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Fear of Risk Limits Merger Success

Originally Published - 3 February 1997

Most mergers and acquisitions are failing to live up to expectations because parent companies keep new purchases at arm's length instead of actively creating value from the relationship, say strategy experts at Warwick Business School.

They are either fearful of "contamination" from a poor- performing acquisition, or simply lack the mechanisms to achieve closer integration which would yield additional benefits, say Duncan Angwin and Professor Robin Wensley.

This reality is rather different to the expectations of investors, who are led to believe that mergers and acquisitions will be major opportunities to create value and recover the often substantial deal premiums.

The reasons why so many take-overs are regarded as little more than a "bolt-on" parcel of assets which fail to realise their acquisition potential are explained in the latest of Warwick's Hot Topics series, The Acquisition Challenge - Realising the Potential of Your Purchase, which shows that most companies are concerned merely with capturing value, rather than creating it.

But there is a glimmer of hope in the authors' discovery of a strong association between success and the transfer of knowledge and information, which may be a way of improving performance of arm's length companies even without the "difficult" and messy business of a full-blown integration.

The surprising findings of their unique analysis of all deals during a full three year period, come at the end of a year which is widely expected to break all records for mergers and acquisitions.

The authors classified mergers and acquisitions into four types, and were surprised that the largest category - 49% - were of the "Preservation" type, where the acquisition is simply left to stand alone. The recession may have meant that the parent was risk-averse, preferring to buy a well-performing company rather than embark upon the difficult and risky process of integration, they say.

The recession and concern about risk may also explain why they found so few fully integrated or "Absorption" acquisitions - only 15%. The smallest category was the 9% of "Symbiotic" ones where there is a mutual dependency and transfer of resources, but a difficult challenge to manage, with high risks and long time-frames.

But the major surprise was the large "Holding" category, companies acquired just to be kept at arm's length to avoid contamination before being traded on - 27%. Often poor performers, the acquired companies were subject to tight financial controls but otherwise left to their own devices in a "post-acquisition void" sometimes for years, causing management frustration and depression.

On enquiring about interviewing one managing executive, we were informed that he had committed suicide say Angwin and Wensley.

With 76% of acquisitions involving little if any resource transfer, this suggests that most are viewed as a parcel of assets to be bolted on to existing businesses. But acquisitions which were perceived as successful were strongly associated with the transfer of knowledge

they say.

Clearly, if companies want to make successful value-creating acquisitions, then they should place a greater importance on the transfer of knowledge and information. By doing this they can benefit from some of the advantages of symbiosis without the disruption of a full-blown integration.

While acquisitions are an increasing feature of corporate life, in the past there has been a concentration on pre-acquisition planning although attention is now turning to the significant post-acquisition problems.

The key factors shown as important to Acquisition success are:

Clarity of Purpose
set non-financial objectives
define financial objectives
understand similarity between acquirer and target

Bridging the gap between evaluation and implementation
select the integration team
develop integration plans down to specific objectives
choose the right managers to run the acquired company

Delivering the benefits
act quickly to reduce conflict and give momentum
impose a new organisational and reporting structure
manage the culture to reward behaviour
communicate the objectives of integration and the new company.

For Further Information, contact:
Duncan Angwin/Robin Wensley tel. +44 (0)1203 523914
or Stephanie Brayford,
Communications Manager tel. +44 (0)1203 524124 email

Further information about the above press release and all other media services at the University of Warwick can be obtained from:

Peter Dunn, Press Officer
Public Affairs Office
Senate House
University of Warwick
Coventry, CV4 7AL
West Midlands
Tel: 024 76 523708