Integration is an art

By Dr. Burkhard Schwenker

Mergers and acquisitions are back in style: over the past twelve months alone, transactions amounting to EUR 190 billion were made. It looks as though we may soon be seeing numbers as high as in the late 1990s.

While the end of the 20th century was about venturing into new business segments, the main focus is now on core business. Mergers and acquisitions only make sense if they ultimately lead to growth in the core business.

We have learned from our M&A experience in the 1990s that over 60% of mergers do not achieve the expected added value, or even fail completely. Can we expect the same sobering results from the new wave of mergers?

There is good reason to be optimistic. Companies have come of age and now pay much lower acquisition premiums (the average acquisition premium in 1990s was over 50%. It has since dropped to 27%). What's more, companies today think their strategic visions through in greater detail, as they now focus on their core business.

The risks of mergers and acquisitions should not be underestimated. Synergies are elusive, and two elements are vital to success: speed and rigor. Speed is important, because the later synergies are realized, the less they are worth. For an acquisition to be successful, synergies must be exploited within three years. Rigor is also key, as stand-alone potential at both companies must be exploited after they have merged.

Good integration management must be uncomfortable, demanding and integrative. The art lies in achieving all three at once. A merger can only be successful if the companies' cultures are turned into one and old rivalries are left at the door. Both of these things take time. After a takeover, there is a conflict between time pressure and the time required to do things right. Overcoming this conflict is only possible with the right mix of actions.

(This column was published in "Handelsblatt", dated December 19, 2005)