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How to avoid merger fiascos

When Dr Reddy's Laboratories bought its German rival, Betapharm, for $572 million, the deal made history, as one of the largest overseas buyouts by an Indian company.

글 Ashish Singh and Sri Rajan

First published on 4월 05, 2007
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When Dr Reddy's Laboratories bought its German rival, Betapharm, for $572 million (about Rs2,517 crore), the deal made history, as one of the largest overseas buyouts by an Indian company. Such big-ticket deals pushed India's M&A numbers over the top, to $27.7 billion in 2006, with money spent on overseas purchases ($8.7 billion) and private-equity investments ($8.4 billion) rapidly approaching the amount spent on domestic deals ($10.6 billion). Yet, deal makers swept up in merger mania need to remember a cautionary fact. When it comes to mega deals—those over $250 million—our research shows that only three in 10 created meaningful shareholder value during a six-year period between 1995 and 2001. Slightly more than half actually destroyed value. But world-class acquirers beat these odds. Through interviews with scores of top acquirers, as well as our analysis of 1,700 large companies in the US, Europe and Japan, we found that the most successful among them share a key trait: They expect the unexpected and plan for contingencies. The top acquirers can spot difficulties and act quickly because they've set up early-warning systems. In effect, they've created a disaster-avoidance system, which is a valuable model for any company considering-or surviving-a merger. Listen and act After a deal is announced, the first step for the acquirer's CEO is to clearly explain the transaction to employees, investors and customers. But that's only half the communications challenge. The other half requires the CEO—to put it bluntly—to shut up and listen. That's the lesson that Bill Amelio, CEO of Lenovo, China's largest computer company, learned during his global travel to oversee integration of IBM's personal computer division, purchased in 2004 for $1.25 billion. In an interview with The Wall Street Journal, Amelio described a communications failure he observed that threatened to stall integration. More opinionated US and European IBM executives incorrectly concluded that, when their Chinese colleagues from Lenovo were nodding, it meant they agreed. In fact, they were simply listening. To avert likely management disputes, Lenovo's US and European executives have learned that a nod doesn't necessarily mean agreement, while the Chinese are being taught better confrontational management skills. Lenovo still has some ground to cover to make its merger with IBM a success, but Amelio's act of listening allowed the kind of prompt action that keeps mergers on track. Don't forget your customers Monitoring customer satisfaction is always important, but never more so than after a merger. Once integration is under way, product disruptions and personnel changes can drive customers into the arms of competitors. A case in point is food giant Kellogg's merger with snack-food-maker Keebler in 2001. When Kellogg's attempt to integrate Keebler's superior distribution system hit a snag, the flow of popular products to retailers suddenly dried up. Because order fill rates—the percentage of orders that are successfully shipped—are the key to the satisfaction of retail customers, the decline sent a strong warning signal. Kellogg's management understood a fundamental merger rule: Look at reality and see things clearly, then act on that understanding. Kellogg's quickly saw that the conversion team needed to take more care in working out the kinks in each distribution centre before it "went live". To adjust, managers focused on a single centre until it was meeting its fill-rate targets. Then—and only then—would the team move on to the next conversion. Kellogg's also reached out repeatedly to customers whose orders had been delayed. By quickly addressing customer issues, Kellogg's got its integration back on track within weeks. Watch operational indicators Problems with employees and customers tend to crop up soon after a deal is done. Operational problems, however, tend to develop more slowly, making them difficult to detect. That's especially true when two companies are tightly combining operations and expect dramatic gains from joint sales. New York-based Citigroup, one of the world's largest financial institutions, is a veteran of such tight-fitting mergers and has learned to keep a close eye on operations long after the deal is sealed. When Citigroup acquired Travelers Group, the massive merger was predicated on cross-selling Travellers insurance and brokerage services to Citigroup customers, a move that executives forecast would generate $1 billion in increased profits. When the cross-selling failed to materialize, Citigroup's early-warning system kicked in. Citigroup spells out short-term financial goals for acquired companies and builds them into the budget; if they drop, the numbers are highly visible. The problem was traced to a personality clash between two top executives that delayed the resolution of several key cross-selling issues. The solution: departure of one of the executives and, to calm Wall Street, early delivery of promised cost reductions. A year later, cross-selling was gaining traction as Citigroup stock rebounded, reflecting investor confidence in the merger team. The moral of the story: Smart acquirers don't pay much attention to the hype around merger booms—or bust. The secret to a healthy merger is keeping a close eye on internal corporate indicators and a finger on the corporate pulse. And when the alarm bells go off, a disciplined response gets a shaky deal back on track. www.livemint.com

When Dr Reddy's Laboratories bought its German rival, Betapharm, for $572 million (about Rs2,517 crore), the deal made history, as one of the largest overseas buyouts by an Indian company. Such big-ticket deals pushed India's M&A numbers over the top, to $27.7 billion in 2006, with money spent on overseas purchases ($8.7 billion) and private-equity investments ($8.4 billion) rapidly approaching the amount spent on domestic deals ($10.6 billion).

