By Oliver Engert. Change management. Why it matters Most companies require inorganic as well as organic growth to achieve superior results. How winners approach integration High performers understand that several factors for integration success have changed over the past several years, so they have retooled their integration approach accordingly.
Integration used to proceed months with little work done before a deal closed. It moves much faster now with considerable planning work done before deal closure. It received too little attention until late in the integration. High performers now recognize the essential role of culture since organizational and cultural misalignment account for about half of integration failures.
Thus, they take a scientific, quantitative approach to diagnosing and addressing cultural conflicts before they derail the integration. Set Interface Language. Decrease font size. Increase font size. Display options. Default More Most. Back to Default Settings Done. Article Preview :. Corning is an example of a company that, during the period we studied, pulled all of the five levers and leaped from the bottom to the top quintile of the power curve.
The management understood that doing three deals a year meant they had to do due diligence on 20 companies and submit five bids.
To understand the cumulative power of big moves, consider the experience of Precision Castparts Corporation PCC , a manufacturer of complex metal components and products for the aerospace, power, and industrial markets.
In PCC was in a poor position. In terms of trends, its geographic exposure was also unimpressive, but the aerospace industry experienced enormous tailwinds over the subsequent years, which helped PCC a lot. Most important, PCC made big moves, surpassing the thresholds on four of the five levers. As our database expands, we will continue to deepen our understanding of realized merger synergies and share the insights that emerge.
After combing through the data from mergers so far —as well as our knowledge of the companies and their industries—we have found six practical measures that executives can take to improve the chance of achieving synergies from acquisitions. For starters, executives should cast a gimlet eye over estimates of top-line synergies, which we often found to be inflated.
Additional steps include vetting assumptions about pricing and market share, making better use of benchmarks to deliver cost savings, and forming more realistic assessments of how long it will take to capture synergies. Wall Street wisdom warns against paying for revenue synergies, and in this case it is right. Almost 70 percent of the mergers in our database failed to achieve the synergies expected in this area Exhibit 1.
Another common reason for errors in estimating revenues is the failure of most acquirers to account explicitly for the revenue dis-synergies that befall merging companies.
In retail banking, for example, important cost-based synergies are expected to come from consolidating branch networks. The acquiring bank assumes that while some customers might leave, cost savings will more than make up for the losses. This experience may be relatively extreme, but our experience indicates that the average merging company loses 2 to 5 percent of its combined customers.
In the mergers for which we have relevant data, these are the 25th- and 75th-percentile figures, respectively. Not all merging parties lost customers, but some lost more than 30 percent.
Most acquiring companies can do better, especially in industries, such as retail banking, that have already seen a good deal of consolidation. Data on the level of customer losses experienced by merging banks are available from a range of sources, including industry associations, regulatory filings, and articles in the press.
Examples are numerous enough to help buyers identify not just helpful benchmarks for example, when a branch closes, 8 percent of retail deposits will be lost to competitors but also the underlying factors that determine whether a deal produces losses above or below the benchmark for instance, the number of customers who also bank with a competitor, the distance to the next-closest remaining branch, and the presence of competitors to take over closing branches.
In other industries, a search of this kind might yield no more than two or three good precedents and only limited data on them—but even that much information can greatly improve revenue estimates. Many deal teams neglect or underestimate the impact of onetime costs. In trying to fulfill the original commitment, the company ended up running over budget, underdelivering on promised synergies, and falling well short of revenue growth targets.
Many acquirers rely too heavily on assumptions about pricing and market share that are not consistent with overall market growth and competitive realities. Actual profit growth was a mere 2 percent.
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