When mergers don't add up

Click to follow
The Independent Online
Further evidence that mergers and acquisitions often fail to live up to the hype and excitement that accompany their announcement is contained in research from KPMG Management Consulting.

The report is a touch ironic, given that it appeared in the same week that the firm announced its intention to merge with rival Ernst & Young. It says that a lack of early planning for restructuring and integration is chiefly to blame for the failure of many such deals.

The research report, called Colouring the Map, is based on the questioning of senior board members of more than 300 companies throughout Europe about recent merger and acquisition activity. It found that planning for restructuring was often poorly thought out and underfunded, and plans largely ignored key areas such as information technology.

More than 55 per cent of respondents were unable to place a value on the budget for restructuring costs in a newly-merged entity, and 43 per cent said the merger had not been completed within the expected time frame. Only 7 per cent of those who budgeted for restructuring had made funds available specifically for IT restructuring, and 14 per cent said their companies had had no advance plans for integration.

Alan Reid, chairman of KPMG's European management consulting practice, said the findings were a "cause for concern" because they showed that companies were not preparing effectively. "Even where comprehensive preparations are made, these tend to focus on closing the deal, not on what happens next," he said. "This tends to suggest that companies are hoping that the benefits they wish to gain from the acquisition or merger - economies of scale, greater efficiency and so on, will happen as a natural consequence of the deal. The reality is that extensive and careful planning is necessary to avoid the kind of problems that can threaten the long-term success of the new company. These include difficulties in integrating the IT systems of the two companies and in finding a successful human resources strategy for the merged entity."

His colleague, Nick Griffin, added that there seemed to be major discrepancies between the number of respondents who rated their merger or acquisition a success and the number whose companies had carried out a formal review. "The fact that so few companies undertake an objective review of the success of the merger or acquisition implies that these measures are judged largely on subjective factors and appearances rather than on quantifiable measures," he said. Even where such reviews were made, they tended to concentrate on financial measures rather than "critical areas" such as staff and IT systems effectiveness, added Mr Griffin.

One reason put forward for this lack of objective measuring is that deals of this sort tend to have an immediate focus on increasing size and geographic spread rather than on more strategic goals. When such aims are set in the context of the main goals and aspirations, it is clear that the targets - more profits, cost reduction and new product development - are not necessarily linked to the wider spread and larger overall presence the deal is designed to achieve.

Mr Griffin said the survey demonstrated that "mergers and acquisitions continue to be risky and troublesome projects for companies to embark on. However, it also makes it clear that, whether or not they are judged successful on their own terms, they are not necessarily the most effective means of achieving the kind of success that most companies require."