The Deal

Eastern exposures

Bain & Co. research shows that only three in 10 megadeals created meaningful shareholder value from 1995 to 2001. Slightly more than half of these deals actually destroyed value.

By Phil Leung and Hugh MacArthur

First published on marzo 26, 2007
min read


As merger mania sweeps Asia, dealmakers need to remember this cautionary fact. Bain & Co. research shows that only three in 10 megadeals—those of more than $250 million—created meaningful shareholder value from 1995 to 2001. Slightly more than half of these deals actually destroyed value. But we've found that world-class acquirers beat these odds by ignoring economic cycles. After interviewing scores of top acquirers, as well as conducting a Bain study of 1,700 large companies in Asia, Europe and North America, we found that merger pros share key traits: They expect the unexpected, and plan for contingencies. Minor deal potholes generally fall into three categories: organization upheavals, customer service blunders and operational dysfunction. More fundamental—possibly cataclysmic—problems may result from weak due diligence or fast-changing market conditions, requiring more radical solutions. Top acquirers quickly spot these problems because they've set up early-warning systems that allow for immediate responses. The first step for an acquirer's CEO is to explain clearly an announced deal to everyone involved—employees, investors and the general public alike. "In the average acquisition, 40% to 80% of the top management and key engineers [from the acquired business] are gone in two years," observes John Chambers, CEO of Cisco Systems Inc. The California telecommunications company acquired more than 57 businesses from 1993 to 2001. To prevent a major brain drain, Chambers obtains monthly reports on employee turnover. After sealing the deal, experienced integrators closely monitor customer satisfaction. While integrating, product disruptions and jarring changes often drive customers into the arms of delighted competitors. For examples of unsettled customers, look no further than China's fiercely competitive Internet search-engine marketplace. When Alibaba.com Corp., China's largest e-commerce company, acquired Yahoo! China in 2005, the goal was to make the relaunched Yahoo! China Web site first among China's 100 million Internet users. But the deal quickly experienced shifts in strategic focus, personnel upheavals, government concerns and a lawsuit against a competitor launched by Yahoo! China's former president. By September 2006, Yahoo! China had slipped to No. 5, from No. 2. Alibaba CEO Jack Ma predicts Yahoo! China will regain profitability in 2007. But the purchase of snack foods maker Keebler Foods Co. by Kellogg Co., the packaged foods giant, offers lessons in how to rapidly recognize problems and respond. After converting their first distribution center following the 2001 deal, the percentage of successful orders shipped plunged. Through contingency planning and warning systems, the problems were quickly pinpointed, and customers were reassured in person or by phone. Within weeks, the integration was on track. The toughest problems to detect often involve operations. Unlike customer and employee discontent that surfaces soon after the deal is done, operational woes may not become obvious for a year or two. Citigroup Inc. has learned how to keep a close eye on operations long after the deal is sealed. Citigroup's massive acquisition of Travelers Group was predicated on cross-selling: Citigroup's banking customers would buy Travelers insurance and brokerage services, generating an estimated $1 billion in increased profits. But after a year, the cross-selling hadn't materialized. Because of its early-warning system, Citigroup executives spotted the problem and retested all the sources of value they'd projected. A year later, cross-selling was gaining traction, and Citigroup stock rebounded. Citigroup may soon be challenged to test its early-warning model in a Chinese environment. The bank recently led the successful bid to acquire a stake in Guangdong Development Bank. And on March 6, Citigroup unveiled an agreed-to ¥1.253 trillion ($10.8 billion) bid for Japanese broker Nikko Cordial Corp. Smart acquirers aren't distracted by hype. Rather, they keep a close eye on internal corporate indicators and, when alarm bells go off, use a disciplined response to get a shaky deal back on track. Phil Leung is a partner in the Shanghai office of Bain & Co. Hugh MacArthur, a partner in Bain's Boston office, leads the firm's Global Private Equity Practice.

As merger mania sweeps Asia, dealmakers need to remember this cautionary fact. Bain & Co. research shows that only three in 10 megadeals—those of more than $250 million—created meaningful shareholder value from 1995 to 2001. Slightly more than half of these deals actually destroyed value.

But we've found that world-class acquirers beat these odds by ignoring economic cycles. After interviewing scores of top acquirers, as well as conducting a Bain study of 1,700 large companies in Asia, Europe and North America, we found that merger pros share key traits: They expect the unexpected, and plan for contingencies.

Minor deal potholes generally fall into three categories: organization upheavals, customer service blunders and operational dysfunction. More fundamental—possibly cataclysmic—problems may result from weak due diligence or fast-changing market conditions, requiring more radical solutions. Top acquirers quickly spot these problems because they've set up early-warning systems that allow for immediate responses.

The first step for an acquirer's CEO is to explain clearly an announced deal to everyone involved—employees, investors and the general public alike. "In the average acquisition, 40% to 80% of the top management and key engineers [from the acquired business] are gone in two years," observes John Chambers, CEO of Cisco Systems Inc. The California telecommunications company acquired more than 57 businesses from 1993 to 2001. To prevent a major brain drain, Chambers obtains monthly reports on employee turnover.

After sealing the deal, experienced integrators closely monitor customer satisfaction. While integrating, product disruptions and jarring changes often drive customers into the arms of delighted competitors.

For examples of unsettled customers, look no further than China's fiercely competitive Internet search-engine marketplace. When Alibaba.com Corp., China's largest e-commerce company, acquired Yahoo! China in 2005, the goal was to make the relaunched Yahoo! China Web site first among China's 100 million Internet users. But the deal quickly experienced shifts in strategic focus, personnel upheavals, government concerns and a lawsuit against a competitor launched by Yahoo! China's former president. By September 2006, Yahoo! China had slipped to No. 5, from No. 2.

Alibaba CEO Jack Ma predicts Yahoo! China will regain profitability in 2007. But the purchase of snack foods maker Keebler Foods Co. by Kellogg Co., the packaged foods giant, offers lessons in how to rapidly recognize problems and respond. After converting their first distribution center following the 2001 deal, the percentage of successful orders shipped plunged. Through contingency planning and warning systems, the problems were quickly pinpointed, and customers were reassured in person or by phone. Within weeks, the integration was on track.

The toughest problems to detect often involve operations. Unlike customer and employee discontent that surfaces soon after the deal is done, operational woes may not become obvious for a year or two. Citigroup Inc. has learned how to keep a close eye on operations long after the deal is sealed.

Citigroup's massive acquisition of Travelers Group was predicated on cross-selling: Citigroup's banking customers would buy Travelers insurance and brokerage services, generating an estimated $1 billion in increased profits. But after a year, the cross-selling hadn't materialized. Because of its early-warning system, Citigroup executives spotted the problem and retested all the sources of value they'd projected. A year later, cross-selling was gaining traction, and Citigroup stock rebounded.

Citigroup may soon be challenged to test its early-warning model in a Chinese environment. The bank recently led the successful bid to acquire a stake in Guangdong Development Bank. And on March 6, Citigroup unveiled an agreed-to ¥1.253 trillion ($10.8 billion) bid for Japanese broker Nikko Cordial Corp.

Smart acquirers aren't distracted by hype. Rather, they keep a close eye on internal corporate indicators and, when alarm bells go off, use a disciplined response to get a shaky deal back on track.

Phil Leung is a partner in the Shanghai office of Bain & Co. Hugh MacArthur, a partner in Bain's Boston office, leads the firm's Global Private Equity Practice.