There is no denying the trend towards mergers and acquisitions as a means of enhancing competitive position. In 1999, the global value of merger and takeover activity was more than $2 trillion – and the construction industry has seen its share of these deals. Yet with the focus often falling on the synergy between businesses, the people dimension can be forgotten.
Securing the strategic prize can be an intoxicating experience for those involved, particularly for senior managers. But a recent KPMG survey found that 83% of buyers were unsuccessful in generating shareholder value from their deals. The pitfalls have been widely documented, but the ingredients of success are harder to pin down. The survey found that successful integration depended on a number of “hard keys” – such as synergy evaluation, integration planning and due diligence – and “soft keys” – such as management team selection, resolution of cultural issues and communications. The most successful had achieved a delicate balance between the two.
The more closely two businesses are to be integrated, the more important the people issues become. Of course, when the main asset of the business is the intellectual capabilities of its people, the soft keys should take an even higher priority. Unless these issues are properly addressed there will not be a smooth transition from two separate companies into one. The recent spate of mergers and acquisitions in the professional services segment of the construction industry exemplify this principle.
To show what this means in practice, we should look separately at each of the soft keys to integration.
Naming the new managers
The KPMG survey found that the companies that gave the highest priority to selecting the management team at the pre-deal planning stage were most likely to be successful.
Unfortunately, management team selection and appraisal is far from straightforward. Hasty decisions can turn out to be wrong and the need to move quickly must be offset by legal compliance considerations. Yet if the selection process is too slow, uncertainty can lead to a damaging drop in morale and the exodus of key talent. This can have a devastating effect on the newly combined business.
So, what approach should companies adopt when considering the management of a merged or acquired business? The survey found strong evidence to suggest that success rates vary according to the degree of integration intended.
Thus, for bolt-on or portfolio businesses, success rates were found to improve if the management team was replaced. For a fully integrated business, on the other hand, success rates were enhanced where managers were retained, primarily because valuable knowledge is preserved within the business and there is a vital sense of continuity to help ease the process of integration.
Resolving cultural differences
The type and complexity of the cultural challenge will depend on the nature of the deal. If the companies are to be fully integrated, a single new company culture will have to be created that focuses on achieving growth. This may mean harnessing the entrepreneurial spirit of one organisation to the processes of another. Sometimes, it can be about such seemingly insignificant details as choosing between formal and casual dress.
KPMG’s survey suggests that the chance of success is increased if a company uses reward systems to stimulate cultural integration. These include:
- Appropriate share options for the key members of the new business
- Harmonising terms and conditions, although this can involve upfront investment if certain benefits are to be bought out or if salaries have to be equalised
- Scale benefits to offer both sets of staff better company car options.
A recent KPMG survey found that 83% of buyers did not generate shareholder value from their deals
The potential for cultural problems in merging companies is huge and getting the balance right can make all the difference.
Communications are critical in the successful handling of any deal. The communications plan must:
- Take account of the different stakeholder groups and the timing appropriate to each
- Choose the right process for cascading information through the organisation (newsletters, focus groups, team listening sessions, briefings, roadshows and so on)
- Include a communication programme for the new business’ first day – which directors will be at which sites, what is the common message, what press releases are planned and so on. You only get one chance to make a first impression
- Cover immediate matters that will affect day-to-day business such as the name or brand of the new organisation, how switchboard staff should answer the phone and so on.
Senior management may shy from making certain tough decisions, but hesitation can be hugely detrimental and result in:
- Inappropriate messages being communicated to stakeholders that later have to be reversed, such as promising no redundancies
- “Death by a thousand cuts”, as redundancies are made piecemeal and over a long period of time
- Lack of decisiveness on brand strategy, bringing confusion both internally and in the market.
Communications must therefore feature right through the integration process, starting early in the pre-deal period and continuing through post-deal planning and implementation.
A focus on the soft keys can increase an buyer’s chance of success, especially when balanced with the right degree of attention to the hard keys.
Steve Munce is a director in KPMG’s merger and acquisition integration group and can be contacted at Steve.Munce@kpmg.co.uk.