UNLOCKING SHAREHOLDER VALUE: THE KEYS TO SUCCESS

UNLOCKING SHAREHOLDER VALUE: THE KEYS TO SUCCESS

MERGERS & ACQUISITIONS A GLOBAL RESEARCH REPORT

foreword

This report presents the findings of KPMG's most recent survey into the issues surrounding M&A integration. The survey sets out to be different.

Rather than looking predictably at the reasons for failure, it emphasises what successful companies are doing right to unlock value from their deals. We focused our sample on the largest cross-border deals completed between 1996 and 1998 so the results capture the experiences of leading blue chip companies. Our innovative approach means that for the first time we have gone beyond respondents' subjective assessment of performance and have applied an objective measure of deal success, based on shareholder value, to arrive at the `keys to success'. The results highlight the importance of an integrated approach to the pre-deal period. They also stress the challenge acquirers face in addressing the `softer' people and cultural aspects of the deal, and in delivering an effective communications plan. As ever, it is the delicate balance between financial drivers and people aspects which underpins success. Neither is sufficient in itself to deliver the benefits.

Finally, our high profile international sample gives us unique insight into the features of cross-border transactions. We have a new perspective on the cultural challenges faced by acquirers and can compare success rates between US, UK and European based deals.

We commend this document to all those embarking on a major merger or acquisition. Our results indicate that acquirers remain over-optimistic about their performance and many still fail to deliver enhanced shareholder value through their acquisitions. Although each deal is different, much benefit can be gained by learning from the experience of others.

John Kelly, Partner Merger and Acquisition Integration

contents

Colin Cook, Partner Transaction Services Europe

Foreword 1 Executive summary 2 Approach 3 Unlocking shareholder value 4 The six keys to success

Focusing on the hard keys Focusing on the soft keys Achieving the result: `hard' keys with `soft` keys 5 The impact of cross-border deals 6 Conclusion

Don Spitzer, Partner Transaction Services Global

page

1 5 7 9 10 15 18 19 21

1 Executive summary

1.1 Survey Objectives This research report sets out to be original. Too many surveys in the past have concentrated on what is going wrong with mergers and acquisitions. We focus instead on understanding what, in their most recent deals, major international companies are getting right in the hope that their experience will provide a useful guide to companies entering into their own deals in the future and that we have the most up-to-date view on this burgeoning market. The results give us an authoritative perspective on how benefits can be delivered to shareholders. Any merger or acquisition is an extremely complex procedure from pre-deal planning, and deal completion, through to post deal integration and the extraction of value. The inevitable pressure on time and resource mean that priorities must be allocated, and hard decisions made about which activities are undertaken, and when, how, and by whom they are done. Our specific objectives were as follows: s to correlate specific actions with the success or failure of the transaction; s to investigate the relative importance of the different activities; and s to assess respondents' approaches and attitudes to cultural and people issues.

1.2 Benchmarking Success Shareholder value was used as the basis of the benchmark by which the success of respondents' deals was measured. We measured equity performance pre and post-deal and set individual company performance against their own industry trends. Deals were then categorised into those that failed to create value, those that neither created nor destroyed value, and those that exceeded their industry trend. Full details of the methodology and survey parameters are outlined in chapter 2.

1.3

Mergers and Acquisitions: Global Research Report 1999 1

1.4 How good are companies at mergers and acquisitions?

The survey found that 82% of respondents believed the major deal they had been involved in had been a success. However, this was a subjective estimation of their success in achieving the deal objectives (see figure 2, on page 8), and less than half had carried out a formal review process. When we measured each one against our independent benchmark, based on comparative share performance one year after deal completion, the result was almost a mirror opposite. We found that only 17% of deals had added value to the combined company, 30% produced no discernible difference, and as many as 53% actually destroyed value. In other words, 83% of mergers were unsuccessful in producing any business benefit as regards shareholder value.

Achieving the balance to unlock value

We have focused the survey on the `hard' factors which impact on value realisation and those activities which address the `soft' people and cultural 1.5 issues. The results give us six `keys' which successful companies use to unlock value.

Hard Keys

Soft Keys

The Hard Keys

As a result of our benchmark analysis, we found that successful companies achieved long-term success by prioritising three key activities in the pre-deal phase (the so called hard keys) which had a tangible impact on ability to deliver financial benefits from the deal. They are: s synergy evaluation; s integration project planning; and s due diligence.

Using the benchmark, a quantifiable benefit could be accorded to each one.

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Mergers and Acquisitions: Global Research Report 1999

Those companies that put priority on pre-deal synergy evaluation were 28% more likely than average to have a successful deal and for integration project planning the figure was 13%.

The results were particularly surprising in relation to the mandatory pre-deal activities. Of these, due diligence emerged as the activity most critical to deal success (companies which prioritised this were 6% more likely than average to have a successful deal). On the other hand, companies focusing their attention on arranging finance or on legal issues (to the detriment of other areas) were 15% less likely than average to have a successful deal.

1.6 We have identified, then, three pre-deal activities. Each one in its own way contributes to deal success, however there is overlap between them. They can therefore have greatest impact if brought together in a single pre-deal process which gives the acquirer essential intelligence about risks, benefits and operational issues. This information will help deal negotiations and shape the post-deal integration programme to ensure shareholder value is increased.

The Soft Keys

Experience tells us that people and cultural issues are important in determining deal success, so we wanted to use this survey to drill down and understand the impact of different decisions and timescales relating to soft keys on deal outcome. The results highlight three soft keys: s selecting the management team; s resolving cultural issues; and s communications.

Those companies that gave top priority to the selection of the management team at the pre-deal planning stage, thereby reducing the organisational issues created by uncertainty, were 26% more likely than average to have a successful deal.

Deals were 26% more likely than average to be successful if they focused on resolving cultural issues, and those acquirers who left cultural issues until the post-deal period severely hindered their chance of deal success, compared with those who dealt with them early in the process.

Companies which gave priority to communications were 13% more likely than average to have a successful deal. When we drilled down to understand this better; poor communications with own employees appeared to pose greatest risk to deal success, more so than poor communication to shareholders, suppliers or customers.

These results highlight the importance of giving early emphasis to management team selection, cultural assessments and communications plans.

Mergers and Acquisitions: Global Research Report 1999 3

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