Poor Communication The Number One Reason For M&A Failure

New Delhi: | Updated: Nov 27 2002, 05:30am hrs
Mr Arthur Bert, global leader of the mergers, acquisitions and alliances division of consultancy firm AT Kearney, expects a phase of consolidation in sectors like cement, telecom, pharmaceuticals, banking and IT services in India. Melbourne-based Mr Bert, who is also AT Kearneys managing director for South Asia, wants to ensure that the firm is prepared to seize new opportunities as they unfold in the region over the next few years. Weve just doubled our senior executive presence in India and we will continue to bolster our presence at the senior level before inducting people at the junior level, he says . I plan to visit India more often.

Mr Bert says of the 300 merger deals in the last five-seven years, the firms success track record has been around 90 per cent. These were the deals where we had significant involvement, says he. Recently, three out of ten deals that we have got involved with are re-mergers.

For the consultancy business, Mr Bert says the firm has identified four core areasfinancial industries, telecom, consumer products and retail, and energy (including process industry and utilities)for driving its business in India.

Sharing AT Kearneys findings on M&As, Mr Bert reveals a chilling fact: only three out of 10 mergers are successful. Excerpts from a conversation on issues pertaining to merger and merger-reintegration with Mr Bert that took place on the sidelines of the India Economic Summit 2002 in New Delhi.

How successful are mergers and acquisitions in India
The data in India is consistent with what we find globally, which is only three out of 10 mergers being successful. Most M&As fail. Weve studied over 1,000 M&As in the last decade and analysed those deals.

One way of measuring success is shareholder value creation. But weve a more stringent measurecreating shareholder value above the industry average. The second matrix is combined profitabilityas per our study, 29 per cent of the companies have combined profitability, that is one penny more than the two companies on the stand alone basis.

What factors lead to merger failures: clash of cultures, big egos, incompatible IT systems or different management approaches
The single reason cited for failure in the chain is: Mastering the integration process. Our study has covered nine reasons: insufficient communication, unclear synergy expectations, compromise in new organisation structure, missing master plan, missing momentum, lack of top management commitment, unclear strategic concept, missing pace of project, and IT issues being addressed too late.

Compromises in organisation structure is extensive. You cant have two CEOs, two CFOs, two VPs of operations. Too often, companies dont take tough decisions in the hope that the cream will rise to the top. It really becomes dysfunctional. Nobody knows whos in charge. The deal rests on an overall integration plan or master plan.

Under-communication is the No 1 reason for failure. Almost all questions coming from employees was about me, me and me: what happens to my health-care benefits, my incentives, my compensation, my redundancy or relocation. They are not focussed on integration at hand, which is a monumental task. Companies need to formulate (step-by-step) a communication plan to lessen their anxiety level and make them focused on integration.

What time-frame should be given to merger-saving companies
One of the key best practices is to create a sense of urgency. Our research shows that the targeted synergies not achieved in 18 to 24 months, typically will never be achieved. Its common sense: beyond two years the competitive landscape changes, internal priorities change. To measure success, a period of three months prior to the deal to two years after the deal should be given to companies to achieve the targeted synergy.