Ground-breaking global research by KPMG International, which found that 83% of corporate mergers and acquisitions
NEW YORK - Nov. 29, 1999
Ground-breaking global research by KPMG International, which found that 83% of corporate mergers and acquisitions (M&A) fail to enhance shareholder value, has identified six "key" activities that make a deal successful. In the report, Unlocking shareholder value: the keys to success, KPMG analyzed the 700 most expensive international deals from 1996 to 1998, and interviewed 107 executives from those companies.
"More than 8 in 10 deals fail to enhance shareholder value because of poor planning or execution or both, yet, by contrast, most of the executives interviewed (82%) believed their deals were successful," said Donald C. Spitzer, the U.S. national partner in charge of the Global Financial StrategiesSM practice of KPMG LLP, the U.S. accounting, tax and consulting firm. "This is an extraordinary finding, and noteworthy because transactions remain the most dynamic driver for growth among corporate executives." KPMG estimates that a record $2.2 trillion in global M&A activity will be recorded in 1999.
Interviews with executives identified a combination of six "keys" -- three hard keys and three soft
keys -- that were necessary for a deal to succeed, according to Spitzer.
KPMG identified the three "hard keys" -- pre-deal business activities that had a tangible impact on the ability to deliver financial benefits -- as:
- synergy evaluation (business fit),
- integration planning, and
- due diligence.
According to the KPMG research, the three "soft keys" -- human resources issues that must be examined even before a deal is announced -- were:
- management team selection,
- cultural issues, and
- communications with employees, shareholders and vendors.
"Emphasizing the touchy-feely people issues along with the hard-and-fast business decisions remains critical to the success of any transaction," Spitzer said.
Among the major findings pertaining to "hard keys" (the business activities), the research showed that companies which put priority on:
- synergy evaluation (whether two businesses are a good fit) were 28% more likely to be successful in improving value to shareholders;
- integration planning were 13% more likely to enhance shareholder value;
- due diligence were 6% more likely to improve the value to shareholders.
"The research shows due diligence to be the most critical issue on balance, and must encompass a wide set of activities, such as management assessments, risk reviews and operational reviews. Companies were 15% less likely to improve shareholder value if their due diligence emphasized finance or legal issues, to the detriment of other areas," said Spitzer.
In terms of "soft keys" (the people issues), companies that placed priority on:
- management team selection, to reduce organizational issues created by uncertainty, were 26% more likely to improve value to shareholders;
- resolving cultural issues were 26% more likely to succeed in adding value for shareholders. Those that handled these issues early in the pre-deal process had a better success rate than those who left cultural issues until the post-deal period;
- communications were 13% more likely to enhance shareholder value. Poor communications with employees posed a greater risk to a deal, compared with poor communications with shareholders, suppliers or customers.
"When a chief executive officer contemplates a transaction, KPMG advocates early involvement of integration planners with industry-specific experience and the cultural know-how to make a cross-border deal work," Spitzer concluded. "Our study identifies what corporations have done right in making deals work for shareholders, giving new impetus to help make future deals successful."
In order to arrive at the average by which success or failure of improved shareholder value was compared, researchers identified a pre-deal trend in a company's equity price and used the performance in the relevant industry segment to plot the company's expected price trend for a year after the deal was closed. Researchers then compared the actual company performance with the average to determine success or failure of enhancing shareholder value. Firms that showed neither an improvement nor a decrease in shareholder value received the benefit of the doubt, and counted as successes. Ninety-seven of the interviews were conducted with executives of companies in North America, the United Kingdom and continental Europe. The other 10 were conducted with executives from elsewhere in the world.
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