The Business Times

Post-merger manoeuvres - dos and don'ts

Over the next few months, as a number of the recently announced mergers in Singapore close, the new management teams will need to make a staggering number of decisions.

Par Till Vestring and Mike Booker

First published on août 20, 2001
min


Merging companies in Singapore must bring the battlefield into focus. Over the next few months, as a number of the recently announced mergers in Singapore close, the new management teams will need to make a staggering number of decisions: Should we keep both brands, give up one brand, or create a new brand? Whose IT system should we adopt? How many branches can we close and what is the best way to reconfigure the new branch network? Who should we select from the two merging companies as department heads? How many people will become redundant? Which pension scheme is better? The ability of the merging management teams to make the right decisions and the speed with which they can execute those decisions will determine whether their mergers will create shareholder value or whether they will, as the majority of M&A deals do, ultimately destroy shareholder value. Few companies in Singapore have experience in this game. Furthermore, several of the deals in front of shareholders now have been put together at very short notice, with little or no time spent on pre-planning the integration. Military manoeuvres best illustrate the amount of planning required to integrate two large companies successfully. The quality of upfront planning, the officers' skills, the training of the field troops and the arsenal of available tools and processes all impact the outcome of such military manoeuvres. Before beginning to plan for integration, merging companies must bring the battlefield into focus. What is the strategic rationale behind the deal? What are the likely sources of value - cost reduction, cross-selling or new bundled service offerings? Is rapid integration the key to success or is it more important to get the strategy right first? The best integration approach depends on the strategic rationale of the deal. Many deals fail to add shareholder value because the integration process is not tailored to delivering the strategic goals of the deal. In a previous article, we outlined the six basic strategic rationales for mergers: active investing, scale, scope, adjacency expansion, refining business models and redefining industries. For each type of merger, the importance of speed, the balance between operational focus and strategy and the emphasis on cost-cutting versus revenue enhancement vary dramatically. For example, executives who use mergers to take their businesses in a fundamentally new direction ('reinventing the business' or 'redefining the industry') need to sacrifice speed and focus on strategy first. Integration comes later and cost reduction tends to be less important. Take the proposed merger between StarHub and SCV. Top managers' challenge will be to develop a profitable business model for their new bundled services (broadband Internet, cable TV, fixed and wireless telephony) and to cross-sell to their respective customer bases. Getting this right will take strategic thinking, testing and careful preparation. Acquisitions or mergers that intend to expand into adjacent markets, address new customer or product segments ('adjacency' or 'scope' rationales) require a balanced approach between strategy and integration. With Raffles Holdings' recent acquisition of Swissotel, Raffles will need to develop a two-tiered branding concept - super premium (Raffles) and business travel (Swissotel) - and to create synergistic linkages between the two hotel brands. In the meantime, however, the combined company may be able to reap more immediate benefits by standardising reservations, marketing systems and operational procedures, and merging common support functions. Finally, successful scale-driven mergers and acquisitions require rapid integration and ruthless elimination of overlap. The challenge often lies more in the sheer scale of the businesses involved and the high degree of overlap than in the strategy for the new entity. Many of the deals currently in discussion in Singapore are primarily aimed at increasing scale: Celestica/Omni, Keppel Fels/Keppel Hitachi Zosen, OCBC/Keppel Capital, SMRT/Tibs and UOB/OUB are the most recent examples. The experiences of the most successful global 'serial acquirers' point towards some perhaps counter-intuitive lessons for success. The next 12 months will show whether these lessons also apply to current mergers in Singapore. - Maintain a high degree of focus on the base businesses of the two merging companies during the transition process instead of throwing a lot of resources at the integration. Most mergers and acquisitions fail because the core businesses of the two companies deteriorate before the integration is even complete. All but a very small part of the merging organisations should be focused on meeting existing revenue and profit targets, not on participating in the integration. - Don't rush. Speed is only valuable once the leaders have paved a well-flagged race course. Otherwise, speed quickly unravels into chaos. Investing in comprehensive, detailed planning upfront always pays off in an ultimately faster and smoother integration. - Deliver bad news quickly. One of the biggest challenges in a merger is that individuals are preoccupied with their own future. As veteran acquirer Dennis Kozlowski, CEO of Tyco International, observes: 'People are normally productive for about 5.7 hours in an eight-hour day, but any time a change of control takes place, their productivity falls to less than an hour.' Eliminating uncertainty improves productivity, even if employees lose their job. Term contracts and performance-based incentives can keep employees who will ultimately leave the company focused on working productively. - Disregard the popular principle, 'for each job, we will select the best person from either company'. This maxim only slows down and disrupts the integration process in scale-driven mergers. Selecting the best teams from either organisation rather than the best individuals makes for much more rapid and smooth integration, because it avoids mixed teams of people who have previously not worked together. - Don't let systems integration issues dictate the timetable for integration. Integrating systems often takes one to two years. Customers and competitors are unlikely to give a new entity that much time. Many processes, facilities, teams and systems can and need to integrate much more quickly. - Integration should come before any fundamental efforts to improve efficiency and effectiveness of processes. Companies that have tried to reengineer themselves while they are merging often get bogged down and stall as employees from both sides wrestle with new processes. Much better to integrate rapidly first, and review core processes later. Management teams involved in mergers and acquisitions in Singapore have their work cut out for them. The best way to create shareholder value from these deals is to tailor the integration process to the strategic rationale of the deal and to follow the best practices developed by frequent acquirers. Till Vestring is global head of Bain & Company's merger integration practice and a partner and vice-president in Singapore. Mike Booker is a manager with Bain & Company in Singapore and has extensive M&A experience in South-east Asia.

