The “New Normal” Continues into the New Year

15 Jan, 2012 in Beyond the Deal, Integration 2.0, Integrations, Mergers and Acquisitions, Post Merger Integrations, Social Media by

Quote of the Month    

“Courage is being scared to death but saddling up anyway.”  

John Wayne

 

 

In the January Newsletter:

Warning: The “New Normal” Continues Shaking and Quaking – Are you ready for “Version 2012″?

Our New Year 2012 will carry over many of the characteristics of 2011, but of course with its own novel twists.  The caution is not to even try to live in the past this year.  If you do, you’ll find yourself falling further off the mark than even in 2011.  On the plus side, the US economy has begun, in a modest way, to come out of its doldrums and the financial markets are as little less volatile on a daily basis.  At the same time, the Euro zone countries are under continuing stress, middle eastern oil producing countries and their neighbors are in a period of upheaval (throw in Nigeria as well), or feeling the repercussions of what is going on next door to them, Thailand is recovering from its partly natural/partly hyper-development caused flooding disaster and China is feeling its way through the wake of the western downturns – trying to determine how to continue the growth it needs without undermining its economy by inflation.

Cross-Border Acquisition Challenges

Consider the challenges Chinese firms have in carrying out cross-border acquisitions in the various regions of the world: low political trust,  a Confucian based hierarchical decision-making model versus a more open, collaborative process one, unfamiliarity with the cultures they are trying to market to – as well as clashes with on how to carry out that marketing.  As these challenges grow in both extent and complexity Chinese firms will be hard pressed to continue operating in a business as usual mode in their acquisitions.  Rather, Chinese acquirers will have to rework themselves, not once, but ongoingly if they are to work through ever growing complexities they will face.  At the same time. the challenges Chinese acquirers face can also be seen as high relief examples of the types of challenges all companies, regardless of country, will contend with in 2012.  This will be true both for integrating domestic acquisitions as well as for acquisitions that cross beyond national boundaries.  This is enough to keep us up at nights if we already weren’t there already.

High Cost of Not Examining Premises

Next, take a look at AT&T’s move to acquire T-Mobile.  Could AT&T have gone about its acquisition process differently enough to successfully move through its anti-trust challenges?  Not only did its proposed acquisition get dropped after it faced massive resistance but this abortive attempt also is liable for a $4 billion breakup fee (plus many other costs).  A T-Mobile acquisition would have been a difficult acquisition in any case, but then we need to ask how many alternatives were examined and why was this course of action chosen?  Do you think your company could afford this kind of scale of loss?  Yet,  many companies involved in acquisition planning and implementation continue to operated not to much differently than AT&T in their acquisitions this year, and are learning nothing of significance from the AT&T debacle.

Transitioning to a New Business Model and Logic 

One more factor that gets far too little attention is that many organizations seeking acquisitions and their targets organizations are in dynamically changing markets and rapidly shifting customer requirements.  Acting as if your organization and the targets you are considering acquiring are in a static universe is a big mistake.

We use an intriguing article by Kevin Travis as a “lens” to look at how organizations can transition from a current, and outdated business model and logic to an insightful business logic that enables it to meet its challenge both now and into the future.  In this case the focus is on how the changing roles in multi-branch banks require reformulating the business logic to grasp the real value in such acquisitions and then guide the actions needed to integrate this newly shaping network for best outcomes.

Key Lesson of 2011 and Moving into 2012

A key lesson from 2011 is that the quest for strategic position often trumps and tempers concerns over even extreme market conditions.  The indications are this will be true for 2012 as well, although at a somewhat slower rate.  A difference in 2012 is that regional variations will be more pronounced than in 2011.  That also means that there is an even greater need to know how to perceive and manage integrations in this increasingly difficult and complex world.

Innovative Tools Are Coming Together in the “Integration 2.0″ Model 

Fortunately, a cluster of innovations (including community management, social media, and technological integration process tools) came onto the M&A stage in 2011 to enable even the toughest and most challenging acquisitions and integrations.  All of these developments come together in what we call “Integration 2.0″.  A successful acquirer will customize its own set these approaches so that it can be fully geared to the challenges of 2012 and come out with quantum leap successes.

Best wishes to all for a very good New Year and to joining with you for best outcomes.

Jay Chatzkel

Editor      

MultchannelBranchBanksAcquisitions as an Opportunity to Change Your Business Logic:  The Case of Multi-channel Branch Banks

In the recent article “Multi-channel M&A’s: Where do Branches Fit?“, Kevin Travis, Partner in the Novantas management consultancy, looks at a fundamental error that acquirers too frequently make as they pursue acquisitions and then remake their newly organized firm. The fatal flaw lay in the mistaken belief that their market will fundamentally continue on the path it historically has taken.  Regardless of the fact that this expectation may well no longer be the case, many acquirers continue to be use an outdated business model or “logic” that is no longer relevant as the basis for carrying out their acquisitions and integrations.   While Travis specifically addresses multi-branch banking organizations that seek to grow by acquiring similar multi-branch banking organizations, the same basic need for revisiting the dominant business model, or logic is equally applicable across any and all organizations.

What are the Real Challenges in an Acquisition?

Travis notes that, contrary to dominant beliefs in the industry, market demand is shifting away from uniform networks of full service branch operations model into one that provides a multi-channel network of options for customers.  If an acquirer is going to best appraise both its own future and  the actual value of a target organization, it first needs to be open to reassessing and revamping it own its business model where necessary in light of dynamically changing market conditions.

