Mergers go swimmingly when there's easy digestion

Sunday, April 17, 2005
St. Louis Post-Dispatch Business E7
"Mergers go swimmingly when there's easy digestion"


When similar-size companies combine -- like May and Federated or Pulitzer and Lee -- generating value depends on creative destruction.
Whether mergers succeed or fail seems of great importance to the people of St. Louis. Pulitzer Inc., owner of the Post-Dispatch, is being acquired by Lee Enterprises. May Department Stores is being acquired by Federated Department Stores. SBC Communications, which has major operations in St. Louis, is absorbing what's left of AT&T Corp.

To produce extraordinary gains from mergers and acquisitions, companies must know and execute two sets of rules: First, they must do the right deal. This was the topic of my March 27 column. Second, they must integrate the acquired company. This is today's topic.

Success requires a high level of expertise and disciplined execution in both steps. It's important to do it right. But many companies do not, with devastating effects.

A study by McKinsey & Co. found that companies doing mergers and acquisitions right produce average annual returns of more than 25 percent. But another McKinsey study found that 72 percent of the largest U.S. companies destroy value with their acquisition programs.

There's reason for optimism in St. Louis. The acquiring companies are well-managed, and the acquisitions are taking place within the same industry. But because these are mergers of similar-sized companies, the odds of creating value for shareholders are cut in half.

How they handle integration will determine whether or not Federated, Lee and SBC can overcome the odds. Generating significant shareholder value in mergers like these requires creative destruction, using the merger to make dramatic changes that would otherwise be difficult to make.

Clear strategy


Successful integration requires a value-creation plan. Cost reduction is the obvious tool for producing value from an acquisition. Federated projects $450 million in annual savings from acquiring May. Lee projects only $7 million of cost reductions at Pulitzer.

Jackson Nickerson, a professor of organization and strategy at Washington University, says value might be created, as well, "by changing the culture and selecting areas for exiting or accelerating growth."

"The combined entity should also seek to create new value either by offering existing solutions to new customers or developing new solutions for existing customers."

Lee plans to create value at Pulitzer by using these approaches to increase newspaper circulation and revenue.

In general, acquiring companies ought to consider these actions:



Before closing the deal

Appoint a senior person, reporting to the chief executive, to lead an integration steering committee. According to GE Capital, which has a record of successful acquisitions, this full-time person should know the acquiring company thoroughly. Also, the integration executive should have deep knowledge of the acquired company by being on the due-diligence team. Identify which redundant departments should be eliminated and which duplicate division heads should be terminated. It's better for a few people to suffer a lot than for everyone to suffer a little. Department heads can't focus on long-term strategic change until they're confident of job security. Decisive management decisions help to prevent political conflict.

Fine-tune the strategy for creating value. Identify the four or five ways that provide direction to managers in the combined company. Three months after

Focus everyone on reasons for the merger. Communicate the major strategy elements and timetables for implementation. Emphasize the tangible benefits for employees of a successful merger and the consequences of failure.

Move fast. Chief executives of companies acquired by GE Capital said that at the time, they thought things were moving too quickly but that in retrospect, they didn't go fast enough.

Have each department develop plans for doing its share. This is the time to eliminate unnecessary lower-level positions and replace people who resist change. Determine which company has best practices for a department. Avoid compromise. Be disciplined and fair. Employees will accept dramatic change if they deem it fair.

In the end, a successful merger between companies of comparable size requires dramatic, traumatic change achieved through quick, decisive action guided by simple rules. Failure to follow the rules can make mergers a disaster. Employees, customers and stockholders benefit when the rules are followed.



Bill Finnie, a business consultant and adjunct professor at Washington University, writes about the do's and don'ts for success.

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