Merging companies in Singapore must bring the battlefield into focus.

Over the next few months, as a number of the recently announced mergers in Singapore close, the new management teams will need to make a staggering number of decisions: Should we keep both brands, give up one brand, or create a new brand? Whose IT system should we adopt? How many branches can we close and what is the best way to reconfigure the new branch network? Who should we select from the two merging companies as department heads? How many people will become redundant? Which pension scheme is better?

The ability of the merging management teams to make the right decisions and the speed with which they can execute those decisions will determine whether their mergers will create shareholder value or whether they will, as the majority of M&A deals do, ultimately destroy shareholder value.

Few companies in Singapore have experience in this game. Furthermore, several of the deals in front of shareholders now have been put together at very short notice, with little or no time spent on pre-planning the integration.

Military manoeuvres best illustrate the amount of planning required to integrate two large companies successfully. The quality of upfront planning, the officers' skills, the training of the field troops and the arsenal of available tools and processes all impact the outcome of such military manoeuvres.

Before beginning to plan for integration, merging companies must bring the battlefield into focus. What is the strategic rationale behind the deal? What are the likely sources of value - cost reduction, cross-selling or new bundled service offerings? Is rapid integration the key to success or is it more important to get the strategy right first?

The best integration approach depends on the strategic rationale of the deal. Many deals fail to add shareholder value because the integration process is not tailored to delivering the strategic goals of the deal.

In a previous article, we outlined the six basic strategic rationales for mergers: active investing, scale, scope, adjacency expansion, refining business models and redefining industries. For each type of merger, the importance of speed, the balance between operational focus and strategy and the emphasis on cost-cutting versus revenue enhancement vary dramatically.

For example, executives who use mergers to take their businesses in a fundamentally new direction ('reinventing the business' or 'redefining the industry') need to sacrifice speed and focus on strategy first. Integration comes later and cost reduction tends to be less important.

Take the proposed merger between StarHub and SCV. Top managers' challenge will be to develop a profitable business model for their new bundled services (broadband Internet, cable TV, fixed and wireless telephony) and to cross-sell to their respective customer bases. Getting this right will take strategic thinking, testing and careful preparation.

Acquisitions or mergers that intend to expand into adjacent markets, address new customer or product segments ('adjacency' or 'scope' rationales) require a balanced approach between strategy and integration.

With Raffles Holdings' recent acquisition of Swissotel, Raffles will need to develop a two-tiered branding concept - super premium (Raffles) and business travel (Swissotel) - and to create synergistic linkages between the two hotel brands. In the meantime, however, the combined company may be able to reap more immediate benefits by standardising reservations, marketing systems and operational procedures, and merging common support functions.

Finally, successful scale-driven mergers and acquisitions require rapid integration and ruthless elimination of overlap. The challenge often lies more in the sheer scale of the businesses involved and the high degree of overlap than in the strategy for the new entity.
Many of the deals currently in discussion in Singapore are primarily aimed at increasing scale: Celestica/Omni, Keppel Fels/Keppel Hitachi Zosen, OCBC/Keppel Capital, SMRT/Tibs and UOB/OUB are the most recent examples.

The experiences of the most successful global 'serial acquirers' point towards some perhaps counter-intuitive lessons for success. The next 12 months will show whether these lessons also apply to current mergers in Singapore.

- Maintain a high degree of focus on the base businesses of the two merging companies during the transition process instead of throwing a lot of resources at the integration. Most mergers and acquisitions fail because the core businesses of the two companies deteriorate before the integration is even complete. All but a very small part of the merging organisations should be focused on meeting existing revenue and profit targets, not on participating in the integration.

- Don't rush. Speed is only valuable once the leaders have paved a well-flagged race course. Otherwise, speed quickly unravels into chaos. Investing in comprehensive, detailed planning upfront always pays off in an ultimately faster and smoother integration.

- Deliver bad news quickly. One of the biggest challenges in a merger is that individuals are preoccupied with their own future. As veteran acquirer Dennis Kozlowski, CEO of Tyco International, observes: 'People are normally productive for about 5.7 hours in an eight-hour day, but any time a change of control takes place, their productivity falls to less than an hour.'

Eliminating uncertainty improves productivity, even if employees lose their job. Term contracts and performance-based incentives can keep employees who will ultimately leave the company focused on working productively.

- Disregard the popular principle, 'for each job, we will select the best person from either company'. This maxim only slows down and disrupts the integration process in scale-driven mergers. Selecting the best teams from either organisation rather than the best individuals makes for much more rapid and smooth integration, because it avoids mixed teams of people who have previously not worked together.

- Don't let systems integration issues dictate the timetable for integration. Integrating systems often takes one to two years. Customers and competitors are unlikely to give a new entity that much time. Many processes, facilities, teams and systems can and need to integrate much more quickly.

- Integration should come before any fundamental efforts to improve efficiency and effectiveness of processes. Companies that have tried to reengineer themselves while they are merging often get bogged down and stall as employees from both sides wrestle with new processes. Much better to integrate rapidly first, and review core processes later.

Management teams involved in mergers and acquisitions in Singapore have their work cut out for them. The best way to create shareholder value from these deals is to tailor the integration process to the strategic rationale of the deal and to follow the best practices developed by frequent acquirers.

Till Vestring is global head of Bain & Company's merger integration practice and a partner and vice-president in Singapore. Mike Booker is a manager with Bain & Company in Singapore and has extensive M&A experience in South-east Asia.