The Business Times

6 ways to lead mergers to results

Driving the integration and making the tough calls are the most critical functions for leaders to manage mergers and acquisitions.

글 Till Vestring and Mike Booker

First published on 9월 03, 2001
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In the next few months, the chief executives behind Singapore's recent wave of mergers and acquisitions (M&A) will face tough challenges: newly-formed teams of people who do not trust each other must make a staggering number of critical one-time decisions while everyone, from senior management to the rank and file, is preoccupied with how the merger will affect them. It will be tempting to delay critical, but politically sensitive, decisions. Yet while leaders deliberate, customers may defect, core employees may leave and the core businesses of both firms could deteriorate before the integration has even begun. What can Singapore's business leaders learn from M&A in other markets? What are the roles leaders play in successful deals? And how does this vary for different types of deals? In all mergers and acquisitions, leaders play six essential roles: Crystallise and communicate the strategic vision for the merger. From the start, leaders must clearly articulate 'why we are doing this' and 'what we plan to achieve', both externally and internally. Additionally, they must determine what the core values and culture of the new organisation should be. Close the deal. This is not a given. One in five deals falls through after it is announced, because of regulatory issues or leaders having failed to resolve outstanding issues. Focus on the key sources of value of the deal. Typically, only four or five sources of value account for the vast majority of total deal value. Leaders must ensure the entire organisation remains focused on what the deal is all about. They must customise the integration programme around these sources of value, and they must ensure rapid progress from planning to concrete action. Drive the integration of the two entities. The leaders are responsible for designing and structuring the integration and delivering on the milestones and commitments they have set. Make the tough calls. Most mergers include no shortage of difficult decisions: who to keep and who to let go is one of the most difficult decisions and one that has to be made early. Other tough calls relate to the new company's identity: which brand to keep and how to shape the new entity's brand. To be effective, leaders need to rally their senior team around these decisions and obtain buy-in from internal and external stakeholders. Cheer on the troops. Leaders must generate enthusiasm for the M&A in both companies, confront fear and uncertainty, and demonstrate commitment from the top. Challenges here include combating investors' fear of stock-price fall-off, regulators' concerns about unfair competition, executives' fear of losing status, employees' concerns about job losses, and customers' and suppliers' worries about potential disruptions in service. While these six roles are essential to all transactions, leaders need to customise their approach to fit the strategic rationale behind the deal. Strategic rationales cover a wide range: some deals focus on squeezing value out of poorly-managed companies through 'active investing' or exploiting economies of scale. Others aim to provide companies with stepping stones to businesses or customer segments adjacent to the buyer's core activities. Deals may broaden the scope of the acquirer's business by adding new capabilities. Or the transaction might aim to fundamentally change the business of the combined company or the sector in which the new entity plays. Many of the deals currently under way in Singapore aim to increase scale. The banking mergers target improved economies of scale in local distribution and in areas such as IT or back-office functions. The NOL/APL merger helped the two players achieve global scale in container shipping. In scale-driven transactions, overlaps, cost savings opportunities and synergies are relatively easy to identify and quantify. Execution, however, is the key to realising value. A major challenge lies in the sheer number of issues leaders must contend with, and the complexity of some of the decisions they must make. It's relatively easy to establish how many branches should be closed using common benchmarks, but the devil is in the details: which branches to close, how quickly, and how the acquirer can transfer customers without losing their business, for instance. While leaders of scale deals need to perform all six roles, the most critical are driving the integration and making the tough calls. Leaders in these deals need to be highly organised: they must design and lead a high-quality and fast-paced integration process aimed at delivering value while keeping both organisations focused on existing budgets and plans. They also need to be decisive. They must manage the tension between the need for speed and the desire for confidence in every decision. Take deciding on the top jobs in the new company—the leader must decide quickly, even with limited information about the other side's managers. Integration cannot progress if the new senior management team is not in place. Leaders must be willing to make the tough people decisions, even to the extent of removing individuals who are likely to block progress. John Browne, CEO of BP in the BP/Amoco merger, handled these roles masterfully. Within 100 days, he had filled all top management jobs and completed most of the 10,000 layoffs. BP's stock price rose 11 per cent over this period and Mr Browne achieved cost savings of US$2 billion within the first 12 months, a year ahead of schedule. Scope and adjacency-driven transactions as well as deals that aim to change a business' fundamental model are different. Revenue increase typically accounts for a high proportion of the promised value of these deals; cost reductions are necessary but not sufficient. Take Raffles Holdings' acquisition of Swissotel. Standardising systems and merging back-office functions will provide cost savings opportunities, but the real value from the deal must come from generating new revenue opportunities across both hotel brands. Crystallising and communicating the strategic vision and retaining focus on the key sources of value are the two most critical roles CEOs need to play for this type of deal. Shareholders, customers and employees will react immediately when this is not done convincingly. The share price of acquirers will drop if the CEO cannot convince the markets of the value of a deal. This can make a deal impossible to execute. Customers will rapidly defect if leaders fail to clearly think through new combined offerings and if they cannot convince customers these offerings are superior to those of competitors. Finally, employees will leave or reduce their commitment if they do not believe in the value of the deal. Every leader is different. So is every deal. But leaders of successful mergers tend to excel at the six roles described above. How successfully Singapore's business leaders play these multiple leadership roles, and how effectively they tailor their leadership to the deal's strategic rationale, will be crucial in creating value from the wave of M&A now under way. Till Vestring is the 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.

