Have the urge to merge? Be prepared

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While opinions differ about the strength of the U.S. economy and the prognosis for the remainder of 2005, one thing seems clear: There will be a great deal of deal-making this year. Thomson Financial, which tracks deal data, reports that December saw a historic number of mergers and acquisitions worldwide-outpacing even December 1999, at the height of the stock market bubble.

According to Thompson, there were more than 8,000 deals last year, with a combined value of $844 billion. At the merger-market peak in 2000, deal values came to $1.6 trillion. The total fell by more than half in 2001 to $743 billion and slumped further in 2002 to $429 billion.

Media Editor Sean Callahan's Page 1 story in this issue underscores the marketing challenges of three combinations announced last month: Oracle Corp.'s acquisition of PeopleSoft, the merger of Sprint and Nextel, and Symantec's acquisition of Veritas Software Corp.

Media companies are being swept up in the M&A wave, too. The number of deals in the media and information industries totaled 394 in 2004 compared with 201 in 2003, a jump of 30.9%, according to media investment bank Jordan, Edmiston Group.

Over the years, numerous books and studies have been published about mergers and acquisitions. What does this mountain of research conclude? Simply this: The much-touted benefits of any merger-"synergies" between the partners' markets, products, services or areas of expertise-are seldom realized.

Take KPMG's two seminal surveys in 1999 and 2001. The share-price analysis in the 1999 survey was that 17% of the deals added shareholder value, 30% caused no significant change and 53% lowered value. In the 2001 study, the share-price analysis numbers improved: 30% of the deals added shareholder value, 39% caused no change, and 31% lowered value.

In both surveys, confidential telephone interviews with board members who were asked to comment on the outcome of the transaction found a majority (82% in 1999, 75% in 2001) said their deal was a success. This shouldn't surprise anyone, since candor about mistakes is the rarest commodity inside a corporation.

KPMG also distilled six factors it said were important to achieving M&A success. These comprised three "hard keys" (synergy evaluation, integration planning and expanded due diligence) and three "soft keys" (management selection, cultural integration and communications). That last item, "communications" encompasses marketing, both internal and external.

During a merger, "employees struggle, customers struggle and your competitors feed on that," said Melissa Gritman, a senior consultant at global human resources outsourcing and consulting firm Hewitt Associates. Her advice? "Continuously provide sales and marketing, and all the people who interact with your customers, as much information as you're able to release."

If the above isn't scary enough, consider these sobering factors:

n The influence of the Internet on commerce and communications has vastly accelerated the pace and visibility of business. If your merged organization bobbles the product pipeline, distribution channels, corporate messaging, even your Web site, your customers and competitors will know about it within a few clicks, and react accordingly.

n Sales and marketing organizations within companies are often, at best, dysfunctional. Trying to merge departments between organizations is not for the faint of heart.

n Downsized key departments may be ill-prepared for the heavy lifting required to make mergers succeed.

n Ongoing weakness in the U.S. dollar will likely mean a number of acquisitions by European and Asian companies. U.S. companies sitting on cash reserves may themselves seek international acquisition targets. Either way, cultural and communication difficulties are magnified when trying to integrate intercontinental organizations.

Yes, 2005 will see a surge in M&A activity. But if history is any guide, most of these marriages will end in disaffection or outright divorce. That won't stop them from happening. The urge to merge is powerful. But please ask this question before optimistically walking down the aisle: "Are we prepared?"

Ellis Booker is editor of BtoB and BtoB's Media Business and can be reached at [email protected]

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