This changed perspective is then reflected in a no holds barred evaluation of how well the acquirer and target are able to remake themselves as needed.  The new understanding becomes the basis for the new business model the acquirer uses as it moves along its pathway through target selection, due diligence, negotiation, planning and ultimately the integration processes that put the new business model into effect.
Consider how different valuations of a target would be if a prospective acquirer looked at it from the old business model versus the new business model.  If an acquirer is captive of the old business model it would tend to over inflate the value of current branch operations as they shift from being profit centers to becoming marginal operations and possibly even loss centers.  Many, if not most, current acquirers wind up fighting the last war, but in a better, more massive and perhaps more efficient ways.  Sticking with an outdated business logic is at the root  of a very sizable portion of acquisition failures.

What does Travis say?

First, that “market acquirers typically rely on back office and branch combinations for savings to off-set takeover premiums. They also look for pricing power as they bulk up in local markets. In other cases, acquirers seek geographic market expansion.  These familiar merger concepts assume that branches are the core of franchise.  But these former stars of the show are being relegated to more of a supportive role in retail banking.”
Travis goes on to say that “Novantas research suggests that up to a fourth of all supposed branch customers actually transact the majority of their banking business through remote channels, including online, mobile, call centers and automated teller machines, and at least 20% are ‘thin network ready,’ (with customers) caring about branches but rarely using them.  This profound customer migration is accelerating, and has serious implications for merger strategy in 2012 and beyond. Banks will need to reconsider the entire branch decision chain – including what they are worth.”
He continues that “Traditional networks are in danger of becoming wasting assets.  Familiar merger strategies are becoming obsolete as branch networks transition to a more supportive role in retail banking. As the retail banking revenue drought drags on, regional players face growing pressure for another round of merger-based consolidation.  Based on a recent Novantas analysis of the U.S. branch system, roughly 16,000 outlets, or 18% of the current total, will either need to be closed or reworked within the next three years in order to remain efficient. Traditional merger models will prove insufficient to meet this challenge.  It is not clear that acquirers and their investment bankers have factored this trend into valuation models.”
Travis cites beyond the deal factors that pose critical questions about repositioning branches for a very different future.  These factors include how location, configuration, staffing and relationship building through alternative channels affect outcomes.

What difference does all of this make?

If a typical multi-channel banking organization does not take these market shifts into account, a regional merger “could begin life with a serious competitive handicap if the predecessor companies had not already started transforming their networks. There still would be initial cost savings from capacity reduction, but the merged entity would be forced to spend heavily to catch up elsewhere, while facing an extended disadvantage in winning customers and building revenues.”
As an alternative, Travis advocates three major steps for potential acquirers to take:
  • Assess the growing base of “virtual customers” both in the current and target network
  • Identify and actively address any competitive gaps in multichannel capabilities, and
  • Incorporating these factors into decisions about what would be involved in formulating the new, post acquisition branch network.

Making These Insights Work for You

Think about Travis’s comments on multi-branch banking organizations and then carry that critical thinking over to your organization and see how much you are applying this adjusted business logic view.

Turn conventional practice on its head.  Instead, start looking at acquisitions as an opportunity to redesign the dominant business logic of the whole company and join together the capabilities required to implement a reformulated business strategy with renewed growth objectives.
Share
tagged , , , , , , , , , , , , , ,

Community Management Enables Successful Acquisition Integration

17 Nov, 2011 in Beyond the Deal, Integration 2.0, Integration 2.0 Tools, Integrations, Mergers and Acquisitions, Post Merger Integrations, Social Media, stakeholders by

Quote of the Month    

“Every time you are tempted to react in the same old way, ask if you want to be a prisoner of the past or a pioneer of the future.”

Dr. Deepak Chopra

 

In the November Newsletter:  

Volatility continues to rule the markets.  Nonetheless, major acquisitions continue to affirm that deal strategy can be more of a driver for acquiring companies than immediate market conditions. This can be seen in the Kinder Morgan Energy Partners (KMP) $38 billion acquisition of El Paso Corp (EP) that will roughly double its natural gas pipeline in the United States.  This is the second largest deal of 2011.

The storminess in the markets also has an impact on what happens after the deal.  Its uncertainty generates pressures for a quicker pace for integrations to grow, and more rapid returns on invested capital than ever.  This, in turn, requires being able to put a set of ever more robust integration capabilities into play.  However, only limited capabilities may be available in the acquiring organization, with the result that the integration takes place with even less effectiveness, and more costly missed opportunities and forced errors in approach, actions and outcomes.So, can an integration still create unprecedented amounts of value optimization in this pressure cooker environment?  Not easily, but it is still possible.  As we discussed in previous Newsletters, a new set of approaches and tools we call Integration 2.0 is available to move an integration through its various stages with enhanced speed, accuracy and effectiveness.

We are pleased to report that another element is making its way to the integration forefront.  This is the “community management” approach to frame and execute the integration.  In this Newsletter we look at how community management may be a better way to carry out the full range of integration processes, including such vexing problems as culture clashes that can hinder and undermine the transition into the “new company”.  

Community Management: The Missing Dimension 

Mobilizing Social Media + More in Your Integration     

Organizations that are in the midst of acquisitions need to seriously consider putting in place a community management approach to harness the powers of social media and any other related initiatives in the integration process.  Organizations that manage this complexity will get far more successful outcomes than those who do not take this path.
Social media, for one, is moving from being seen as an interesting gambit into an set of tools and technologies to engage relevant communities in all types of organizations.  Although most social media is primarily used in marketing, it is taking on a growing role in connecting networks of people both internally and externally to projects and operations.  As of yet social media is only being used in isolated instances in integrating acquisitions to increase effectiveness, decrease costs and time spent.  But this will change over the next several years.  One stumbling block for using social media in integrations is that people have little experience in managing this array of processes so that they lead to creating value.  This is a critical gap that can be bridged by using community management to facilitate the full range of integration processes which, of course, includes social media.

