How to ensure a successful merger

How to ensure a successful merger

Since 2000, Gerdau has realized more than 30 acquisitions worldwide.

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How to ensure a successful merger

Since 2000, Gerdau has realized more than 30 acquisitions worldwide. Those acquisitions have impacted the Ebitda positively by more than 28% and also helped to maintain the Ebitda margin 20% over the period. The same voracious appetite could be observed in the GP Investments Group, which undertook more than 29 acquisitions in 2007 alone. From the last Brazilian IPOs, some of the most successful ones were accomplished by the (Submarino, ALL, among others), with substantial shareholders' return.

In Brazil, merger and acquisitions face a good momentum. In the first quarter of 2008, the transactions amounted to R$42 billions, which corresponds to 80% of the total of transactions in the whole year of 2007. However, not all companies face the same success as Gerdau Group and GP Investments Group. Our surveys show that regarding great deals (over US$ 250 million) between 1995 and 2001, only three in one mergers generate value to the shareholders. That means that 70% of the acquisitions were negative to the company's value.

In spite of these unfavorable statistics there are some winners. Through quantitative interviews with well succeeded groups and analysis with 1.7 thousand companies all over the world, we have found that they have the same approach concerning the best results: they remain ready to deal with unexpected matters and plan contingencies. That means that they can easily identify the difficulties and have a prompt reaction.

After a deal is announced, the first thing the CEO of the acquiring company should do is a transparent explanation of it to all the stakeholders - employees, investor and clients. But that is only the beginning - understanding both sides of the question is fundamental. This is a lesson that Bill Amelio, CEO of Lenovo, the main Chinese computer producer, learned with his incursions around the world to monitor the integration of the IBM PC's division, acquired in 2004 for US$1.25 billion. The IBM American and the European Executives were not aligned. The reason was not the language, but the executive culture. As soon as the problem was identified and perceived by all parts, Amelio ensured that information was enough traded and discussed so that there would be success on the decisions the executives might take - a fundamental and subtle role in the process.

But it is not only about aligning people thoughts. Monitoring the client's satisfaction is always important, especially after a merger. Since integration is in process, undesirable changes on the products offered and on the team of collaborators might represent losing the consumers to the competitors. A good example is the merger between Kellogg with the savories company Keebler in 2001. When they tried to integrate Keebler distribution channel, which clearly had a superior operation, Kellogg made mistakes and the product flow of large turnover was prejudiced, causing the lack of the products on supermarkets shelves. In that case, the order index success (percentage of orders delivered completely and on-time) was of sum importance to the retailers. The decrease in this index was negatively perceived after the merger.

Nonetheless, the reaction was fast: the team responsible for the integration began to act more carefully, considering the particularities of each distribution center before each logistics decision. To adjust it, the managers focused on one center at a time: when the order index success achieved the expected result, they moved to the next center and so on. The mobilization was also external: Kellogg reached out to the retailers that were facing delivery problems to understand and properly solve the obstacles. In a few weeks they were back to their original integration plan.

Soon after a merger is complete, problems with employees and clients tend to appear. However, operational problems tend to appear even later. When Citigroup acquired the Travelers Group, the merger took into consideration cross-selling of brokerage and travel insurance services. When the cross selling didn't materialize, Citi bells rang. As a contingency plan, they developed a short-term plan with financial goals for the recently acquired companies - that way it was easier to track them on their adjustment: it would be clear if an indicator fell, because everyone would see. In parallel the problem was detailed, which led to an identification of conflict of personality between two top executives. Their conflict represented a delay in several key points of the expected cross selling. The solution: one executive left the company and as contingency to calm the financial market they anticipated a cost reduction plan, previously announced to the market. A year later cross selling was more expressive and Citi shares were healthy again, which reflected the investor trust on the integration.

Moral of the story: the secret for a healthy merger is to keep an eye on the internal indicators and a finger on the company's pulsation. So when the bells ring, a prompt and disciplined response will soon put the integration process back to the desired track.

Kicker: The integration is only possible if the executives share their objectives.

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