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Making M&As work - a note for CEOs

Why do most M&As fail? Studies have shown that one in five M&As fall through after the deal has been signed, and of those that don't fall through, more than half will actually destroy shareholder value.

글 Kenneth Chang

First published on 12월 18, 2001
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Following is the second and last of a two-part story on strategic M&As contributed to The Korea Herald by Kenneth Chang, a manager of the consulting firm, Bain & Company. Why do most M&As fail? Studies have shown that one in five M&As fall through after the deal has been signed, and of those that don't fall through, more than half will actually destroy shareholder value. How often have we seen CEOs stepping down after poor results or political infighting following a merger? There are many reasons M&As fail. In the first article in this series, we talked about having the right strategic intentions as the most important element for success before the deal. But in terms of making the M&A work after the deal has been signed, it is leadership that is the biggest determinant. Every leader is different. So is every deal. But leaders of successful deals tend to excel at one of the toughest challenges - articulating the promise of the merged corporation and leading employees, customers, and investors to fulfill it. These leaders focus on critical elements that drive the merger or acquisition. And to succeed, they study models that others have adopted to handle similar transactions. Today, making, consummating, and integrating a deal puts pressure as never before on chief executives to play multiple leadership roles and switch quickly from one role to another throughout the merger process. The roles employed - and hence the leadership time invested - vary dramatically with the type of deal. Some strategic acquisitions provide companies with steppingstones into businesses or customer segments related to the buyer's core activities. In other cases, acquisitions may broaden the scope of the acquirer's business by adding new capabilities. The most complex acquisitions intend to fundamentally redefine the business of the combined companies or to change the rules of industry competition in favor of the new entity. As the rationales for transactions have changed, new challenges have evolved, especially for those leading the deals. In all mergers and acquisitions, leaders play five essential roles. These roles are visionary, cheerleader, closer, captain, and crusader. Each role presents a different challenge. First, as the visionary, a leader must establish and communicate the strategic vision for the merger. This means clearly articulating "why we are doing this" and "what we plan to achieve," both externally and internally. Typically, leaders need to explain the top four or five sources of value in the deal. Additionally, the leader determines what the core values and culture of the new organization should be. What are the golden rules people should live by? To bring the vision to life, the leader needs to explain and demonstrate these values from the outset. In the case of the DaimlerChrysler merger, Chairman Jurgen Schrempp captured the imagination of journalists and analysts alike with his vision: "This is much more than a merger. Today, we are creating the world's leading automotive company for the twenty-first century." While the jury is still out on the success of the DaimlerChrysler merger, the vision of what these two companies can become was made clear. The leader's second job as the cheerleader is to cheer on the troops - initially his own and eventually both companies' - to generate enthusiasm for the merger or acquisition, and to confront fear and uncertainty in its various forms. Challenges here include combating investors' fear of stock-price falloff, executives' fear of losing status to counterparts from the merging company (often a former rival), employees' concerns over job losses, and customers' and suppliers' worries about potential disruptions in service. Third, as the closer, leaders must close the deal, and this is not a given. One in five deals falls through after it is announced, sometimes because of regulatory issues, other times because of the failure of leaders to resolve outstanding disagreements. When Glaxo Wellcome and SmithKline Beecham first announced their intention to merge in 1998, the markets welcomed the news, sending the combined companies' value up 18 percent within two days. But prices fell a few weeks later when the companies announced that the merger was off. Glaxo's Richard Sykes and SmithKline's Jan Leschly could not agree on who should get the top jobs. Glaxo and SmithKline only resolved their differences after Jan Leschly retired. Jean-Pierre Garnier, formerly of SmithKline, became chief executive of the combined company when the merger finally closed in December 2000. A leader's fourth task is to captain change by managing the integration of the two entities. He or she owns the action plan that outlines milestones and deliverables for the teams responsible for integration. Further, the captain defines the "rules of engagement" - the basis on which the two companies will start to work together. In the case of AOL Time Warner, CEO's Steve Case and Gerald Levine appointed two experienced right hand men, Bob Pittman and Dick Parsons to captain implementation. These two agreed on a plan to cut costs and improve efficiency across the organization and to make sure the divisions communicated with each other. Delegating this way, freed Case and Levine to continue running the two companies, and to focus on more strategic opportunities to fulfill their vision. Finally, the most challenging call is to be a crusader for the new entity. Crusading roots itself in the second task - building enthusiasm in both companies - and develops momentum as the deal closes and integration progresses. Generating momentum means dispelling inertia and encouraging people into actionconsistent with the overall strategic vision. The crusader needs to give guidance on how to behave and to set both hard and soft targets for performance. And, when crusading for changes in behavior, he or she needs to lead by example. Between mid-1998 and the spring of 2000, Sir John Browne, Chief Executive of British Petroleum (BP), closed a series of transactions totaling $120 billion that brought together BP, Amoco, Arco, and Burmah Castrol into a single company. Browne said of his approach, "You have to create a single organization - with common processes and standards, common values, and a way of working that encourages people to look forward than to dwell in the past." He moved swiftly to achieve his goals. Within 100 days of closing the Amoco deal, he had filled all the top management jobs and completed most of the cuts. He startled some Amoco executives by imposing BP's structure and management style on the new company, an approach that ultimately resulted in the resignation of some senior figures at Amoco. As a wave of strategic M&A transactions sweep Korea, we must learn from the numerous successful and unsuccessful deals that have occurred globally. While situations may be different in Korea (as they often are) the core of leadership making M&A's work does not differ all that much. Korean executives also need to play the five roles of visionary, cheerleader, closer, captain, and crusader. There are as many approaches to leading a merger as executives who attempt the task. But one cannot assume that any one approach will do. Would-be deal leaders should consider carefully the major risks inherent in the transaction and craft leadership styles to manage those risks most effectively, invoking different roles at different times to make the most of the opportunities their deal presents. The message is clear: Korean company CEOs and executives will be the keys to driving these M&As to create value and to create a new economic landscape for Korea.

