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Roland Berger Strategy Consultants

content

Fresh thinking for decision makers

November 2011

Post Merger Integration


(PMI) underscores the
success of mergers
|Culture and synergy
management is critical
|As are the right people,
actions and plans |Because you only get one
shot at getting it right

The process of professional


synergy management breaks
down into Several phases
Starting with the discovery of effective levers and ending
with the realization of defined actions. Yet the three phases
in the middle nomination, selection and alignment
are equally vital

SELECTION
Synergy levers must be selected
based on their financial impact, the
speed of implementation and the
sustainability of the impact always
in line with the relevant corporate
culture.

ALIGNMENT
The sequence of actions must be
optimized: The right thing must be
done at the right time. It is also important to identify cause-and-effect
relationships between different
actions, some of which may be
mutually exclusive while others
complement each other.

NOMINATION
A PMI manager must be nominated.
Successful synergy management
requires clearly defined areas of
responsibility and a transparent executive hierarchy.

content

The specter of recession is driving speculation and stoking up fears that European blue
chips could be sold out to well-heeled investors from booming emerging countries. Outgoing RWE boss Jrgen Grossmann alarmed his shareholders by claiming that the threat
of a hostile takeover hung over the energy group. Daimler chief Dieter Zetsche prefers to
pacify nervous stockholders, insisting that he sees no such danger for the auto giant. For
his part, Roland Koch, former Minister-President of Hesse and now head of construction
group Bilfinger Berger, proclaims that "We are becoming increasingly international" and
is setting aside a billion euros for acquisitions over the next two years.
Not a trace of a hangover from the crisis, then. Thomson Financial puts the global volume
of mergers and acquisitions (M&As) in the first half of 2011 at around EUR 900 billion, not
including transactions in the private equity sector. That is a year-on-year increase of 50%.
Roland Berger Strategy Consultants sees brisk M&A activity in the offing especially in the
automotive engineering, capital goods, business services and consumer products segments.
The scarcity of domestic targets is leading more and more predators to look beyond their
national borders. Recently, an objection raised by the US Department of Justice only just
thwarted the most spectacular of these projects. Accordingly, American network provider
AT&T will, due to fears of market domination by the resultant telephony colossus, not be
allowed to buy Deutsche Telekom subsidiary T Mobile USA after all. Not for the time being.

Yet the failure rate seems almost as high as the


takeover rate
The stream of "dream weddings" such as that of Daimler and Chrysler has long since dried
up. The list of failings is long and damning: The price was not right. Legal obstacles were
underestimated. Hidden threats were either overlooked or played down. In interviews
conducted as part of Roland Berger Strategy Consultants' study "Synergy Management in
Post Merger Integrations", 84% of respondents regard corporate culture as an "important"
or "very important" tool with which to realize synergies. Tellingly, however, only half of them
believe that sufficient attention is genuinely paid to this criterion in the M&A process.
Many mergers never even get off the ground. Roland Berger's analyses show that, in 2010,
barely 74% of the trumpeted M&As were ever actually consummated. As late as 2008, more
than 80% of the happy couples still at least made it to the altar. Even that, however, was no
guarantee that one plus one would add up to more than two.
The biggest stumbling block is going about integration and synergy management the
wrong way. According to the Roland Berger study, this is the one factor to which 80% of the
respondent experts primarily attribute the failure of acquisitions. Other reasons are also
cited, but play a far less significant role. They include culture shocks that drain all the energy
from the new entity, exorbitant acquisition prices and the egos of the chief executives in-

Global volume of mergers


and acquisitions in the first
half of 2011

900
000
000
000

Euro

Google ingests Motorola Mobility. Beer giant SABMiller launches a hostile takeover bid
for Australia's number one beer brand Foster's. Fiat acquires a majority stake in Chrysler.
US pharmaceuticals service provider Express Scripts swallows rival Medco Health Solutions.
Microsoft buys Skype. And Volkswagen seeks to make a big splash on the international
commercial vehicle market by snapping up MAN. Browse through the business press and it
seems companies are acquiring and merging like there is no tomorrow.

Post Merger Integration

Year-on-year increase of 50 %
Source: Thomson Financial

Roland Berger Strategy Consultants

Three insider tips for


successful postmerger integrations

Nomination:
Find the right head

Selection:
Choose the right actions

volved. All these factors can leave a merged or merging enterprise unable to exploit its new
opportunities. In some cases, the entire transaction is quite simply a mess. There is no
structured process, no leadership, not enough time and not enough manpower. Above all,
there is an inability to identify synergies well in advance and then leverage them in the right
order and at the right time. In other words, there is an inability to do precisely those things
that would make the new company more efficient and more competitive. And because no
planning is done for what comes after the merger, chaos all too often reigns.
Conversely, post-merger integration (PMI) draws on past experience to anticipate and
eliminate perceivable weaknesses and pitfalls at an early stage. Synergy management is
at the heart of this process. Done professionally, synergy management enables measurable
progress in the search for, prioritization of and implementation of activities in which the two
merged entities can sustain and add value together. The whole principle of change management is posited on this foundation. There is seldom time to experiment. Companies that
team up usually have a chance to succeed but just the one. A new consulting model crafted by Roland Berger Strategy Consultants ensures that this one-off opportunity is exploited
to the full. The model is rooted in insights gained from a broad spectrum of national and
international projects. Roland Berger's recent large-scale study injected further valuable
knowledge. As different as industries, companies and their cultures may be, Roland Berger's
systematic model can be tailored to each unique set of circumstances and applied to
powerful effect in almost every situation.