In the next few months, the chief executives behind Singapore's recent wave of mergers and acquisitions (M&A) will face tough challenges: newly-formed teams of people who do not trust each other must make a staggering number of critical one-time decisions while everyone, from senior management to the rank and file, is preoccupied with how the merger will affect them.

It will be tempting to delay critical, but politically sensitive, decisions. Yet while leaders deliberate, customers may defect, core employees may leave and the core businesses of both firms could deteriorate before the integration has even begun. What can Singapore's business leaders learn from M&A in other markets? What are the roles leaders play in successful deals? And how does this vary for different types of deals?

In all mergers and acquisitions, leaders play six essential roles:

Crystallise and communicate the strategic vision for the merger. From the start, leaders must clearly articulate 'why we are doing this' and 'what we plan to achieve', both externally and internally. Additionally, they must determine what the core values and culture of the new organisation should be.

Close the deal. This is not a given. One in five deals falls through after it is announced, because of regulatory issues or leaders having failed to resolve outstanding issues.

Focus on the key sources of value of the deal. Typically, only four or five sources of value account for the vast majority of total deal value. Leaders must ensure the entire organisation remains focused on what the deal is all about. They must customise the integration programme around these sources of value, and they must ensure rapid progress from planning to concrete action.

Drive the integration of the two entities. The leaders are responsible for designing and structuring the integration and delivering on the milestones and commitments they have set.

Make the tough calls. Most mergers include no shortage of difficult decisions: who to keep and who to let go is one of the most difficult decisions and one that has to be made early. Other tough calls relate to the new company's identity: which brand to keep and how to shape the new entity's brand. To be effective, leaders need to rally their senior team around these decisions and obtain buy-in from internal and external stakeholders.

Cheer on the troops. Leaders must generate enthusiasm for the M&A in both companies, confront fear and uncertainty, and demonstrate commitment from the top. Challenges here include combating investors' fear of stock-price fall-off, regulators' concerns about unfair competition, executives' fear of losing status, employees' concerns about job losses, and customers' and suppliers' worries about potential disruptions in service.

While these six roles are essential to all transactions, leaders need to customise their approach to fit the strategic rationale behind the deal. Strategic rationales cover a wide range: some deals focus on squeezing value out of poorly-managed companies through 'active investing' or exploiting economies of scale. Others aim to provide companies with stepping stones to businesses or customer segments adjacent to the buyer's core activities. Deals may broaden the scope of the acquirer's business by adding new capabilities. Or the transaction might aim to fundamentally change the business of the combined company or the sector in which the new entity plays.

Many of the deals currently under way in Singapore aim to increase scale. The banking mergers target improved economies of scale in local distribution and in areas such as IT or back-office functions. The NOL/APL merger helped the two players achieve global scale in container shipping.

In scale-driven transactions, overlaps, cost savings opportunities and synergies are relatively easy to identify and quantify. Execution, however, is the key to realising value. A major challenge lies in the sheer number of issues leaders must contend with, and the complexity of some of the decisions they must make. It's relatively easy to establish how many branches should be closed using common benchmarks, but the devil is in the details: which branches to close, how quickly, and how the acquirer can transfer customers without losing their business, for instance.

While leaders of scale deals need to perform all six roles, the most critical are driving the integration and making the tough calls. Leaders in these deals need to be highly organised: they must design and lead a high-quality and fast-paced integration process aimed at delivering value while keeping both organisations focused on existing budgets and plans.

They also need to be decisive. They must manage the tension between the need for speed and the desire for confidence in every decision. Take deciding on the top jobs in the new company—the leader must decide quickly, even with limited information about the other side's managers.

Integration cannot progress if the new senior management team is not in place. Leaders must be willing to make the tough people decisions, even to the extent of removing individuals who are likely to block progress.

John Browne, CEO of BP in the BP/Amoco merger, handled these roles masterfully. Within 100 days, he had filled all top management jobs and completed most of the 10,000 layoffs. BP's stock price rose 11 per cent over this period and Mr Browne achieved cost savings of US$2 billion within the first 12 months, a year ahead of schedule.

Scope and adjacency-driven transactions as well as deals that aim to change a business' fundamental model are different. Revenue increase typically accounts for a high proportion of the promised value of these deals; cost reductions are necessary but not sufficient. Take Raffles Holdings' acquisition of Swissotel. Standardising systems and merging back-office functions will provide cost savings opportunities, but the real value from the deal must come from generating new revenue opportunities across both hotel brands.

Crystallising and communicating the strategic vision and retaining focus on the key sources of value are the two most critical roles CEOs need to play for this type of deal. Shareholders, customers and employees will react immediately when this is not done convincingly. The share price of acquirers will drop if the CEO cannot convince the markets of the value of a deal. This can make a deal impossible to execute. Customers will rapidly defect if leaders fail to clearly think through new combined offerings and if they cannot convince customers these offerings are superior to those of competitors. Finally, employees will leave or reduce their commitment if they do not believe in the value of the deal.

Every leader is different. So is every deal. But leaders of successful mergers tend to excel at the six roles described above. How successfully Singapore's business leaders play these multiple leadership roles, and how effectively they tailor their leadership to the deal's strategic rationale, will be crucial in creating value from the wave of M&A now under way.

Till Vestring is the 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.