UK: Ready? Set? Go (Slowly)!

Last Updated: 4 March 2002

Proceeding With Caution is the Best Bet for Companies Planning Cross-Border Mergers & Acquisitions

Imagine you’re on an airplane, a parachute strapped to your back. The wind is rushing up at you; your heart pounds. You think you’re ready. You think you’ve taken all of the proper precautions. You step to the door and look out, then down. You lean forward. You’re ready to go…

Wait! Don’t jump yet. What if someone told you that over 50 percent of the time parachutes fail to open? Would you still jump? Would you at least double-check your equipment, make sure everything’s in order?

Something like this is happening in the world of international business. Despite overwhelming evidence that most cross-border mergers and acquisitions fail to increase shareholder value, the trend towards them continues. Many top executives feel that cross-border mergers and acquisitions activity is essential for survival, though many admit that such activity might bring loss to the company. Why this disparity between facts and behaviour? What makes mergers and acquisitions activity, despite its poor track record, so appealing and necessary in the eyes of corporate leaders? And what makes companies believe that they’ve been successful when, in fact, the numbers say otherwise?

Can failure look like success?

A large percentage of all cross-border mergers either destroy shareholder value or create no discernible difference, according to some studies. In a recent Andersen survey of technology, media and communications companies, 75 percent of the 43 firms surveyed planned to increase mergers and acquisitions activity within the year. Of that 75 percent, two-thirds believed that "negative impacts" would result if they did, proving that the urge to merge persists despite fear of bad results.

Many corporations may also believe they’ve achieved success when, in actuality, they have not. In fact, studies reveal that many companies don't have measures in place to evaluate success or failure. Additionally, perhaps as many as 70 percent of mergers and acquisitions deals are unsuccessful in increasing shareholder value, a common determiner of a successful deal.

Why pursue the deal?

Despite poor results, companies continue to pursue mergers and acquisitions deals, and for several good reasons, according to experts:

  • Market share: Companies want to increase size and sales volume to create economies of scale.
  • Assets: Unique assets or technologies can be acquired. Airlines that merge or form deals with other airlines may gain proprietary flight paths, for example.
  • New customer base: A business can expand its customer base into a new area by acquiring a firm that already has customers in that area. A specific niche also can be filled this way.
  • Defense: Some companies acquire or merge with a target to beat out competitors. Other companies fear being acquired if they are small and merge defensively.
  • Getting rid of the opponent: Whether they admit it or not, some firms eliminate competition by reducing the number of players through mergers and acquisitions. Companies also may remove competitive technologies from the marketplace by merging with their manufacturers.

And that’s not all. Acquiring a company may be easier for corporations seeking growth than other types of deals, such as joint ventures. The acquiring company has more control, and finds the deal and merged entity easier to manage.

According to Marcos Araujo, the decision to merge also may be a cultural issue. Araujo, an Andersen Legal partner in Madrid specialising in European Union and competition law, explains that European countries often find it difficult to work together in joint ventures due to lack of common language, differing legal guidelines and differing economic structures. An acquisition eliminates the need for cooperative management.

Gauging a merger's real value

A merger's success should be judged by both hard and soft values. Hard values are concrete, such as money, property, equipment. Soft values are less tangible: Are employees satisfied? Have cultural issues been addressed?

Experts say that both values measure mergers and acquisitions success, but hard values remain the best judge. Shareholder value, specifically stock value, is the most-used benchmark of how well a corporation has done in a deal.

But just using stock value as a measuring stick can be misleading. If no increase in stock value occurs following a deal, the argument could be made that the stock price would have fallen without the deal. Numbers can’t always be trusted.

And don’t forget that the goal of the deal must be considered when evaluating success. Can a merger or acquisition be considered successful even if it destroys shareholder value? For example, if a company's goal is to gain market control, elimination of the competition equals success, regardless of what happens to short-term stock prices.

Choosing caution, choosing success

There are strong reasons for companies to merge or acquire, but proceeding with caution is essential. Learning from failed mergers is a good way to go forward in today’s increasingly global economy.

Nine out of 10 mergers announced are completed, according to the Andersen study. Yet most of the companies engaging in these mergers have no plans in place for execution or integration. The paperwork’s the easy part, but top management needs to stay involved long past the initial excitement. Leaving the integration phase to middle management is not the most effective way to ensure success.

Integration problems can also be alleviated through thorough research and planning. An in-depth study must be completed, including hard factors (like synergy evaluation and due diligence) and soft factors (like cultural issues).

"Success is not simply a twist of economic fates; it is also the result of keen insight into human behaviour," according to Chris Mills. Mills, an Andersen partner in London, further explains that "successful M&A is based on anticipation of what people feel and how to motivate them toward desired behaviour."

The nature of the deal also determines the best way to proceed. "It’s all in the approach and the nature of the deal," explains David Roberts, partner at Garretts, the Andersen Legal member firm in London. According to Roberts, proper integration and understanding of corporate cultures becomes imperative "in a merger of equals and a merger of cultures," such as a merger or joint venture. However, he goes on to state that "in a hostile takeover, cultural identities and sharing become less important."

Be prepared. Then jump.

Are you properly prepared? Have you taken everything into consideration? Everything must be in place not just for the initial signing, but for integration as well. Goal setting spanning several years in the future of the "new" entity is essential.

And make sure that you are doing it for the right reasons. "Don’t rush into a sale or acquisition just because you’re being pressured by shareholders, because the price sounds right, or because it seems exciting," cautions Walt Cercavschi, an Andersen partner helping clients develop mergers and acquisitions strategies.

If you’re ready, and you’re set, go ahead and jump. Just make sure you know exactly where you want to land and how you’re going to get there.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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