MERGERS AND ACQUISITIONS: A DANGEROUS GAME

Global Finance, May 2007 by Hawser, Anita

EUROPE

With the pace of corporate M&A showing no signs of abating, a study of more than 200 European deals In the past two years Indicates that few mergers-just 9%, In fact-are deemed to be "completely successful." According to Thomson Financial, last year M&A deals in Europe topped $1.35 trillion, and this trend shows no signs of abating, with a number of deals being negotiated between companies in the banking and financial services space as well as private equity firms raising the competitive stakes in cross-border M&A.

The "ballooning" M&A trend is driven by companies' appetite for system consolidation and financial economies of scale. Yet, according to consulting firm Hay Group, most companies are not extracting maximum value from M&A deals because they are failing to measure "Intangible assets" such as the Impact on human capital, business culture and corporate governance.

Hay Group's report, entitled Dangerous Liaisons: Mergers and Acquisitions-The Integration Game, found that more than 90% of corporate mergers and acquisitions fell short of expectations because of companies' overemphasis on financial and systems due diligence.

Almost 60% of senior business leaders with M&A experience conceded that their "over-prioritizing" of systems integration resulted in insufficient focus on "intangible assets" such as cultural integration, which increased the risk of failure. Most executives (70%) blamed this on difficulties in obtaining sufficient "intelligence" on corporate culture and the human capital of target M&A companies.

However, Hay Group concluded that while companies paid "lip service" to auditing and integrating intangible assets, as many as 70% failed to prioritize these assets, and only 27% analyzed the "cultural compatibility" of firms to be merged, with just 22% conducting a human capital audit.

"The secret of successful merger strategy lies in gaining an accurate picture of the target company's cultural, human and structural assets," says David Deraln, European M&A director, Hay Group. "Falling to take these factors into account when planning and implementing a merger will fail to deliver against [companies'] objectives." -Anita Hawser