It's no secret that most corporate acquisitions take longer to implement, cost more than budgeted, and accomplish less than is hoped. What should concern investors is that management and the investment community have accepted these facts - along with the suboptimal returns on shareholder value - as if there were no recourse.
Yet institutional investors can be effective in helping to focus management's attention on critical areas. For evidence, one need only look at the efficient corporate response to the environmental concerns of the late 1980s. With three or four years of similarly tough decisions, we believe the M&A problem, too, can be turned around, leaving the investment community to address new and different challenges.
There's a 70% chance, give or take, that the transaction investors financed will fail to achieve the goals management has set. In fact, according to a recent study we conducted of executives and consultants participating in 350 merger transactions, the failure rate skyrockets to 90% for high-tech mergers and acquisitions.
In other words, any avenue for capital assets and executive talent other than M&A that has a better than 30% success rate (or, in high tech, 10%) is arguably a better use of funds.
Investors have a vested interest in turning the situation around. The investment community has a fiduciary obligation to keep its eye on this ball on behalf of the people whose money it invests.
Of the transactions that fail to live up to management's expectations, we estimate that frequently it's because the deal should never have been done in the first place.
Investors should begin to ask the right questions. At the first meeting with management following the announcement of a major acquisition they should ask: What are your goals for this merger? How will you measure your progress? What are your quarter-by-quarter milestones? What were the three or four alternative investments you considered for this, say, $3 billion? How can you assure us that this merger has a 70% or better chance to meet or exceed your objectives?
In order to create a dialogue, investors have to communicate to management that they're willing to hear about setbacks. If this is not tacitly understood, shareholder communication will be puffery, at best. The reaction of investors must not be to "beat up" the transition team, but to understand how the situation has changed and what the new plan looks like.
The investment community should not be satisfied with the 30% success rate of today's mergers. It has a role to play in improving the odds of success at least 70% before 2000 - a mere three years from now - and it has a responsibility to shareholders to do so. If we pay attention to this challenge now, we can solve it quickly.
Investors should insist on a specific 24-month implementation plan that sets forth measurable objectives and commits to performance milestones. If management plans to grow in Europe, what's the target date and by what percentage? If they want to restructure sales, by what date? When will the R&D functions be refocused? What's the cost reduction goal? What's the market share goal by major product line? Encouraging dialogue at this level of detail enables investors to assist management in setting and achieving performance targets.
The stakes are increasingly high. Global mergers and acquisitions, on their way to another record this year, should represent a very effective strategic option. Cross-border transactions already had reached record levels before the British Telecom/MCI deal was announced.
Ensuring effective implementation in this area won't be difficult. It just entails doing what institutional investors do best: probe management for better information and become advocates for more responsive and responsible behavior. It won't take long to see the fruits - low-hanging or otherwise - of this labor.
Management time is the scarcest and most valuable resource in all strategic initiatives. Many merger integration efforts fail because the people in charge lack experience, particularly with merger implementation, or they are trying to do two jobs at once - their pre-merger assignment and merger planning and implementation.
The merger-implementation leaders should be taken offline for 24 months (or more) and focused solely on ensuring the merger or acquisition is effectively implemented.
They must have the mandate, the time and the competence to make the difficult decisions required; they should be compensated based on deadlines met and goals realized; and the chief executive officer should be only a "beeper away" until success is in hand.
John A. McCreight is president of McCreight & Co., a Wilton, Conn.-based consultant to corporations on mergers and acquisitions and other strategic moves that cause large-scale change.