The process of professional synergy management


breaks down into five phases
Starting with the discovery of effective levers and ending with the realization of defined
actions. Yet the three phases in the middle of the process are equally vital. Frequently
underestimated, they largely determine whether the companies concerned ultimately
achieve their goals, lose their way in a maze of specifications or simply run themselves
into the ground.

Alignment:
Do the right things at the right time

Nomination: Successful synergy management requires clearly defined areas of responsibility and a transparent executive hierarchy. Ideally, a PMI manager with direct access to
top management will be at the helm. Under the aegis of the steering committee, the PMI
manager spearheads the first set of integration teams.
Selection: Synergies must be selected based on their financial impact, the speed of implementation and the sustainability of the impact always in line with the relevant corporate
culture.
Alignment: The sequence of actions must be optimized: The right thing must be done at the
right time. It is also important to identify cause-and-effect relationships between different
actions, some of which may be mutually exclusive while others complement each other.
At most companies, the problem is not a lack of insight but failure on the implementation
side. They know their weaknesses full well. What many often lack is simply the knowledge,

content

experience and resources to do the right thing under what is often crushing time pressure.
Almost every second company that took part in the Roland Berger study "Operations
Efficiency Radar 2010" expects acquisitions to lead to profitable growth. At the same time,
four out of ten admit that their PMI skills are not nearly adequate in some cases. Preparation
for potential mergers thus suffers, as does implementation after the event and this at a
time when alien worlds (and worldviews) are clashing for the first time, and when language
and communication problems are putting spanners in the works. Often, these factors alone
can make a mockery of all the high-sounding plans and projections. Unrealistic deadlines,
vain haggling over titles and positions, lack of resources and negligent controlling can all
too quickly derail the entire process.

Post Merger Integration

Full-time PmI Manager


wanted

71%

That is not what structured integration and synergy management looks like. The latter nails
down and operationalizes synergies ahead of any takeover or merger. It adheres to a master
plan, is subject to strict but transparent management principles and is at all times subject
to close monitoring, leading to clear, measurable outcomes. Above all, it motivates the entire team to buy into the project.

37%

The above profile may read like the rsum of any top executive. For post-merger integration, however, it is absolutely essential. Experience consistently shows that the higher the
level of personnel involvement in synergy management, the earlier the PMI manager is
involved in an acquisition and the more he or she is able to contribute his or her expertise,
the greater are the prospects for success. "A full-time PMI manager is a definite success
factor," agrees Reinhard Fasshauer, head of Group Project Portfolio Management at financial
service provider Talanx. He is far from alone in taking this view. Three out of four of the
managers queried in the Roland Berger study are convinced that PMI managers should be
released to dedicate their full energies to this task. However, the study finds that this is the
case only in one third of all transactions. Rolf Erfurt, Director Operations & Performance
Improvement at Canadian aircraft manufacturer Bombardier, is another man who knows the
value of such a position: "You will only be able to leverage synergies later on if the PMI
manager is involved from the outset." Nearly every second respondent in the Roland Berger
study comes to the same conclusion: In the case of successful takeovers, the PMI manager
was nominated before negotiations even commenced.

Reality

The leader who masterminds integration is the key. PMI managers hail from top management echelons. They are excellent communicators, experienced, tolerant, prudent and able
to make decisions. They have built up a tightly meshed network of information and relationships throughout the group, are widely recognized for their performance and command
respect as can-do free thinkers. More important still is to get them involved in all acquisition
and merger planning from an early stage. The Roland Berger study also shows that these
people devote 100% of their capacity and attention to extensive integration projects, and at
least 50% to partial integration projects. Ideally, PMI managers report straight to their CEO.
"That gives them the freedom and the standing within the organization that they need,"
says PMI manager Georg Schulz of international building materials group Holcim. He should
know: His company generates most of its growth through acquisitions.

Ideal

Nomination: PMI needs leadership

71% of all participants want


a full-time PMI manager, but only
37% see this realized

Roland Berger Strategy Consultants

Roland Berger has developed a new formula for the selection of synergy levers that
allows evaluation to be aligned with the individual situation. It distinguishes between tops
and flops and can be applied to all aspects of the company either vertically (along the value
chain) or horizontally. Four criteria are critical to realizing synergies:

Culture

Sustainability

Speed

But how can effective actions to tap synergies be identified systematically? Do you look
from one end of the value chain to the other? Sort them by revenue potential, cost-cutting
potential or opportunities to improve the product portfolio?

Efficiency

Selection: New formula evaluates synergies


Keys to REALIZING synergies

Efficiency: What is the (monetary) value of the synergy?