Yet, deal makers swept up in merger mania need to remember a cautionary fact. When it comes to mega deals—those over $250 million—our research shows that only three in 10 created meaningful shareholder value during a six-year period between 1995 and 2001. Slightly more than half actually destroyed value.

But world-class acquirers beat these odds. Through interviews with scores of top acquirers, as well as our analysis of 1,700 large companies in the US, Europe and Japan, we found that the most successful among them share a key trait: They expect the unexpected and plan for contingencies. The top acquirers can spot difficulties and act quickly because they've set up early-warning systems. In effect, they've created a disaster-avoidance system, which is a valuable model for any company considering-or surviving-a merger.

Listen and act

After a deal is announced, the first step for the acquirer's CEO is to clearly explain the transaction to employees, investors and customers. But that's only half the communications challenge. The other half requires the CEO—to put it bluntly—to shut up and listen. That's the lesson that Bill Amelio, CEO of Lenovo, China's largest computer company, learned during his global travel to oversee integration of IBM's personal computer division, purchased in 2004 for $1.25 billion.

In an interview with The Wall Street Journal, Amelio described a communications failure he observed that threatened to stall integration. More opinionated US and European IBM executives incorrectly concluded that, when their Chinese colleagues from Lenovo were nodding, it meant they agreed. In fact, they were simply listening. To avert likely management disputes, Lenovo's US and European executives have learned that a nod doesn't necessarily mean agreement, while the Chinese are being taught better confrontational management skills. Lenovo still has some ground to cover to make its merger with IBM a success, but Amelio's act of listening allowed the kind of prompt action that keeps mergers on track.

Don't forget your customers

Monitoring customer satisfaction is always important, but never more so than after a merger. Once integration is under way, product disruptions and personnel changes can drive customers into the arms of competitors. A case in point is food giant Kellogg's merger with snack-food-maker Keebler in 2001. When Kellogg's attempt to integrate Keebler's superior distribution system hit a snag, the flow of popular products to retailers suddenly dried up. Because order fill rates—the percentage of orders that are successfully shipped—are the key to the satisfaction of retail customers, the decline sent a strong warning signal.

Kellogg's management understood a fundamental merger rule: Look at reality and see things clearly, then act on that understanding. Kellogg's quickly saw that the conversion team needed to take more care in working out the kinks in each distribution centre before it "went live". To adjust, managers focused on a single centre until it was meeting its fill-rate targets. Then—and only then—would the team move on to the next conversion. Kellogg's also reached out repeatedly to customers whose orders had been delayed. By quickly addressing customer issues, Kellogg's got its integration back on track within weeks.

Watch operational indicators

Problems with employees and customers tend to crop up soon after a deal is done. Operational problems, however, tend to develop more slowly, making them difficult to detect. That's especially true when two companies are tightly combining operations and expect dramatic gains from joint sales. New York-based Citigroup, one of the world's largest financial institutions, is a veteran of such tight-fitting mergers and has learned to keep a close eye on operations long after the deal is sealed. When Citigroup acquired Travelers Group, the massive merger was predicated on cross-selling Travellers insurance and brokerage services to Citigroup customers, a move that executives forecast would generate $1 billion in increased profits. When the cross-selling failed to materialize, Citigroup's early-warning system kicked in. Citigroup spells out short-term financial goals for acquired companies and builds them into the budget; if they drop, the numbers are highly visible. The problem was traced to a personality clash between two top executives that delayed the resolution of several key cross-selling issues. The solution: departure of one of the executives and, to calm Wall Street, early delivery of promised cost reductions. A year later, cross-selling was gaining traction as Citigroup stock rebounded, reflecting investor confidence in the merger team.

The moral of the story: Smart acquirers don't pay much attention to the hype around merger booms—or bust. The secret to a healthy merger is keeping a close eye on internal corporate indicators and a finger on the corporate pulse. And when the alarm bells go off, a disciplined response gets a shaky deal back on track.