Merger & Acquisition Management Strategies Guided by Value

Merger and acquisition activity is poised for a turnaround, according to a May 2003 survey of chief financial officers at 150 large-scale US multinational companies by world-renowned accounting firm PricewaterhouseCoopers. Sixty-nine percent of those surveyed said they were preparing to do mergers and acquisitions in the next two years. Also, more companies in traditional industries have M&A intentions than do those in technology companies.

Almost two thirds (63 %) of CFOs indicated that M&A activity is an important route for pursuing growth, and its importance is particularly great for companies that are low-growing and comparatively small.

Based on the experience of these CFOs, the most common reasons why the expected benefits from previous deals were not fully realized include: overly optimistic revenue or cash flow forecasts (84%); difficulty fusing together different corporate cultures, business concepts and managerial styles (79%); excessive patience shown for attaining cost reduction and earnings goals (62%); poor integration of information and financial reporting systems (61%); and failure to standardize the M&A process and achieve a consensus on it among employees (56%).

Looking ahead to future M&A activity, most of the surveyed CFOs also believe that, in addition to the abovementioned factors, more attention will have to be paid to compliance with new legislation (such as the Sarbanes-Oxley Act in the US), and to standards for internal controls and corporate governance. These survey findings were more or less confirmed by other PwC research on Managing For Value (MFV)

This second research effort, completed in May of this year at the same time as the CFO survey, involved sending questionnaires to CFOs in 2500 prominent companies in 19 countries. The questionnaire concerned the effect of the trend towards MFV, which has been sweeping the world for the last year or two, on M&A, strategies and operations management. Respondents were first divided into two populations-high-performing companies which were practicing MFV made up the main sample for observation, while the other lower-performing companies served as the control sample-and were then subject to in-depth analysis and interviews. The results reveal that, over the five year period after companies adopt MFV, they generate shareholder returns (dividends plus share price gains) that are 9 percentage points higher than the market as a whole; and these companies share certain special characteristics: 1) a new perspective on M&A, where "big is beautiful" is replaced by a pursuit of "high-quality growth"; 2) focused strategies, with value drivers guiding the direction of employees' efforts; and 3) a new approach to risk featuring rapid responses to changes in market conditions and the legal environment. Each of these three characteristics is described below.

• High-quality growth-The relatively high-performing companies concentrate on seeking ‘high-quality growth' and not size for its own sake. This change in focus includes modifications in M&A strategy and the pattern of acquisitions. When the emphasis is on quality, the tendency is to do fewer large deals; it does not mean doing more small deals, however. Lagging performers, on the other hand, are still doggedly adjusting their tactics, attempting, for example, to use the design of their reward systems to improve post-deal results.
  
  So-called ‘high-quality growth' refers to growth that brings with it greater ‘economic profit', and economic profit in turn refers to the real profit that is left after the expansion in required capital costs is deducted from the increase in profit that comes from growth. The evidence at hand also indicated that only 29% of the high-performance companies had better-than-average revenue growth, and in terms of profit (net revenue), no more than 55% were better than average. However, about seven out of ten (69%) had superior growth in economic profit compared to their industry averages.

• Concentration on strategy-High-performance enterprises are good at using value drivers to guide the direction of employee effort. What is more, their emphasis is on strategy formation, as opposed to operational implementation. They refuse to take any aspect of their strategic thinking for granted. Rather, these companies probe deeply into all the strengths and weaknesses of their strategic decision-making, and would never casually rest their assumptions on so-called ‘common knowledge' for the sake of convenience.

• A new approach to risk-Better-performing businesses have a different approach to managing risk. Basically, they are very sensitive to changing trends in their external environments, and they adjust more quickly in response to market or regulatory changes, unlike poorer-performing businesses whose heads are buried in internal reports and control procedures. Better-performing enterprises are focused on their big external risks-how, for example, to avoid being overtaken by competitors, how to correct problems with their position in the value chain, and how to avoid losing important customers-and they tailor their behavior to hedge against each specific risk. Because this hedging is explicit, overall risk is spread more effectively, results are better and costs are lower.
  
  For businesses, M&A can be a swift and effective shortcut to growth. If not properly managed, however, this strategy has a very high failure rate. At a time when the global economy may be on the verge of a turnaround, I believe that Taiwan's businesses can seize the moment and apply value-guided thinking to manage their M&A strategies.