CitationDownload as .RIS
Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited
These brief summaries highlight the key points and action steps to be found in the feature articles in this issue of Strategy & Leadership.
Page 4:New McKinsey research challenges conventional wisdom about M&AStewart Early
Diane Sias leads the North American Post-Merger Management (PMM) practice for McKinsey & Company. Rob McNish is a Principal in McKinsey's Corporate Finance and Strategy (CFS) practice. Over the past five years, McKinsey has been involved with over 800 individual post merger engagements. Their interviewer is Stewart Early, a Contributing Editor of Strategy & Leadership.
Rob McNish: The perspective gained from post-merger management (PMM), combined with corporate finance and strategy (CFS) research, has helped us improve target selection and evaluation.
The stock market knows the sellers will likely capture value, but statistically it will be a coin toss whether the average acquirer will capture value.
From a thorough analysis of the acquisition statistics, we've determined that there are patterns of success that can be found in the data. For example, larger, high-performing companies making smaller acquisitions of less successful companies do better than average. When companies pursue a balanced buy-and-sell approach over time, they perform quite well for shareholders.
Diane Sias: When a company has an integration program - where they make a series of acquisitions that seem to be heading towards a particular goal - over time their weighted average return to shareholders is much greater than the market overall.
We were able to make a distinction between those companies that had simply accumulated M&A experience and those that had undertaken some formal, post-transaction learning. There is little correlation between mere M&A experience and post-merger performance. But from a sample of successful firms we learned that formal post-transaction learning is a key first step toward better performance.
McNish: Our research indicates that acquirers who are relatively strong performers compared to their targets do better than average in the acquisition game. Research indicates that acquirers who buy companies in their own industry or a nearby adjacent industry receive more market approval, at least initially, than those that reach far outside of their existing industry.
Firms need to have the capability to involve people with integration skills at the opportunity-identification phase or the due-diligence phase.
The critical step in getting the deal right in the first place is estimating synergies accurately while doing the deal. Having the people who will actually have to make the deal work involved in determining which synergies are real and which are not is invaluable.
The average acquirer overestimates the total amount of synergies. However, acquirers tend to do a better job of making estimates of cost-based synergies than they do of estimating revenue-based synergies. Some 70 percent of mergers fail to achieve expected revenue synergies. But on the cost side, the experience is considerably better, though they are still overestimated by 20 percent or more in about 35 percent of the cases.
Page 12:Reducing M&A risk through improved due diligenceJeffery S. Perry and Thomas J. Herd
M&A failure can be attributed to poor synergy, bad timing, incompatible cultures, off-strategy decision-making, hubris, and greed. But one universal lesson has become obvious: making a deal "work" is one of the hardest tasks in business.
The good news is that a handful of best practices can reduce the risk and give the deal a fighting chance. The inherent danger in due diligence is not that companies fail to do it, but that they fail to do it well.
The deals that are being struck today are far riskier than those of the 1990s due to converging trends:
The pieces of business are being sold today often have entrenched processes and cultures that are difficult to integrate into the buyer's organization.
Because of the global reach of today's industries, many acquisitions are cross-border transactions, which are intrinsically risky.
Expectations have changed. In the 1990s, a merger or acquisition was expected to deliver cost reductions. Now, M&A is often a core growth strategy as well. Achieving projected growth targets is far less certain than achieving projected cost savings - and more difficult to measure.
New accounting rules mean the game will not be played in the same way. Acquirers will have to explain in more detail the reasons behind an acquisition to their boards of directors and investors.
The following offers four "best practices" that separate the winners from the losers in the M&A playoffs.
Call on the experts (internal and external) who have experience in helping companies identify and realize cost and revenue synergies.
Trust but verify.
Focus on what matters - in most deals, success hinges upon getting a few things right, such as: create an aggressive market penetration strategy; devise an innovative plan for product launches; realign the sales force; rationalize the supply chain network and IT applications and create a shared services organization. Identify the high priority, complex initiatives, determine the associated risks and craft risk mitigation plans.