From Project Management to Community Management

One of the major reasons integrations fall short of reaching their goals is that they are viewed, for the most part, as exercises in project management that are carried out by a select and limited number of people.  A contrasting approach fusing community management and social media together to allow the mobilization of a markedly broader range of critical people.  It seeks to engage individuals both inside the acquiring and acquired organizations as well as those in the network, but outside of the organization, to participate in necessary integration processes during that unique window of opportunity that an integration presents.A successful outcome requires quite a bit more than merely adding a few social media technologies to the integration mix.  Like any other element of an integration effort, social media will not thrive by itself.  All integration elements, including social media  require active cultivation and responsive, intelligent management.
In a recent webinar, Rachel Happe, co-founder and principal at the Community Roundtable (www.community-roundtable.com) focuses on exactly these points. Happe and her colleagues developed the community management model that is discussed here.  She asserts that “Community is not social technologies…It is the about relationship and connections” and what is essential in these types of endeavors is a business understanding of community structure.  sHappe defines a community as a group of people with shared values, behaviors and artifacts.  If any of these three elements is missing the type of relationship shifts to a less powerful relationships found in an affiliation or network.What are the payoffs for instituting community management? The most valuable benefits are:

  1. A networked structure to that speeds information transfer
  2. Shared ownership and commitment
  3. Maximum investment, and
  4. Reducing costs

A Strategic Initiative 

Since community management is a strategic initiative, the first step is to address the need to understand goals and the business context.  That allows the organization to understand the size of the community that has to be created to accomplish the desired outcomes.For the community to work it cannot be a one sided proposition where the organizations harvests all the gains and those participating do not benefit in a significant way.  There has to be a balance between the goals of the organization and the needs of community members.

Culture Eats Strategy For Lunch

Those involved in managing the community must create the architecture and environment that support the people involved in an integration in achieving their goals.  Managing the community is not a mechanistic act.  It recognizes that an array of people from different backgrounds and perspectives must collaborate for success.  As Happe put it, “If the culture is not supportive of what you are trying to accomplish, you will not get very far. Culture eats strategy for lunch”. This is not an easy task and, in fact, integrations very often falter due to these underlying cultural conflicts. Culture as used here means the organizations values and its way of doing its business.

The Community Maturity Model
The Community Roundtable developed a “community maturity model”  to give an organization a way to gauge the maturity level of current competencies and determine what issues it needs to address to move through subsequent stages.
The further along the continuum, the more ability the organization has to achieve outcomes that might not have been possible in earlier stages. communityroundtable
There are eight competencies in the model and four stages of development.  Every organization will have a different competency profile.  Some may have a more developed strategy competency, while others will have come further along in culture or content and programming.  There will be uneven development until congruency across all competencies is achieved.

When an organization determines where it is in the model it can have a realistic understanding of what it can achieve at its current stage and identify what is involved is building towards the next stage of development.  Project management is not jettisoned in this model.  Its importance is remains critical, but it is now seen as part of this fuller picture.

According to Happe, the model allows you to:

  1. Identify desired business outcomes
  2. Understand target audiences and members
  3. Build short and long term value for all constituents for their participation
  4. Know the role and value of a community manager,
  5. Be able to prepare a State of Community Management Report

Try This Experiment

Map out your integration approach from the community management perspective. Gauge what stage you are at in these capabilities and what more you might be able to accomplish if you could develop them sufficiently to move to the next stage.

In the course of this experiment you will learn both where your strengths are as well as about what gaps you have.  By doing this you will give yourself beginning familiarity with the community management approach and what it can do for you as well as a gaining a better understanding of where and how you are having the most success and what is having a drag effect on your integration efforts.

Please send any insights or comments you have from trying this experiment to jaychatzkel@progressivepractices.com.  We are breaking new ground here and your comments will help build a body of knowledge and experience on how to use the community management model for the best outcomes.

 

Communication and Change Management

Good communication is critical if your acquisition is to be effective.  First, you need to assure your investors that the acquisition is a good financial and strategic move.  Second, you need to make sure that your employees are aware of their changing roles and whether they will or will not have a place in the newly emerging company.  Transparency, openness and respect for people’s legitimate concerns are key in keeping everyone involved in a positive way during this trying period.  If you deal with your employees honestly and directly, you will develop their trust, which will help you enormously as you map out their future responsibilities.  It is essential that you have a clear plan and communicate information about who will stay and who will not stay as rapidly as possible, in order for your company to implement the changes you want.

Change management has to be an important consideration when you are going through these transitions.  Acquisitions and integrations can be an extremely novel and volatile experience for both the acquired and the acquiring company.  When done in accordance with the “quantum leap” approach, the acquisition is not just a static addition to an existing company but an opportunity to rethink and reframe a large part of your company or even your entire company.  This means making almost every dimension of your company eligible for recasting in light of new conditions and a new set of options.  It is a time for reappraisal of strategic business goals, major markets, customer targets, core processes, and how your company is structured for making the newly emerging company able to succeed.
Share
tagged , , , , , , , , , , , , , , , , , , , , ,

Glenmore – XStrata Acquisition: Value Creating Masterstroke or Just a Super Bloated Creature?

1 Mar, 2012 in Beyond the Deal, Human Capital Integration, Integration 2.0, Integrations, Mergers and Acquisitions, Post Merger Integrations, stakeholders by

Quote of the Month 

 ”What would I do if I had only six months to live?  I’d type faster.”