Speed: How quickly can actions unfold their full impact?
Sustainability: Is it a one-time effect or a permanent saving?
Culture: Will employees be able to understand and accept the action?
The Roland Berger study comes to an unequivocal conclusion: Successful PMI projects
directly reflect how much importance is attached to these four criteria when selecting
synergies. Not only are the criteria applied significantly more frequently in successful
cases: They are also crucial in achieving that success.
True, experience counts for much. Yet the crucial factor is always to scour both sides of the
alliance in search of potential. As obvious as that may sound, reality shows that it clearly
isn't. The Roland Berger study shows that, in a third of cases, the failure of mergers is attributable to lack of cooperation on synergy management. In successful M&As, such shortcomings are hardly ever encountered (only 5%).
Decisions about what is to be done usually get taken from the top down a process that,
as a rule, is completed in a matter of weeks. The outworking of these decisions then takes
place from the bottom up and can take months. Only then are potential actions prioritized.
Several rules of thumb apply: Quick and easy takes precedence over slow and complicated.
To begin with, speed of implementation beats optimized costs. Priority is given to actions
that keep customers and employees on board. Swift revenue gains can silence the skeptics,
give a boost to supporters and allay the fear of job losses. Risk discounts too can help
shrink overblown expectations down to more realistic dimensions.

Alignment: The mix is what matters


Keeping a close eye on costs is an important part of synergy management. Making a fast
buck is not all there is to it, however. "It is not enough just to look at financial synergies,"
notes Joachim Hofmann, PMI manager at German power line provider SAG. Synergies
that make production more efficient or streamline the organization of global production
networks can have a faster impact on the new corporate entity than, say, much-hyped
attempts at vertical integration or drives to slash overhead costs. Though frequently underestimated, mutual dependencies and interrelationships between individual actions are
equally critical to the success of an M&A venture.

content

Post Merger Integration

A matrix developed by Roland Berger clearly shows which of these levers operate in isolation and which only work in connection with other levers. The issue of a global production
footprint, for example, is more closely intertwined with vertical integration and the topics
of management than, say, production efficiency. On the other hand, overhead costs are
the most important lever with which to influence the latter.
Knowing exactly how different levers affect each other raises their efficiency. The key is to
test every action early on to be sure it will work in practice. It is not unusual for the workforce initially to feel blown away by the fresh winds blowing from board level; and it is important to remember that uncertainty can paralyze or even sink even the best attempts at integration. Top performers in particular quickly feel slighted or left out and then just go,
taking their knowledge with them. "The biggest mistake," SAG manager Hoffmann says,
"is not getting these people to buy into the process."
At least as bad is the fact that there is so little leeway for most M&As. This places an inordinate strain on the organization, which disconnects from the move or obstructs it rather
than playing its part. For those charged with driving mergers, the pressure to succeed is
sometimes enormous. Careers depend on it. Yet pressure leads to resistance. Influence,
jobs and money lots of money are at stake. And time is money.
Actions taken too hastily are just as counterproductive as false promises, however.
They alienate employees and kindle uncertainty among other stakeholders. Experience
teaches us that synergies that are not realized within two years at the latest will
probably never be realized. It follows that the time frame for PMI projects should neither
be excessively tight nor over-generous. The ideal schedule will map out in detail what
happens when. To this end, it should reveal interdependencies between individual actions
and clearly show who within the organization is responsible for what. Milestones break the
journey down into manageable stages. A detailed schedule will always build on a readymade foundation: the integration plan produced by the due diligence test. This is the
phase in which the initiator of the transaction carefully and systematically gathered,
checked and analyzed the detailed data concerning a potential investment, takeover or
merger candidate, or in which the said candidate disclosed this data.
What may look easy on paper is in fact a tour de force that pushes many an organization
to its limits and beyond. Everything seems to be being restructured, realigned and modified
all at the same time and that while the ship is still going full steam ahead. Companies
can apply themselves as intensely as they like to getting their mergers completed. They
can be as disciplined and rigorous as they like about leveraging potential synergies to
ensure sustainable positive performance. The stark reality nevertheless remains unchanged: Even the best theories are never an exact science. There are pitfalls at every turn.
That is why schedules are there to be adapted. What must never be adapted, however,
are the milestones defined for the PMI process if only in the interests of maintaining credibility. Any departure from this proven principle could put the entire project at risk.

IF YOU HAVE ANY QUESTIONS,


PLEASE FEEL FREE TO CONTACT US:
Thomas Rinn, Partner
+49 711 3275-7349
thomas_rinn@de.rolandberger.com
Oliver Knapp, Partner
+49 711 3275-7213
oliver_knapp@de.rolandberger.com
Christian Bhler, Senior Consultant
+49 89 9230-8017
christian_boehler@de.rolandberger.com

think:act CONTENT
ditors:
Prof. Dr. Burkhard Schwenker, Dr. Martin C. Wittig
Project management: Dr. Katherine Nlling
Layout: Roland Berger Media Design
Roland Berger Strategy Consultants GmbH
Am Sandtorkai 41
20457 Hamburg
+49 40 37631-4421
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