The Hindu Business Line : Businesses in a merger need to make sense together

A full-page advertisement, in the form of an article, in a newspaper gave a lot of good advice about mergers. Accenture, the international consulting company, was offering to help you manage a corporate merger effectively. There can never be too much advice about managing the aftermath of a merger, for that is when and why a lot of failures take place. Thus, the advertorial emphasised that if you do not pay attention to the details of how to integrate the two companies in a merger, the results can be disastrous.

The advertorial wanted you to prioritise the areas you will integrate and not try to do it all at once. It urged you to start preparing for the operational aspects of the merger even before you conclude the deal so that you do not lose time once the deal is approved. It also warned of a clash of cultures when two companies combined and that, if not foreseen and planned for, could derail all good intentions.

I have no complaints about all this good advice. However, the lead paragraphs of the advertorial, that set the context, caught my attention. According to them, world over mergers and acquisitions are taking place at such a rapid pace that it was getting to be harder to gain control of quality assets. If you did not go out there and quickly merge or acquire another company, you were losing an opportunity to create value. And of course, once you get hold of this asset, you need to extract maximum value by proper integration of the firms.

Creating demand

So the corporate chieftains need to think a bit before they rush out to acquire somebody to grab all that `value' that is lying around. The only value that gets created by indiscriminate mergers is the value for investment bankers and consulting firms. Far too many mergers fail not just due to poor integration but because of equally poor conception of how the merger fits the strategy of the firms involved.

Mergers (supposedly between equals creating a new third entity) and acquisitions (where one firm absorbs another into its fold) are a rather tricky business. One never knows how it is going to work out. All the research on the subject has resulted in one unanimous conclusion: `It depends.' One merger that got a lot of flak not too long ago is getting rehabilitated now and being quoted as an example of success.

The HP experience

Hewlett Packard (HP), the large multidivisional electronics and computing company, acquired Compaq Inc, the PC company, in 2002 and it seemed to make sense. Compaq was in trouble, getting beaten, quite soundly, by competition. And everyone thought HP would now have the volume to challenge Dell Computers and make a success of it. The problem was that the PC market was slowing and the prospect of just 5 per cent market growth would have been quite disastrous for such a big business segment within HP. So the Chairman and CEO who engineered the merger, Ms Carly Fiorina, went ahead with a major restructuring of the company. (Note: When in doubt, restructure.) In the confusion that followed, she redesigned divisions, compressed 83 independent business units into four, changed the culture of the company by centralising strategy setting, altered compensation structures, decision- making processes, and so on. The company was being turned inside out and performance was sinking. It was not clear whether the merger with Compaq or the restructuring was going awry.

The Board got worried andoffered her help. She refused to share responsibilities with a COO or have separate CEO. When results got worse, she changed her mind, but the Board decided to let her go and get someone else. Enter the new CEO, Mr Mark Hurd, who plodded away trying to make all the changes work. He comforted employees and markets awaiting further upheaval by saying that he would stick with the strategy of his predecessor; the company is now beginning to show results. So Mr Hurd is being hailed as the person who made the merger and the restructuring work. Well, HP may be happy that the integration went well and the CEO paid a lot of attention to the details of managing. But we also need to keep in mind that the markets have changed. Dell's direct sales model has hit a plateau and HP with a good retail network seems to be selling well in the laptops and server lines. Thus, one can't be too sure if it is only fortuitous that HPs pc division is doing well.

Meanwhile, another conglomerate, AOL Times Warner seems to be wondering what it can do to break up without disintegrating. Egged on by all the value it will be creating through mergers, the company has been marching along; it has now come to a point where it does not make sense to stay together.

Time has been steadily growing into a media conglomerate through mergers. Essentially a magazine company, Time, acquired a film studio, Warner Communications in 1990. Then, it saw the cable channels doing well and so acquired TBS and CNN six years later.

It wanted a piece of the Internet action too. So it merged with AOL, just as the fortunes of that company were tanking. Nobody can figure out what is common to books, magazines, movies, television, and the Internet, except that all of them are in my living room. Smarter people who make stock recommendations are not sure either. Unable to decide when and how to break up, the current CEO has just asked each division to behave independently, not look for any synergies, and do the best they can. The finance expert looking at all this would ask why it is more relevant for the company to hold the portfolio of these diverse businesses and not let individual investors decide the kind of portfolio they want to hold. We have to wait for a corporate answer or meet the consultants who told them that these mergers were adding a lot of value.

Strategic sense

The point is that it is not easy to predict how the market is going to turn out. Yet, businesses need to take a chance in probing directions for their company in the way they think the market is going. But the ease of mergers and acquisitions has made companies trigger happy. The result, quite often, is that companies confuse corporate strategy with business strategy. If they are acquiring firms in the same business, it must serve a business strategy of furthering competitive advantage and then quick integration is important, to derive economies of scale, and to digest competencies.

If the merger is with a slightly or distantly related business, then it needs to fit into the corporate strategy of the companies, and then synergies and hard work to derive them become important. Thus, even before the problems of integration, the merger or acquisition has to make strategic sense.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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