Isaac Asimov  

 

In this Post:   

A record breaking combination is underway with the joining together of the UK based Glencore International Plc  with Swiss based XStrata Plc corporation.  This $90 billion fusion brings together the largest publicly traded commodities supplier with one of the world’s most sizable mining trading companies.  There are concerns about whether this ratcheting up in size brings with it greater ability and effectiveness or will the acquisition result in a bloated, less focused and sluggish creature.  The question is whether this massive transaction will actually create the value that its backers have promised.  In this post we look at questions that need to be successfully answered if significant value creation is to take place.

Mark your calendar for a talk on Leveraging Intellectual Capital in Post-Acquisition Integrations by Jay Chatzkel, editor of the Beyond the Deal Newsletter at the March 13 Intellectual Capital Practitioners Program.  This talk will focus on how to capture and leverage intangible assets from the beginning through the end of the acquisition process.

The Glencore-XStrata M&A: Is This a Value Creating Combination?

A $90 Billion Masterstroke or a Bloated Behemoth?

Glencore International Plc (GLEN-UK), the world’s largest publicly traded commodities supplier, agreed to buy XStrata Plc (XTA), one of world’s largest mining firms, for about $41 billion in shares in the biggest mining takeover to date.  The transaction would create a business with $209 billion in sales, bringing together Glencore’s global trading network for energy, metals and farming products with XStrata’s coal, copper and zinc mines.

Mick Davis, the current CEO of XStrata (who will also become the CEO of the combined group), laid out the promise of the proposed combination.  Davis expects that “synergies from the transaction will deliver annual gains of $500 to $600 million” which will mainly come from putting XStrata production into Glencore’s marketing and trading system.  “This would create such a different animal in the space with huge flexibility and optionality to get value from exploration to delivery of product “…and he continued, “No company has that capability.”

However, there are also significant questions about that assessment. One doubter is Liam Denning of the Wall Street Journal’s Markets Hub.  Denning commented that “Investors need to ask themselves if consolidation makes economic sense.”  He added that “from the perspective of shareholder value creation, there is little evidence to support the idea that a $90 billion company will be better at creating value than a $60 billion company” (referring to the value of the combined company versus XStrata’s value before the deal).  As Denning sees it, “Mega acquisitions destroy value for the acquirer because they tend to overpay.  It’s a classic ‘winner’s curse’.  He cites that XStrata shared were valued at a 15% premium over the February 1 closing price.

That the valuation is a controversial one is attested to by at least two major shareholders of XStrata opposing the deal on the grounds that that “the proposed exchange ratio clearly understates XStrata’s assets and future earnings.”

The Valuation Question: Are Both Cost Savings and Growth Synergies Appropriately Appreciated?

The first question: How did Glencore valuate XStrata?

Most acquisition valuations focus on cost cutting synergies and target tangible assets involving financial assets, property, equipment, inventory and staff head count.  It is important to know is whether Glencore also identified and inventoried the key intangible assets in both firms’ assets during its due diligence and follow-up negotiations as well since these intangibles are essential for “growth synergies” or generating growth in the new organization. Intangibles range from the more obvious patents and trademarks, to data, to the less obvious embedded knowledge that would be required to develop and sustain R&D as well as other organizational processes, the skill sets of key staff, relationships with customers, regulators, key vendors etc. and ultimately the core capabilities required to achieve optimal value creation outcomes arising from the combination.

While both of the companies involved deal with physical resources, either through trading or extraction, a lack of understanding of their intangibles will erode the new entity’s ability of achieve the greatest outcome in the post acquisition period.  Just consider the one important example that the new combination has to pass muster by a number of anti-trust panels around the world.  The members of these panels are all customers of these companies.  Being able to successfully gain approvals from these panels will determine whether the new combination can go forward.  Think about the failure of the GE-Honeywell planned acquisition to gain approval from the European Commission panel and the subsequent collapse of that deal.  Glencore and XStrata will face much the same challenges.  A well grounded understanding of the approval process and its stakeholders, both intangibles, is essential here.

The Question of Readiness

A second question is to examine is whether Glencore has developed the level of readiness that will allow it to shape its integration plan to cull and recombine any core embedded capabilities from both companies.  The degree that Glencore is ready to create a new significantly more powerful set of capabilities will become the basis for the newly emerging company’s success.  Capabilities are often both embedded and unique.  They are not low hanging fruit that are harvested with little thought and preparedness.  Glencore and XStrata need to be have the specific action plans and trained participants that can bring into play the processes, people and knowledge that will be core to building  on their existing capabilities and take them to new and considerably higher levels.   The new Glencore needs to prepare to meet the following challenges:

  • Will the senior leadership, business unit managers and sub managers of both companies develop lists of the top 3-5 core organizational capabilities that will enable the new company to meet its strategic goals and differentiate itself from its competitors?
  • Will it then be ready to chart and carry out the projects it needs to mobilize these new capabilities for specific outcomes?
  • Will it have the sufficient levels of trust in which the flow of open communications can happen?
  • Finally, are those involved prepared to honestly evaluate costs and gains from the work of leveraging these outcomes?

Fulfilling the Promise

If Glencore and XStrata are developing real answers to these questions they can then demonstrably justify the acquisition price for XStrata shares and while at the same time give investors a roadmap for how the integrated company will achieve outstanding value creation that is  claimed by its leadership.  Until then the question of the worth of the acquisition value can only be debated and then resolved, if at all, after several years of operation.

