To master how to manage a merger, look no further than the global chemical industry. The $5 trillion-plus category has long used M&A to grow, shift strategic direction and consolidate segments. It’s registering record activity this year – perhaps surpassing 2016’s $260 billion mark – plus higher multiples and growing interest from activist investors.
Although there is often an implicit assumption that mergers yield value, actually realizing value is not always straightforward, with companies often taking 2-3 years to get full returns. And even then, in our experience, not everyone is able to capture value. Duplicate structures and public criticism often play a role.
In an attempt to create real value and truly learn from each side, one CEO overseeing the execution of a recent merger took a unique approach. He went a more entrepreneurship direction and allowed the managers in areas that were performing well to control how their units merged. The result? Real value was created by allowing some autonomy in the process.
There are well-proven steps that any enterprise, chemical or not, should use to capture the full value-creation potential of its M&A moves. Our research shows that in deals where best practices in merger management are employed, total shareholder returns rise at least six percentage points above deals without these practices. Here are what we call the “Fabulous Five:”
- Build a compelling value-creation story and communicate it clearly. The story should include a strategic view of where the new merged company is heading. Capture the strengths of both companies and what it will take to build a world-class entity. Strong communications about a clear and ambitious plan to capture value may even serve as a “sharp repellent” against activist investors. Still, looking at a deal through an activist lens can be beneficial to create focus on what will be gained, presenting the short-term benefits of the deal while explaining its long-term, value-creation promise.
- Leverage synergies and opportunities for transformation. Manage the combination for higher profitability and growth, and determine the necessary organizational structure and operations setup. To identify savings, look at overlapping activities – from product offerings, customers, and markets served to technological capabilities and R&D projects. Determine standalone improvements that can create significant value. Tackle opportunities for transforming the combined company. In a recent, large chemical deal of “equals,” where shareholders worried there might be little value creation, a major review that dug deep into both enterprises uncovered value well above early estimates.
- Start early to shape the integration strategy. The due-diligence phase is a good place to start. Weave the integration program into the deal rationale and set priorities for it from the merger’s strategic and value-creation logic. Make decisions early about what and what not to integrate and at what speed. When the deal is signed, develop an integration road map that covers the timeline and top-level leadership appointments in particular. A CEO of a family-owned chemical company decided early on that he wanted to shake up the sleepy culture, so he acquired a company with visionary leadership and eventually named that CEO to succeed him. It’s now a top 10 chemical maker.
- Over-invest early on cultural integration. Many mergers fall short because they fail to recognize and act upon cultural differences or misalignment on management philosophies. Our research shows that mergers that focus on culture succeed three times more often than those where integrating cultures hasn’t topped the agenda. Among other steps, organize events, including operations visits and activity workshops, so teams from both companies can discover each other. Address key differences head-on in management practices and processes, emphasizing to employees the new ways of working and the rationale behind them.
- Keep the business running. Focus on the day and devote undistracted attention to customer relationships on both sides. Continue to develop opportunities and fulfill business plans from day one. This includes ongoing sales force effectiveness and cost-paring moves. Communicate quickly to customers the rationale and new value proposition of the merger.
An integration is always a time of uncertainty. Competitors will certainly seize any opportunity to poach customers and top-performing employees. Using these steps is a way to avoid losing ground in the weeks after day one.