The longer a company takes to make its intentions known, the greater the likelihood that employees will worry about job security and become distracted. On a higher level, concern over the direction of the merged firm and the progress of transition can cause defections among key customers and employees,” the report said.
“Firms that move quickly to make the tough decisions and communicate them to stakeholders minimize uncertainty and its debilitating effects. This will become even more important as more and more companies do deals to acquire talent.”
Before planning the execution of the transition, a substantial number of companies wait until their transaction has received regulatory approvals or has closed, processes that take an average of four months, Peterson said. Assuming they begin immediately thereafter to plan for execution of integration, another three months easily can elapse.
Of the 125 companies surveyed, 72 percent cited incompatibility of information systems as a leading post-deal difficulty, up from 39 percent of participants in a similar survey in 1997. Of that 72 percent, 56 percent said this led to delays, 25 percent said it led to lost business and 22 percent said it led to lost revenue.
Sixty-six percent of the 125 companies interviewed identified differences in operating philosophies as a major problem, compared with 47 percent in the earlier review. Within that 66 percent, 42 percent said this resulted in delays, 24 percent said it caused lost business and 25 percent reported it was responsible for lost revenue.
Variances in management practices posed a significant difficulty for 57 percent of companies queried, vs. 41 percent during 1997. Forty-four percent of that 57 percent attributed delays to this incompatibility, while 32 percent said it caused lost business and 29 percent said it caused lost revenue.
“Due diligence efforts typically focus on the financial and operational risks of an acquisition, but pay little, if any, attention to cultural differences, knowledge sharing and systems integration issues. Yet these are generally recognized as the most difficult and costly aspects of integrating two companies,” the PricewaterhouseCoopers report said.