Orchestrate the unveiling - smart acquirers take pains to gain the support of the analyst community when a deal is made public. They know that analysts react more favorably to an announcement of an acquisition if it is followed up with a cogent discussion about the acquirer's high priority integration initiatives, key risk factors and risk mitigation plans (including timing of each).
In the end, the fate of the deal could depend on knowledge you gain from a better due diligence process.
Page 20:Making brand equity a key factor in M&A decision-makingShailendra Kumar and Kristiane Halsted Blomquist
Brand is a strategic asset that should be managed. This is an increasingly important issue for businesses that favor or have favored acquisition-based growth strategies. To ensure optimal strategic value from the brands they are buying and selling, just calculating brand value does not suffice. They need a process for:
Integrating brand and corporate finance M&A practices.
Determining how to brand the acquired company and how to manage the migration of the brand to the new company. The imperative is to ensure that customers remain happy and loyal to the brand.
This article offers a guide to equip acquiring companies with a framework for incorporating brand evaluation and brand strategy into the M&A transaction process. It helps non-marketers and marketers alike better understand how to:
Conduct marketing due diligence before the deal.
Think about brand strategy in the context of a portfolio. Criteria would touch upon: control, strategic importance, relative brand strength, brand synergies, risks involved.
Establish brand migration plans to help maximize the value of brand in the deal.
The goal is to show that if brand considerations are taken into account at the outset of a transaction then the business will enjoy a stronger, more sustainable competitive advantage to drive increases in shareholder value.
Where it is not a driver of the deal, inserting brand into the deal-making dialogue can be difficult, for such transactions are often large and complex. Moreover, branding is seldom top-of-mind for the corporate finance team. As such the burden is on the brand team members to educate their colleagues in finance about the impact that acquiring, divesting or making a joint venture with a third party can have on a brand as well as the business. The strategic framework for inserting brand-based issues into the M&A process puts branding in a light better understood by the finance team as it helps quantify brand equity and illuminate brand strategy's integral connection to business strategy. Since numbers speak louder than words with this audience, the tighter the link to the bottom-line, the better.
Page 28:Modeling how their business really works prepares managers for sudden changePeter Bürgi, Bart Victor and Jody Lentz
"Chemcor", is a mid-sized specialty chemicals firm. To cope with constantly emerging opportunities and threats, they face a formidable execution challenge. They must balance the disciplining effects of planning against the need for innovative, adaptive action. For Chemcor, reconciling these seemingly opposed demands is crucial for their long-term success. The top corporate strategy officer at Chemcor resolved to help three company divisions work towards finding such a way.
The strategic situations of the three divisions could be summed up as follows:
division A - long-term industry star, perhaps too complacent about its own success;
division B - problem child, paralyzed by internal and external complexity; and
division C - rooted in a secure network, but historically not very flexible.
How to correct the balance between planning vs. adaptive action?
To complement the planned strategy development process, separate workshops were held for the strategists and senior managers at each of the organization's three divisions. Built around a radical new technique for analyzing an organization's identity, landscape, and deepest interests in the face of a variety of potential situations, these workshops were intended to help managers learn to continuously assess their organization's strategic situation in real time.
Called "Real Time Strategy", the workshops encourage a thorough conversation about issues of identity and strategy. The workshop uses a technique called LEGO Serious Play® , an adult learning tool designed to uncover and create new insights by using LEGO construction toy materials as a language to think, articulate, visualize, communicate, and understand business and managerial challenges.
The representation of their strategic situation made from Lego construction materials that the Chemcor managers built in the Real Time Strategy workshop enabled them to have a profitable conversation about how their business model would work in variety of different potential situations. They were able to experiment with events that changed their environment and then evaluate how to adapt and respond to them. In sum, the workshop encouraged senior managers to cultivate their ability to adapt rather than to only implement the plan.
