Merge in haste, regret later

As the Dairy Board considers an alliance with major Australian company Bonlac Foods, agricultural editor
PHILIPPA STEVENSON reports that research into such mergers suggests that success is not guaranteed.

Like a besotted courting couple, the thrill of the chase can blind business partners to the hard graft necessary to make a marriage work.

International consultancy PA Consulting has studied more than 500 mergers and acquisitions worldwide. Auckland-based spokesman Brian Shaw says between 50 per cent and 80 per cent fail.

"Most of them get caught up in the thrill of the chase, and spend so much time on figuring out how to do the deal that when they get to the point of signing it they have no idea how they are going to put the companies together and make it work."

The speedy globalisation of business that has spawned supersized retailers has prompted a corresponding merging frenzy among food manufacturers keen to promote brands and remain competitive, he says.

The alliances being contemplated or formed in the Australasian dairy sector, including the New Zealand industry's proposed mega-merger of New Zealand Dairy Group and Kiwi Dairies, were part of the international trend, Mr Shaw said.

Joint ventures by companies had a slightly better success rate than straight-out mergers or acquisitions but still about a third of those were seen to be unsuccessful by their owners.

"And that failure rate [of all alliance types] seems to be consistent regardless of the prevailing economic climate."

The reasons for failure range from the occasional strategy error ("they bought the wrong company") through paying too much ("most successful mergers are independent of how much they paid") to the biggest factor: "They don't integrate the two companies together after they sign the deal."

PA research in Britain on merging companies, including 60 per cent worth more than £50 million ($166 million), showed that most did not have a plan in place the day they signed the deal for how they were going to integrate.

"From PA's experience of more than 500 integrations, if there is not a detailed plan of how the benefits are going to be delivered within 100 days of signing the deal you will never get them.

"And if you have not delivered 80 per cent of the benefits in a further 100 days after that, then you will never get those either.

"It means you've got six months to make the thing work, or else you never get it."

Mr Shaw said timing was critical because in the early days of a merger the staff involved expected a lot of change.

"They get into a state where they expect things to happen and be different and if they don't they just go back to where they were and don't want to change."

It's not all bad news.

Mr Shaw said the good news was that if integration was done right the benefits could be up to 50 per cent greater than identified in the due diligence study.

"If you get it right you can do very well, but if you get it wrong most of the value goes to the target company's shareholders."

Mr Shaw said it was wrong to assume that everything both companies did would add value to each. In fact, value was usually resident only in a few parts of the two businesses.

"One may have great products; one may have some great new distribution networks, and you put the two together and that's value."

Integrating to a moderate level was more successful than trying to integrate everything.

"You really have to decide what the benefits are and make sure you really merge those. The other stuff can follow later, and in some cases it doesn't matter if it happens at all."

Research showed that if the culture within two companies was perceived as quite different, the chance of the acquisition being successful was much greater.

"It is probably something as simple as people saying, 'We are so different we had better do something about sorting out the people issues in this merger'."