Following is the second and last of a two-part story on strategic M&As contributed to The Korea Herald by Kenneth Chang, a manager of the consulting firm, Bain & Company.

Why do most M&As fail?

Studies have shown that one in five M&As fall through after the deal has been signed, and of those that don't fall through, more than half will actually destroy shareholder value.

How often have we seen CEOs stepping down after poor results or political infighting following a merger?

There are many reasons M&As fail. In the first article in this series, we talked about having the right strategic intentions as the most important element for success before the deal. But in terms of making the M&A work after the deal has been signed, it is leadership that is the biggest determinant. Every leader is different. So is every deal. But leaders of successful deals tend to excel at one of the toughest challenges - articulating the promise of the merged corporation and leading employees, customers, and investors to fulfill it. These leaders focus on critical elements that drive the merger or acquisition. And to succeed, they study models that others have adopted to handle similar transactions. Today, making, consummating, and integrating a deal puts pressure as never before on chief executives to play multiple leadership roles and switch quickly from one role to another throughout the merger process. The roles employed - and hence the leadership time invested - vary dramatically with the type of deal. Some strategic acquisitions provide companies with steppingstones into businesses or customer segments related to the buyer's core activities. In other cases, acquisitions may broaden the scope of the acquirer's business by adding new capabilities. The most complex acquisitions intend to fundamentally redefine the business of the combined companies or to change the rules of industry competition in favor of the new entity. As the rationales for transactions have changed, new challenges have evolved, especially for those leading the deals. In all mergers and acquisitions, leaders play five essential roles. These roles are visionary, cheerleader, closer, captain, and crusader. Each role presents a different challenge.

First, as the visionary, a leader must establish and communicate the strategic vision for the merger. This means clearly articulating "why we are doing this" and "what we plan to achieve," both externally and internally. Typically, leaders need to explain the top four or five sources of value in the deal. Additionally, the leader determines what the core values and culture of the new organization should be.

