Despite the growing volume of studies purporting to show that most M&A deals fail to create shareholder value, companies seem unable to resist the urge to merge. It's all too easy to succumb to the allure of an apparently game-changing deal. A new study from A.T. Kearney offers insights that might make the most gung-ho growth strategist flinch, but also suggests ways that companies bent on acquisitions can increase their chances of success.
The consulting firm analyzed 175 deals to create the following taxonomy of mergers:
1. Volume extension. Horizontal integration of direct competitors to increase market share and achieve economies of scale.
2. Regional extension. Integrations of companies in the same industry, but different geographies.
3. Product extension. Combinations of non-competitors that serve the same customers, but with different products and services.
4. Competency extension. Mergers in which the goal is to access key marketing, distribution, or R&D assets to strengthen core competencies.
5. Forward extension. Vertical integration of downstream customers or vendors to acquire additional market segments, channels, and, potentially, end customers.
6. Backward extension. Vertical integration of upstream suppliers, for example to safeguard resources.
7. Business extension. Mergers between unrelated organizations to diversify business, reduce risk, or transfer skills.
The first four types encompassed more than 97 percent of the total sample.
A.T. Kearney used three metrics to gauge overall merger performance: change in return on sales (ROS), change in sales growth, and change in EBIT growth. ROS growth edged up an unimpressive 0.3 percent on average. But average sales growth slowed 6 percent. All seven types of mergers failed to make money; EBIT growth decelerated by more than 9 percent on average.
In addition, shareholder value, as measured by market capitalization, declined 2.5 percent overall.
Why the disappointing results? The anticipated synergies often turn out to be illusory because of unforeseen costs and complexities, the study notes. Sales growth may slow because focusing on cost synergies pulls companies' attention away from markets and customers.
But the main cause of post-merger financial slowdowns, A.T. Kearney argues, is simply that companies treat all mergers alike. To have a better chance of beating the odds, companies should carefully assess the risks and opportunities specific to each merger type. For example, regional extensions often run aground on the cultural conflicts and operational complexities associated with cross-border deals.
Other tips for achieving a successful merger:
• Sequence integration activities. Growth- and market-related activities should sometimes take precedence over cost synergies.
• Integrate select parts of the value chain. Operational and administrative functions are often good candidates for integration, but it may be wise to leave some functions -- sales and marketing, for example -- alone.
• Adapt integration speed. Full-scale restructurings may take several years. And faster is not necessarily better.