Marriages Made in Heaven?

When properly integrated, Mergers and acquisitions can create profitable growth.
Jan 01, 2001

In recent years, some of the industry's largest companies have said "I do" at the merger altar. Midsized pharma, small biotech, and genomics companies have also joined the mating frenzy. The mixed results of those unions have left shareholders, customers, and employees wondering-are such marriages made in heaven or in hell?

The consolidation trend has created a new breed of pharmaceutical superpowers: AstraZeneca, Aventis, Pfizer, Pharmacia, and the soon-to-be GlaxoSmithKline. Ten major competitors are now five. Is this a healthy evolutionary progression in which the fittest rule? Or is it little more than asset shuffling among global conglomerates? Skeptics worry that the new entities will strip existing assets to fuel short-term growth that covers an underlying frailty in their product discovery engines.

Conducted across 15 major economic sectors, new research probing merger and acquisition (M&A) integration holds valuable lessons for those engaged in, or planning for, consolidation. Best Practices studied 100 companies and conducted extensive interviews with a mix of pharma and nonpharma M&A integration managers at a select group of 20 companies. Taken together, the companies and managers involved in the study had handled approximately 1,000 M&A integrations. This article presents the insights and lessons learned from those experienced in integrating companies and business units. The research indicates that for pharmaceutical marriages to benefit shareholders, customers, and employees, merging parties must adopt an integration strategy that is far more challenging than what industry managers have faced in the past.

The step-by-step integration process of a mega-merger can take up to three years.
The Big LeagueThe stakes are high. Integration teams help create or destroy billions of dollars in market value, depending on how well they execute their assignments. Consequently, the payoffs are enormous for those companies that develop successful M&A management styles. For example, Cisco Systems, one of the most highly valued companies in the global economy, has acquired more than 55 companies since 1995. During that five-year period, Cisco's stock price grew more than 2,000 percent, its annual revenue increased more than 500 percent, and it revolutionized the global economy by helping build the Internet. M&As enabled Cisco to accomplish all that after going public just 15 years ago.

At the same time, statistics that underscore the risks of that type of growth populate M&A annals:

  • 75 percent of large mergers fail to create shareholder value greater than industry averages.
  • Productivity drops 50 percent following the announcement of a merger.
  • Leadership attrition soars to 47 percent within three years following a merger.
  • Employee satisfaction drops 14 percent following mergers.
  • 80 percent of employees feel senior management cares more about economics than about product quality or people.

The research shows that many corporate marriages that looked attractive during the engagement were not well crafted. Those combinations failed to create long-term value, often producing frustration for employees, customers, and shareholders.

"Shareholders will always remember it as the day we lost $16 billion of their money," observed one executive when an announced merger fell apart and wreaked havoc on both partners' market valuations.

Yet, despite the risks, companies continue to merge because the payoff of accelerated growth can be enormous. Indeed, the aggregrate cash-and-stock value of worldwide corporate combinations reached $3.4 trillion in 1999, and the cumulative tally for 2000 is expected to match or exceed that number.

Lessons LearnedBigger is not always better. The greater a company's size, resources, and employee population, the greater its complexity in managing people, product portfolios, R&D projects, facilities, territories, and technology. The insights of savvy M&A integration managers from other industries hold valuable lessons for the pharmaceutical sector. Four fundamentals seem particularly germane to the pharma industry and its integration managers:

  • M&A events must support an underlying business strategy to create added value.
  • M&A integration is best approached as a multiphase, structured process-not as a one-time project for which preparation is ad hoc.
  • Cultural integration is the most difficult dimension of events that bring tens of thousands of people together in new organizations.
  • M&A "synergy" tactics work best when targeting three related value-creating goals: cost reduction, operational integration, and accelerated growth.

Communicating the right message at the right time is essential to the integration process.
Stick to BusinessMergers and acquisitions must support the business strategy if they are to increase long-term shareholder value. On first reflection, that fundamental seems like a business truism-factual but obvious. But the study's veteran M&A managers report that many corporate mergers were either a defensive competitive maneuver or the result of pressure to consolidate.

The new Pfizer and Pharmacia-and others like them-were born in competitive tumult. They resulted from senior leadership teams taking quick, pre-emptive actions to acquire Warner-Lambert and Monsanto, respectively, while other competitors vied for the same prizes. The target companies carried the multibillion-dollar blockbuster products Lipitor (atorvastatin) and Celebrex (celecoxib), but they also came with business units that did not align with the strategies of the acquiring companies.

In such cases, companies must revise or reshape business strategies to fit the newly combined assets-or shed units to remain focused on the dominant business strategy. Both alignment actions can be tricky, because they must be executed against background pressure to reduce costs quickly while retaining key talent.

Outside the pharmaceutical sector, savvy deal makers have developed systematic criteria to target acquisitions that will drive product growth and generate profits in harmony with their strategic objectives. For example, Cisco methodically evaluates prospective partners to ensure that the combined entity will generate revenues greater than the sum of its parts. In the technology sector at large, where M&As are a frequent growth-driving tactic, companies such as Nortel Networks, Cisco, Lucent Technologies, and Intel employ performance scorecards to help evaluate how potential target companies fit with their business strategies. They seek partnerships in which there will be alignment between the two organizations in multiple areas:

Short-term growth. Shareholders must be able to see the immediate benefits of a partnership.

Long-term growth. There must be long-run victories for shareholders, employees, customers, and business partners.

Shared vision. The acquired company's vision of the industry and its role therein must be consistent with the acquiring company's corporate vision.

Geographic proximity. There must be geographic proximity between the companies to avoid major communication obstacles and managerial confusion.

Quality of people. Bench strength ensures continued or accelerated growth in the acquired businesses.

Survey respondents rated "interviewing target employees" as the top activity critical to cultural integration.
Quality of products. The portfolio should offer high-quality growth prospects that can be extended throughout the existing distribution system.

Quality of intellectual property. Strong technology, patents, trademarks, service marks, and know-how underpin the premiums paid for acquisitions. It's imperative to evaluate those intangibles.

Markets and market share. New or complementary markets help extend companies and their products.

Internal performance. The degree of customer and employee satisfaction, process efficiency, and other operational factors are critical commentaries about integration challenges.

Talent retention and flight risk. If cultures clash or 100 percent of stock options vest-making the acquired company's managers millionaires-many assets may walk out the door on closing.

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