 

Join the Presentation on “Leveraging Intellectual Capital in Post-Acquisition Integrations”

You are invited to join Jay Chatzkel, editor of the Beyond the Deal Newsletter, for a March 13 presentation on “leveraging intellectual capital in post-acquisition integrations”.  To access this talk visit the IC Knowledge Center’s Practitioner’s Series link to sign up for this event.

You can also contact Jay Chatzkel directly for an invitation at jaychatzkel@progressivepractices.com.This program is for both intellectual capital practitioners as well as anyone else who would like to learn more about how to discover and enhance the role of intangible assets in their organizations.

The talk will examine the significance of intangibles and capabilities in achieving success in acquisitions and how to mobilize your organization to go about achieving quantum leap value creation gains.

Subscribe to the Beyond the Deal Blog

Link to the Beyond the Deal Blog, with continuing updates on the changing world of Integration 2.0, with additional articles and commentary.  You can subscribe to it at:  www.beyondthedeal.net/blog/.

 
Share
tagged , , , , , , , , , , , , , , , , , , , , ,

The Changing M&A Landscape: Trends and Countertrends

30 Sep, 2011 in Beyond the Deal, Integrations, Mergers and Acquisitions, Post Merger Integrations by

Quote of the Month

“Even if you’re on the right track, you’ll get run over if you just sit there.”

Will Rogers

 

In this blog:

First, the world economy continues to churn and funding its tightening.  Are we headed into a downturn or is the broader truth that we are in the midst of major change and reconfiguration of economic realities?  We examine the changing M&A global landscape, looking into the dynamic trends and countertrends that shape the market and our opportunities.  Step back from the day to day and think about where we have come from and where we are going.

Second, there are companies that continue to surprise in being successful, even more successful than incumbent companies in their own field or across borders in very different countries. What is their “secret sauce”?  What is involved in coming up with your very own version of a “secret sauce’?

 

The Changing M&A Landscape: Trends and Countertrends

Let’s take a look at three trends shaping and reshaping the M&A world.

Volatile Markets & Tighter Financing Leading to M&A Slowdown?

First, the most obvious dynamic is that the uncertainties and volatility of August continued into September due to global debt and unrest, and are all leading to a tightening of funds available.  With a tightening of financial markets, a good part of sizable M&A’s cannot be achieved since many are tied to debt financing.  This is causing PwC and others to predict an M&A slowdown for the balance of the year.  The overall economic slowdown is expected to put a downward pressure on valuations of companies in all sectors for the near term.

Enormous Cash Reserves Drive Selective M&A Activity

However, if we look at this from another perspective, which is that the world is in a dynamic change process, more than solely an economic downturn, we see other forces in play that will continue to redo the whole landscape of M&A’s and global economies over the rest of this decade.

The bottom line is that there is an enormous amount of cash available. This is both true on individual companies balance sheets, and is also the case for entire countries.

On the company and sector level, IT is a dominant sector in which companies such as Intel, Marvell, Broadcom, Microsoft and Apple amongst others, are rich in cash and are, or may be considering significant acquisitions.  Their cash reserves, coupled with cheaper acquisition prices for more financially pressed firms, will lead to a sizable amount of IT acquisition over the next several years.

Cross-Border M&A’s Increasing – West to East & East to West

A second long-term dynamic is the continuing growth of cross-border acquisitions.  On the one hand, some leading product suppliers in the West have recognized that to grow they need to establish a presence in developing countries, something that will be, in good part, accomplished through acquisitions.

But an even more powerful part of the cross-border dynamic is coming from Asian companies who are moving into European as well as North and South American markets through acquisitions.  These acquisitions are driven both on the company level as in the case of India’s Tata, and, in the case of China, by both individual companies and a by M&A’s being named a top national governmental policy priority.

China: The Largest Driver

According to Ross James, manufacturing M&A partner with Deloitte, “Industrial intellectual property, manufacturing know-how and strong brand names will continue to be the main incentives for Chinese manufacturing companies pursuing overseas acquisitions.”  These companies are also cash rich and have sufficient capacity to finance M&A’s.  James continues to say that, “If the current trend continues, 2011 to 2016 will see greater Chinese investment into the EU, with deals exceeding $1 billion becoming commonplace.  Significant domestic demand fueled by China’s burgeoning middle class, will play a key role in acquisition activity.”

The Chinese government is a major player in this dynamic.  In its 12th five-year plan, China’s Central Committee set out four major tasks for the future, with accelerating M&A activity being one of them.  This is something that Chinese “state capitalism” brings about. Just imagine the reaction to a push for that kind of industrial policy decision in the US or other Western countries.

While nationalism has some role here, there is much more to this decision by China. Duncan Innes-Ker of the Economist Intelligence Unit and based in Beijing says, “China would seek to diversify its investments after low returns from its US currency holdings and concerns about the greenback’s future.  China is likely to be increasing its appetite for risk, with mergers and acquisitions set to rise.”

Tata: A Template for Cross Border Acquisition and Integration?

India-based Tata Group, whose motto is “Leadership with trust”, provides an exciting glimpse of the future in the present.   Tata saw it could not confine itself to India if it was to become the big and international concern it believed it needed to be if it was to thrive in its chosen businesses.  Tata began acquiring an array of business in the UK, starting with Tetley Tea in 2000 that brought Tata immediately into being a global entity.  Tata followed by acquiring Jaguar/Land Rover (JLR) where it gained valuable off road technology that it brought back to its auto operations in India.  Much to the surprise of many, it has since turned JLR into a profitable venture.  Tata then went onto the acquisition of Corus’s steelworks, a transaction that brought Tata into the specialty steel business, something that would have been hard to build on its own.  All of this put together has made Tata the largest manufacturer in the UK, with a payroll of 45,000 and is positioning Tata as possibly the UK’s leading edge company in attitude and practice.