Page 36:The 30-hour day: what an "on-demand" strategy means for media and entertainmentNeil Parker
An explosion of new media delivery technologies allows consumers to participate in a powerful vision: rapidly available information and entertainment, served up on demand. However, most media and entertainment (M&E) businesses are finding that an "on demand" business strategy is far more than simply making content quickly and easily accessible to consumers. The media industry's abrupt transformation - from a seller's market a few years ago to today's turbulent buyer's market - has made it critical for an M&E company to acquire a new set of business capabilities to survive in the on-demand era. This article explores:
how the industry got to this point and four trends impacting it;
examples of what an on-demand M&E business might look like; and
a suggested roadmap to use to become more competitive.
An on-demand era model for M&E businesses requires four new capabilities:
rapid response to customer needs and market changes;
a dogged focus on integrating core processes;
content delivered at low fixed-investment levels by extensive use of variable cost structures (this is totally different from a "build it at any cost, hype it, and they will come" approach to selling entertainment); and
resilient operations that are designed to withstand a wide range of unpredictable threats.
How can an M&E company acquire on-demand capabilities? Through a process of ongoing transformation that entails progressively acting on five key on-demand imperatives:
optimize business customer and partner offerings;
drive direct-to-consumer relationships; and
enable integrated media.
To achieve on-demand capabilities, adopt new approaches to both businesses processes and technology infrastructure over time. Each step will represent a new level of business process and IT sophistication. Here are three keys:
Focus efforts on specific on-demand components. It is essential not to define on-demand too broadly. Since only specifically targeted efforts can be executed with the right speed and quality, picking your battles is essential. At the same time, think big. Without this big vision, it will be hard to prioritize and coordinate efforts across the organization, and harder still to marshal the organizational energy required to drive change.
Start to build platforms that can support an on-demand operating environment. Use a phased progression through three steps: define standards, consolidate operations, and cut the cord on legacy resources.
Most important of all, start with existing initiatives. On-demand does not entail discarding all existing approaches and projects. On the contrary, in most cases on demand can provide a clearer picture of current capabilities and their associated value.
page 44:Case study: the IBM Think strategy - melding business strategy and brandingKevin Clark and Mark McNeilly
When operations are consolidated to simplify product lines and to gain efficiencies in practices and marketing, can the brand identities also be consolidated? This was the question that IBM PC Division marketers faced. This article explores their approach to answering it.
Key factors addressed by the team tasked with this project, included:
In the new, more competitive business-to-business environment, value is moving beyond just providing products to providing value that improves the customer's business. For IBM, this meant not merely offering a product, but understanding how to help the customer reduce the costs of operating the product. This is especially true when, as in the personal computer industry, the purchase price is a small fraction of the cost of using and maintaining the product.
Branding and business strategy are inextricably linked. As good brand stewards know, a brand's meaning is the sum of the entire customer experience. Aligning branding and business strategy leverages the power of both for greater marketplace impact.
Look for opportunity out of adversity. It would have been easy for the project team to look at the problems caused by the multiple brands, shrug their shoulders and continue on the same path. However, in this case, it was the chance to meld several disparate brands into a family. Strategically this reenergized IBM in the personal computer space and enabled them to send a new message to the marketplace. Tactically this improved marketing communications efficiency because the investment supported a single message and family of offerings.
Leverage what you have. Beyond the obvious strength of the ThinkPad brand was an incredibly powerful yet underutilized and dormant resource, the linkage between IBM and "Think". By reaching back into IBM's history with "Think" and binding it to a strong modern incarnation (ThinkPad) the team was able to build a more meaningful and long-lasting branding approach for IBM's PC family.
Get feedback to improve your plans. Crucial to success was obtaining input and feedback from multiple sources. Market research, use of IBM's marketing council and industry council, corporate headquarters and other sources led to significant changes. This led to a better strategy overall and tactics that would ensure positive outcomes.
Persistence linked with executive support is essential. Over the months of planning there were many times when it seemed as if the "Think" strategy would be derailed. Any one of these could have spelled the end of an excellent idea. But persistence and the support of a small group of executives and thought leaders ensured its survival and ultimate success.