After The Merger

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T H E M c K I N S E Y Q U A R T E R LY 20 0 0 N U M B E R 4

This Quarter

After the merger Last year broke records in mergers and acquisitions. More than 28,000

deals, worth a total of over $3.2 trillion, were struck—an increase in value of one-third over the previous year’s deals and nearly six times the value of deals completed in 1994. The sheer number suggests a variety of purposes behind the agreements. Many of today’s most successful companies, including Cisco Systems, use mergers very effectively to improve their skills. Others, such as Swiss Bank Corporation and Union Bank of Switzerland, reenergize themselves by merging and making follow-on acquisitions. Deals between chemical and pharmaceutical companies are fundamentally altering the shape of those industries, while mergers such as those between America Online and Time Warner and between Citicorp and Travelers Group create whole new industries. Despite all this activity, many academics, analysts, regulators, and consultants challenge the value of mergers. At McKinsey we believe that mergers do create value, but only if the right deal is struck and integration is tailored to the situation and managed well. If a deal has been misconceived, no degree of brilliant postmerger integration will clean up the mess. And even if a deal has been well thought out, the participants can stumble. Many key operational decisions must be made in the months following an announcement, but it is easy to get caught up in the excitement and demands of deal making and to fail to think clearly about what comes after. Chief executive officers are under pressure from shareholders, boards, and often the investment community to justify their strategies. They must also manage regulators whose say-so can break a whole deal, as the recent collapse of the WorldCom-Sprint merger and of the international three-way merger of Canada’s Alcan Aluminium, Switzerland’s Algroup, and France’s Pechiney reminded us. Even in the best of transitions, mistakes are made, important issues are overlooked, and alternatives are left unconsidered. The three articles that make up our feature section are devoted, in different ways, to those things that mergers too often miss.

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“The people problem in mergers” recognizes that while plenty of attention is paid to the legal and financial side of deals, they stand or fall on the strength of their human side. When, as today, a company’s highest return ratio is the “return on talent,” the company must ensure that it still has the people it wants when the smoke clears. Authors Ira Kay and Mike Shelton explain how a well-chosen and -managed employee-selection process, including frequent and open communication, can allay a staff’s anxiety about the future. Their analysis is confirmed by an interview with CEO Jon Boscia, who discusses how his company, Lincoln Life Insurance, managed people issues when it bought the life insurance business of CIGNA. While planners might think too little about people, they certainly do think about synergies, which are the obvious source of near-term value creation in mergers and fundamental to the value of a deal. Although much is made of cost reduction, increased purchasing power, and a lower cost of capital, few notice the enormous potential of pricing. This is odd, since even small pricing changes can have a dramatic effect on the bottom line. The authors of “The hidden value in postmerger pricing” ponder the neglect of the subject and then go on to explain how a combined company can optimize its pricing. Finally, “When to think alliance” reminds us that mergers are not the only way to obtain synergies, know-how, and access to new markets. Long considered a kind of stepsister to full-blown M&A, alliances have become more prevalent as a result of the effect of the Internet on interaction costs and the demands it creates for speed. But, although there has been much research into the value of M&A, there has been little study of alliances. The authors of this article draw on a study of the market’s reaction to more than 2,000 alliances and reach a number of conclusions about when alliances are to be avoided or embraced. The market does notice when alliances happen, and it cares—often, quite a lot. The authors advise management to consider alliances when it works in or with fast-moving industries, when it ventures into uncharted terrain, and where M&A is for whatever reason not feasible. But about joint ventures, a more committed form of alliance, the market tends to be skeptical. The authors stress the importance of considering the complete range of options in an unbiased fashion and keeping all stakeholders fully informed. Which might be to say that alliances are not so different from mergers and acquisitions after all.

David Fubini Director, Boston office

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