How to create value, not headlines (Last of four parts)

SUNDAY, 04 SEPTEMBER 2011 18:59 KPMG PERSPECTIVES

Last of four parts

6. The hard truths about soft issues. With 45 percent of Fortune 500 CFOs blaming post-M&A (mergers and acquisitions) failure on “unexpected people problems,” Kelly says acquirers cannot afford to “concentrate primarily on the hard mechanics of extracting value. However intensive the planning, however innovative the financing, and however watertight the contract, people are the key to extracting value—and these softer issues cannot be left to chance.”

The three soft issues on which many deals founder are selecting the management team, cultural differences between buyer and targetcompany, and communication. Management shouldn’t, Kelly warns, define communication purely in terms of PR and investor relations: “Poor communication to employees is likely to have a more detrimental effect than to shareholders, suppliers or customers.”

7. One size does not fit all. Some deals go wrong at the start, others in the middle but many go awry after the paperwork is signed. “I’m always surprised at the lack of sophistication in post-M&A integration. Very few executives have a good model in mind,” says Capron. One question too few boards think through is the degree of autonomy an acquisition is allowed. There is no simple, right answer. “You have to ask what makes sense for the specific deal,” says Capron. “If you’re acquiring an entrepreneurial firm, you need the entrepreneurs to remain committed if you are to deliver value. And yet to avoid replication of effort, and internal inconsistency, you need to have some degree of centralization.”

KPMG research suggests that while it might be useful to replace managers when buying a bolt-on business, successful acquirers retain key leaders at companies being fully integrated. This approach helped Johnson & Johnson commercialize such valuable products as Tylenol.

One overlooked aspect of successful integration is divestment. As Capron points out: “Acquirers must be disciplined about selling resources they don’t need, lest they become overloaded with excess baggage. General Electric divests as often as it purchases after reconfiguring its targets.”

8. Balance risk and reward. In the acquisition business, activity is too often confused with achievement. Capron cautions: “Keep in mind that over-reliance on acquisition adds to your overall risk. You can always grow your business through acquisition. But that growth can destroy value, rather than enhance it.” It sounds obvious but, as Kelly says, many companies have ignored this simple truth. In the heyday of M&A, while the champagne glasses clinked, you would often see “an ashen-faced figure in the corner”—the operations director whose job was to make it work. And yet, Kelly says, acquisitions will still attract many. “If you’re a European conglomerate, in a mature market, and you’re projecting forward three to five years, you’re probably realistically looking at single-digit growth in a hard, mature market. That isn’t going to excite investors. If you plan early, pay the right price, and deliver the cost and revenue synergies, you can deliver value for shareholders.”

This article is written by Paul Simpson and was taken from the publication Agenda magazine, April to May 2011, produced by KPMG’s Global Advisor Services Practice.

For comments or inquiries, please e-mail Roberto G. Manabat at rgmanabat@kpmg.com ormanila@kpmg.com.