What is Tata’s “secret sauce”?  Tata was a challenger conglomerate from a formerly peripheral area that went international in order to access resources.  According to Andrea Goldstein, Senior Economist at the Organization for Economic Co-operation and Development (OECD) and the Center for the Advanced Study of India, “Tata was driven by multiple factors, including the need to access new markets, the opportunity to integrate the value chain (e.g., in steel), and the quest for brand control (e.g., in tea, autos, etc.).  This strategy proved feasible because Tata possesses strong leadership combined with vision; can exploit the possibility of leveraging increasingly developed financial markets in India, a large domestic market, and global liquidity; and reacted fast to the opening of specific opportunities at given times.”

Will One Size Fit All?

Is the Tata way the only way for all challengers?  No firm, or even a nationally backed venture, can copycat the core capabilities that were uniquely cultivated and have come together to enable Tata over time to to be the broadly effective enterprise it is in both India and in its extensions across the globe.  It turns out that its secret sauce is really not that secret: but one that involves strong values, vision, and leadership, coupled with risk taking, healthy discipline and excellent execution skills. Secret sauce or not, this is its competitive advantage and it works.

The reality is that any company, conglomerate or even national initiative can only succeed over time if it builds up a similar cluster of capabilities.  Leveraging financial strength is the usual focus. It is a necessary ingredient in the sauce but it is not sufficient.  All of these other capabilities need to be in play as well.  The look and feel of each of these initiatives will differ from one to the next, but the underlying sets of capabilities will have much in common.

To 2016 and Back

Where will these initiatives come from?  Entities from China, India and Brazil are the most frequently mentioned emerging players, but don’t be surprised if other challengers such as Turkey or countries in Eastern Europe and beyond come onto the stage as well.  And, with enough competitive stimulus, the next generation of recast existing firms (e.g.. possibly Ford and others) and new firms in North America and Europe will join into the mix.

With this as our starting point, let’s take a step back and note how the world of 2011 differs from the world of 2006, just five years ago.  From there, go forward to visualize the world of 2016 and detect in what critical and key ways it will differ as well. Going back and forth will help identify the dynamic trends that are reshaping our markets, both for now and into the future. An awareness of these dynamic trends gives a handle on how to reconsider how companies can move through all the pre-deal and post-deal integration phases to set themselves up for achieving unprecedented gains.

 

Create Your Own “Secret Sauce”

What will drive success in acquisitions and integrations going into the future is the kind of leadership that shapes and guides an operating context.  It sets the direction and tone for the organization through its work in shaping the vision, values and strategies for the new entity that emerges from the integration.  It is the leadership’s role to see that the organization is developing the capability to create opportunities for acquisitions and other growth combinations and to take advantage of those that are brought to the organization.  To do this, the leader’s strategic vision has to be shared by everyone who is involved with the organization in its supporting or partnering network.   This type of leadership cannot be passively delegated or assumed to exist at other layers or areas of a company.  However, it can be cultivated and manifested at all levels of the organization.  This is of great importance because every level has to take a leadership role in its area of responsibility.

If the leadership does not keep the organization nimble and responsive as it goes through acquisitions and integrations, the organization is likely to grow in size more than in capability, value and profitability.  It is important to note that in some cases, even companies with the best integration capabilities have made only marginal gains in financial and general performance when growth synergies have not been fully pursued.  The challenge that must be overcome is to integrate acquisitions in a manner that will continually renew the organization and its capability to perform and grow in a fast-changing business context.

For example, a new CEO set a stretch goal of doubling the company’s revenue in a three-year period.  To achieve this goal, business unit leaders had to reconsider everything they knew. Standard operating procedures would no longer work.  The leaders had to consider options that they had never seriously considered, including an aggressive acquisition model.  They had to see new possibilities, learn new skills, work with people inside and outside the organization in new ways, and achieve tangible success.  At the corporate level an infrastructure was created to engage with them to develop the acquisition capabilities to accomplish that audacious goal.  In this way, an acquisition/integration approach became an outgrowth of the overall strategy and, at the same time, created the opportunity for the organization to renew itself.

Share
tagged , , , , , , , , , , , , , , , , , , , ,

M&A’s Continue Unabated During Economic Roller Coaster

31 Aug, 2011 in Beyond the Deal, Human Capital Integration, Integration 2.0, Integrations, Mergers and Acquisitions, Post Merger Integrations, Springboards for a Quantum Leap Integration, stakeholders by

Quote of the Month

“HP has suffered through a string of 3 really lousy CEOs.  Apotheker is just the latest. All had comparable failings.

  • They were wedded to their personal histories (what worked for them before) and old-fashioned, out-of-date business ideas.
  • Where Steve Jobs led Apple on a course to deliver what people wanted in the future, Fiorina, Hurd and now Apotheker drove HP with their eyes firmly in the rear view mirror, ignoring major trends changing markets.
  • Where Steve Jobs built a company capitalizing on market shifts to introduce new products that grew sales and value, their lust to buy old businesses and enter profit-sucking gladiator wars with me-too products killed value.”