What are the golden rules people should live by?

To bring the vision to life, the leader needs to explain and demonstrate these values from the outset. In the case of the DaimlerChrysler merger, Chairman Jurgen Schrempp captured the imagination of journalists and analysts alike with his vision: "This is much more than a merger. Today, we are creating the world's leading automotive company for the twenty-first century." While the jury is still out on the success of the DaimlerChrysler merger, the vision of what these two companies can become was made clear. The leader's second job as the cheerleader is to cheer on the troops - initially his own and eventually both companies' - to generate enthusiasm for the merger or acquisition, and to confront fear and uncertainty in its various forms. Challenges here include combating investors' fear of stock-price falloff, executives' fear of losing status to counterparts from the merging company (often a former rival), employees' concerns over job losses, and customers' and suppliers' worries about potential disruptions in service. Third, as the closer, leaders must close the deal, and this is not a given. One in five deals falls through after it is announced, sometimes because of regulatory issues, other times because of the failure of leaders to resolve outstanding disagreements. When Glaxo Wellcome and SmithKline Beecham first announced their intention to merge in 1998, the markets welcomed the news, sending the combined companies' value up 18 percent within two days. But prices fell a few weeks later when the companies announced that the merger was off. Glaxo's Richard Sykes and SmithKline's Jan Leschly could not agree on who should get the top jobs. Glaxo and SmithKline only resolved their differences after Jan Leschly retired. Jean-Pierre Garnier, formerly of SmithKline, became chief executive of the combined company when the merger finally closed in December 2000. A leader's fourth task is to captain change by managing the integration of the two entities.

He or she owns the action plan that outlines milestones and deliverables for the teams responsible for integration. Further, the captain defines the "rules of engagement" - the basis on which the two companies will start to work together. In the case of AOL Time Warner, CEO's Steve Case and Gerald Levine appointed two experienced right hand men, Bob Pittman and Dick Parsons to captain implementation. These two agreed on a plan to cut costs and improve efficiency across the organization and to make sure the divisions communicated with each other. Delegating this way, freed Case and Levine to continue running the two companies, and to focus on more strategic opportunities to fulfill their vision. Finally, the most challenging call is to be a crusader for the new entity. Crusading roots itself in the second task - building enthusiasm in both companies - and develops momentum as the deal closes and integration progresses. Generating momentum means dispelling inertia and encouraging people into actionconsistent with the overall strategic vision. The crusader needs to give guidance on how to behave and to set both hard and soft targets for performance. And, when crusading for changes in behavior, he or she needs to lead by example. Between mid-1998 and the spring of 2000, Sir John Browne, Chief Executive of British Petroleum (BP), closed a series of transactions totaling $120 billion that brought together BP, Amoco, Arco, and Burmah Castrol into a single company. Browne said of his approach, "You have to create a single organization - with common processes and standards, common values, and a way of working that encourages people to look forward than to dwell in the past." He moved swiftly to achieve his goals. Within 100 days of closing the Amoco deal, he had filled all the top management jobs and completed most of the cuts. He startled some Amoco executives by imposing BP's structure and management style on the new company, an approach that ultimately resulted in the resignation of some senior figures at Amoco. As a wave of strategic M&A transactions sweep Korea, we must learn from the numerous successful and unsuccessful deals that have occurred globally. While situations may be different in Korea (as they often are) the core of leadership making M&A's work does not differ all that much. Korean executives also need to play the five roles of visionary, cheerleader, closer, captain, and crusader. There are as many approaches to leading a merger as executives who attempt the task. But one cannot assume that any one approach will do. Would-be deal leaders should consider carefully the major risks inherent in the transaction and craft leadership styles to manage those risks most effectively, invoking different roles at different times to make the most of the opportunities their deal presents. The message is clear: Korean company CEOs and executives will be the keys to driving these M&As to create value and to create a new economic landscape for Korea.