It should be time to sit back and relax a bit. The merger is done. All the long days and nights of due diligence are behind you, and closing day has come and gone. The integration planning team has completed its work. Management is busy putting the new company together. Everything is on track.
Trouble is, Wall Street won't take your word for it. Come to think of it, your board and management team may not, either.
It started with one analyst asking about a particular issue that, in reality, was a nonissue. However, others soon were drilling down into the same area. While the integration is going well, there's no easy way to prove it. Your executives are playing defense almost every day, and some -- including some you work with -- predict your merger will go down in flames.
"Nightmare" is a good word to describe that scenario. Unfortunately, it's a nightmare that many, many senior management teams have shared. At its heart, this may seem to be an investor-relations matter, but leaving it to the IR department to manage on a case-by-case basis is a huge mistake. Once negative perceptions have been formed about a transaction, they can badly damage even a deal that's going well.
Determining just how to measure merger success is a core issue that should be part of the earliest post-merger integration planning. There are three major challenges:
1) Separating merger benefits from other nonintegration business and market changes;
2) Demonstrating that the merging companies are doing what they said they would do (and if not, are deviating from the plan in a controlled fashion); and
3) Quantifying the bottom-line impact of the merger integration.
A good merger communications program enables management to spell out from the beginning just what will constitute success as the integration rolls forward and to lay out the metrics used to measure the company's progress. Using these metrics, management can announce the achievement of interim goals, demonstrating to investors that the merger is indeed on track. If it isn't, executives at least will be armed with the data to explain why, and to say precisely what the company intends to do about it.
The process is relatively simple, once the need is identified. There is a natural tendency to hand off integration plans to line managers and simply measure them against bottom-line performance. While that sounds appealing and "empowering," it is fraught with difficulties when the changes are difficult to find or see. Instead, it is far better to create very specific, granular, separately trackable initiatives during integration planning and use them for post-close measurement.
For example, during the planning stage, avoid high-level, difficult-to-measure objectives, such as "consolidate vendors to capture savings." Instead, drill down deeper and provide specific detail, such as:
"The company is aiming to combine seven premerger suppliers into two vendors with contractual ties. This will result in our ability to negotiate a 4% discount because of the higher volume each will have. We can also save 2% on shipping efficiencies by consolidating orders. When applied to our total volume, we will save $220 million."
Now that the specific components of these initiatives can be easily tracked, we can ask: Did we consolidate as planned? Did we negotiate the discount we planned? Did we capture the expected shipping efficiencies? Has our volume changed?
Obviously, developing such detailed initiatives must be done during the planning stages if they are to be tracked and evaluated later; it is nearly impossible to create this level of granularity after the fact.
Use simple, easily verified metrics
Even in the most complex mergers, there are only a few places to capture financial benefits from integration. Quantitative benefits almost always come from reductions in head count; purchased goods and services; asset reductions; or increased revenue. These categories are easy to observe and measure at the initiative level.
Qualitative benefits are also desirable and should be tracked as well. Examples include best practice sharing and improved personnel movements and advancements. However, beware of benefits that are supposed to be quantitative that cannot be expressed in the categories above. If "we will be much more efficient in doing task A" has not yet been translated into head count, assets or purchases, there may be more validation work to do.
The advantages to tracking against these simple categories are substantial. Discussing progress with the Street can now be specific and unambiguous, while not running afoul of rules and practices on giving profit and loss guidance to investors.
Establish a baseline for measurement
To accomplish either of the two steps noted above -- initiative-level tracking and simple metrics -- it is critical to pick a starting point from which all progress will be measured. This avoids arguments over what has and has not occurred. Here are two examples of the confusion that the lack of a clear starting point can cause:
First, let's say you've got 20 positions approved, with two being open positions. If, as a result of the merger, you don't fill the open positions and decide to lay off four more people, did you save four jobs or six? Answer: It depends where you started counting. Quarter to year-ago-quarter comparisons require one type of answer, whereas reconciliation to the merger business case would be different.
Second case: Say you're planning a new IT initiative next year that's in your approved budget. Because your merger partner has those capabilities, you no longer have to implement it. You've avoided costs, but you haven't generated any changes in cash. What is the bottom line here?
The key is to choose a reference point and stick with it. For external audiences, a fixed point just before deal close or around the time of the announcement is ideal.
We generally use the process described above to create a communications plan that:
Articulates very specific initiatives and progress. For example, "We have 780 integration initiatives of which 520 are fully implemented, 110 are in progress, and 150 are behind schedule or under review for modification."
Communicates easily understood numbers against a preagreed baseline. Examples: "Of the 4,367 people reductions planned, 2,367 have actually exited the organization. We have sold, disposed or written off $28 million in assets against a plan of $367 million total and are ahead of year-to-date plan of $23 million."
A well-designed merger communications program will not only help investors feel more comfortable with any transaction, but it will help your management team and board rest easier at night as well. As important, it will make employee communications more tangible and easier to understand. The alternative -- waiting until a crisis arises to put communications front and center -- represents an unacceptable risk. - Gerald Adolph
Gerald Adolph is a senior vice president at Booz Allen Hamilton Inc. and head of the firm's restructuring & integration group.
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Telling your story to the street |
| • When discussing your transaction, avoid platitudes like "we'll be more efficient" and "we'll learn from each other." Instead, link these ideas to tangible outcomes. |
| • When communicating tangible benefits, choose categories--head count, purchase, assets, revenue--that are simple, verifiable, clear and understandable. |
| • Trust your internal sources, but verify everything before taking it public. Nothing destroys credibility as quickly as the "oops" statement. |
| • Resist the urge to sandbag. Wall Street is looking for precision. Consistently beating synergy targets by a wide margin--unless there's a good reason for it--can erode your credibility. |
| • Understand what analysts want to know. Your better-than-anticipated cost reductions may be exciting to you, but if the market wants something else --growth, customer stability, etc.--your communications will be off the mark. |
| • Communicate for both the short term and the long term. Analysts tend to focus on cost savings immediately after the deal announcement, but over time they become more interested in growth. Be prepared. |
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