Adam Hartung, Forbes Contributor, August 25, 2011    

In the August Newsletter:

August has been a month filled with upheaval.  This is the month that world economies took front row seats on a major economic roller coaster ride that had many of the signs of heading into a next global recession.  In the midst of all of this volatility the M&A world had its greatest volume “Merger Monday” for acquisitions of all of 2011, to the surprise of many.  Adding a further dimension to this extraordinary mix, HP and Bank of America announced massive corporate divestitures.  Their sell offs are the outcome of ill conceived acquisitions and ineffective integrations that took place years earlier, in 2008 and 2004.  At root, all of this underscores the reality that acquisition strategy and integrations are not a sprint, but instead are a marathon: a whole process, not a loosely joined series of event…This and more in the August Newsletter!

World Economies on Roller Coaster Ride, but M&A’s Continue Unabated

Acquisitions and Divestitures: B of A Sells Off Credit Cards and HP Sheds Computer Business  

Google Chairman Communicates to UK Stakeholders  

Aligning the Values of Legacy Companies Into a Single Company

World Economy on Roller Coaster Ride but M&A’s  Continue Unabated

What an August…But keep your seat belts fastened…There’s more to come!

Turmoil in the stock market, the first ever downgrade of the United States credit rating and a debt crisis in Europe … The market is down 600 plus points one day and up 400 points the next, and on and on.  All of this wreaks havoc on valuations as well as creating a thoroughly unsettling environment.

In a normal world these stunning conditions would suck out all of the energy for undertaking acquisitions of almost any size.  That is what took place starting in 2007 and continued through 2009, where only the acquisitions that took place were characterized as bottom feeding. While there might be caution and trepidation among some this time around, for others this massive market volatility was brushed aside as a cluster $18 billion dollars of acquisitions were announced on Merger Monday, August 15.

With its vast hoard of cash on hand, Google is acquiring buying Motorola Mobility for $12.5 billion.  This is Google’s largest acquisition by far, one in which concern over difficult markets and potential anti-trust issues are outweighed by what could be considered a remarkable need and strategic opportunity, both defensively and offensively.  (Note that other technology companies are also sitting on enormous stores of cash.  Apple has about $76 billion in cash and Microsoft has $53 billion on hand.  They, and others, may well follow and join the acquisition fray.)

At the same time, major non-technology acquisitions came into play as well.  Big moves included Transocean Ltd. paying $2.2 billion in cash for Aker Drilling ASA, the $3 billion Time Warner Cable Inc. offering for Insight Communications, and in the agricultural sector, Cargill buying Provini, an animal feed producer, held by Permira.ir for about $2 billion.  But that was hardly the end of the acquisition rush.  On August 24, Express Scripts Inc and Medco Health Solutions announced their $29 billion merger.

As Scott A. Barshay, a corporate partner of the Cravath, Swaine & Moore law firm, aptly put it, ”Even intense market volatility won’t get in the way of strategic deals …Well-capitalized companies are focused on the years ahead, not the last week of trading.”

So, what is going on here?  Strategic opportunities are trumping market conditions.  Regardless, it is well worth inquiring as to whether any of these acquisitions are being irrationally prompted by bloated balance sheets, resulting in large scale but questionable and risky deals that are not thoroughly thought through.  Many of these acquisitions are not simple bolt-ons to existing organizations, but to make the most sense, will require a recasting of the acquirer as well.  We shall soon enough see how capable these firms are to go “beyond the deal”, with a well grounded and comprehensive integration effort.

As we discussed in the July Newsletter, there is a lot more involved in these major acquisitions than “getting the trains to run again.”  The real promise of these major acquisitions lay in leveraging the full range of assets to create unprecedented value.  Time will tell how able these firms are at realizing that promise or if they are heading into hazardous and unsupported territory.

Acquisitions and Divestitures: B of A Sells Off Credit Card Unit, HP To Shed Its PC Business

The divestitures by Bank of American and HP, also announced in August, give a cautionary reminder of how costly myopic acquisition hopes and flawed strategy can be.  In these two cases poor strategic thinking undermined these transactions from the moment they were completed.

Bank of America is shedding its $8.8 billion Canadian credit card venture to the TD Banking Group to compensate for the financial instability that arose from the
$4.1 billion rescue acquisition of sub-prime mortgagor, Countywide Financial in 2008.  B of A is putting its remaining European card portfolio on the block, as well as selling off half its interests in the China Construction Bank ($8.3 billion), for the same reason.   B of A is struggling to regain its footing as it reels from losses in the troubled sub-prime mortgage division.  What looked like a bargain acquisition has turned out to be the exact opposite.  It has resulted in enormous collateral financial losses, a vast amount of distraction and extensive opportunity costs that amount to a very high price to ultimately pay for an “attractive price”.

HP’s decision to selling off its personal computer business is a case of controversial and flawed understanding of what was needed to grow the company, in this case a $25 billion mistake.

HP CEO Leo Apotheker is offloading a unit “the founders never liked anyway.

David Packard only reluctantly agreed to focus on PCs in the early 1990′s. And Walter Hewlett, a board member and son of co-founder Bill Hewlett, undertook an unsuccessful campaign to block the 2002 acquisition of Compaq Computer, a deal that vaulted Hewlett-Packard to the top of the PC industry”, but fundamentally misdirected the energies of the company.

“From Hewlett-Packard’s beginnings in 1939, the company’s founders set out to invent one-of-a-kind products and tools for engineers. They never intended to become the biggest provider of a commodity product,” said Michael Cusumano, a professor at the Massachusetts Institute of Technology‘s Sloan School of Management.  As PC profits deteriorate as competition from Asia producers and other platforms emerge (tablets, etc.), Apotheker is seeking to return to that philosophy.

“Their DNA never included being a commodity consumer products manufacturer, which is what the PC has become,” Cusumano said. “It’s certainly not where the action and innovation is in the business these days. They can reinvent themselves. They may have the capability to do it.”

Some have said that HP would have been better off selling its computer business to Compaq in 2001 and returning to its core business, instead of acquiring Compaq for $25 billion.  Now it is selling off that business while it is simultaneously acquiring British software firm Autonomy for $11.6 billion.  Is HP making a new strategic blunder?  There are those who are saying that is exactly what is happening.

Both of these divestitures make the case that the whole strategic acquisition and integration process needs to be under continuing review to insure they are in accord with principles of soundness and alignment.  Mistakes and misjudgments are just going to happen in this imperfect world.  But, a sound acquisition/integration process tends to improve the quality of decision-making in the first place, significantly mitigates the prospects for risk and enhances the ability to make necessary course corrections as the company moves forward.

 

Google Chairman Communicates to Its UK Stakeholders

Shortly after Google agreed to acquire Motorola Mobility for $12.6 billion, Google Chairman Eric Schmidt gave a keynote speech at the Edinburgh TV festival on August 26 on how Google will launch its Internet TV in Britain within six months.

This is an excellent example of how a company manages the execution of its integration communication strategy to key stakeholders, in this instance British TV executives.  The Motorola Mobility acquisition gives Google another chance to build a successful Internet TV platform.  Google’s previous effort in this area failed and Google is now gearing up for a second and more auspicious launch.

For Google, integrating Motorola Mobility is not purely an internal integration matter.  Effective integration is comprehensive integration.  It entails continuously communicating the value of the new Google to its critical external stakeholders.  This involves engaging with stakeholders to support its move or at least to neutralize their opposition.  Google clearly signaled the significance of its intent by committing its most senior leadership to carry out this outreach.  It chose the Edinburgh venue to deliver an unprecedented keynote lecture in a highly prized public setting.

Schmidt’s address is even more newsworthy in that he is the first person from outside the TV industry to make the keynote lecture in the thirty five year history of the event.  This is not an isolated or chance occurrence, but part of executing a broad ranged stakeholder communication strategy.  Expect to see many more elements of its communication strategy as Google continues to systematically go out to its broad range of global stakeholders.         

AligningtheValuesofLegacyCompaniesAligning the Values of Legacy Companies into a Single Company

How does an acquiring company operate in this volatile landscape?  Perhaps the most essential element for that is for decision-makers and all the other actors who are involved to reground themselves in the acquirer’s core organizational values.

An emerging company’s underlying values will either support or disrupt your effectiveness in achieving your goals.  Working in a single company where the leadership acts on one set of values, the middle management acts on the basis on another, and the line workers act on the basis of a third set of values is difficult enough.  This dissonance is compounded during a large scale acquisition where multiple value sets coexist after two major, complex companies combine.  If you don’t manage this situation well, these conflicting sets of values will undermine the best intentioned and best financed acquisition.  The extent to which the core values align and are commonly held in an emerging company will play a key role in determining whether that company will achieve the necessary level of employee engagement and commitment.  Shared values create a trusting environment where knowledge is not seen as a source of personal power, but rather as a common resource.

Managers and leaders often overlook and under-appreciate the role of values in knowledge generation and transfer, yet it is not difficult to identify the values that drive individual and organizational behavior.  Those values support, or disrupt, the company as it moves forward toward quantum leap gains.

In our rapidly changing world, command-and-control leadership is losing its ability to mobilize for rapid response to the wide variety of complex demands that a company faces.  Values-based organizational networks, coupled with a set of compatible partners, are more able to provide viable responses to customers.  This difference is especially important in a world where diverse global customers have come to expect high performance regardless of their location, their needs and when they require a response.

This does not mean that companies can take a shortcut by establishing a hard-an-fast set of rigid, uniform values.  What may be considered to be a core value in one company may not be valued in the same way in another company, or even a different part of the same company that is operating in another culture or another part of the world.  The goal of alignment is to create the capability to leverage the diversity of positive values of the two legacy companies in your newly emerging company, not to drive everyone to march in a lockstep fashion or to have cookie-cutter sameness.  Diversity has to be seen as an opportunity to get beyond a too-limited viewpoint, not something to be squelched for efficiency’s sake.  What is needed is to find a core group of values that are among the overlapping values between one legacy company and the other.  If this core group includes such values as integrity, respect and responsiveness, the other particular values can be seen as complementary.

The key is to have a minimum set of commonly held values that will serve as the foundation for collaboration and interdependence across the new organization.  Beyond the critical few core values that must be held in common, all other values can be held in the full diversity that is needed to operate in a wide base of cultures and with very different arrays of customers.

A resonant and articulated set of values serves as a gyroscope for a company to make its strategic growth decisions.  A company that acts in alignment with its own core values will make decisions that reflect those values and is less likely to make to topical and opportunistic acquisitions that are ultimately detrimental to its interests.

Subscribe to the Beyond the Deal Blog

Link to the Beyond the Deal Blog, with continuing updates on the changing world of Integration 2.0, with additional articles and commentary.  You can subscribe to it at:  www.beyondthedeal.net/blog/.


Using Social Media to Speed Up and Improve Performance and Outcomes of Your Integration Processes 

Is social media a fad or is it a viable set of tools for advantage in an integration?  Social media is now mature enough to be a major accelerator of speed and quality in integration outcomes.  Click on this link to the Social Media Strategy to Transform Integrations PowerPoint presentation to see how you can start developing this capability in your organization now.  See how you can develop and implement an effective social media strategy in your firm.  Contact Jay Chatzkel or Euan Semple to make arrangements and for further information.
Share
tagged , , , , , , , , , , , , , , , , , , , ,
Pages (4): 1 2 3 4 Next »