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 / Summer 2009 / Issue 55(originally published by Booz & Company)


Making the Most of M&A

Mergers and acquisitions are becoming more critical — and more perilous — than ever. You can build your capabilities, even in the midst of turmoil.

The credit collapse and economic crisis of 2008–09 may have reduced the number of merger and acquisition deals in the short run, but it has increased the importance of M&A capabilities going forward. Industries are consolidating and restructuring with increasing speed — sometimes by choice, and sometimes by government fiat. Companies with available cash are pursuing an increasing array of acquisition opportunities presented to them as the crisis unfolds. Just in the pharmaceutical industry, in the first three months of 2009 alone, Roche bid US$40 billion for Genentech, Pfizer agreed to buy Wyeth for $68 billion, and Merck said it would acquire Schering-Plough for $41 billion.

At the same time, the pressure to avoid failure, in deal making and execution, has never been so high. Years ago, a company might have had more time to fine-tune the details, or a chance to recover if its M&A initiatives went sour. Today, the margin for error is much reduced. Capital is more expensive, the time granted by investors to produce results is shorter, and there is less slack in the balance sheet to recover from missteps. If the postmerger integration falters, then analysts grow skeptical, shareholders look for the exits, employees become restless, regulators and prosecutors get curious, and competitors pounce.

The Greek historian Herodotus could have been talking about M&A when he said, “Great deeds are usually wrought at great risks.” But too many companies are unprepared for dealing with the complexities of M&A risk. World-class capabilities are not built overnight; they are developed and refined over several years and multiple transactions.

Moreover, many companies diminish their effectiveness by managing M&A as a linear process. They treat each stage of a deal as if they were handing off the baton in a relay race, switching from the boardroom team, to the negotiating team, to the integration planning program leaders, to line management. This approach lengthens the time line of the acquisition, exposes the newly merged company to the impatience of the markets, and makes it harder to resolve issues early — so they surface later, causing additional delays and difficulties. The alternative is to pursue the stages of M&A in parallel (with substantial overlap and continuous referencing back and forth), managed by a single large team whose members communicate easily and regularly with one another and with the rest of the organization. This type of process places great demands on resources, time, and staff. But the results are worth the added effort. To understand this approach, consider how the process works for more experienced M&A leaders during the four basic stages of any merger or acquisition.

Stage 1: An Enhanced Pre-deal Business Case

An effective M&A process begins before any deal is considered — with senior management setting out a road map for future growth. This road map is not only a traditional long-term strategic plan, but rather a detailed set of proposed milestones toward the strategic goals of the company integrating mergers and acquisitions, organic growth investments, and alliances. The road map provides a foundation for understanding the kinds of deals that a company should pursue, and establishes a “sanity check” to make sure there is a compelling business case for all proposed deals.

With that road map in hand, the chief financial officer and M&A team can make an objective assessment of a deal’s prospects. In today’s environment of skeptical stakeholders, the traditional narrow business case — a financial snapshot of a deal’s attractiveness, including a broad description of long-term benefits and little discussion of potential execution problems — is no longer acceptable. Instead, a thorough analysis must show whether the combined company can realize the full value of the transaction. This might mean answering questions such as:

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  1. Gerald Adolph and Justin Pettit, with Michael Sisk, Merge Ahead: Mastering the Five Enduring Trends of Artful M&A (McGraw-Hill, 2009): Context, business cases, and practical advice for the growth strategist.
  2. Irmgard Heinz, Jens Niebuhr, and Justin Pettit, “Six Rules for the New CFO,” s+b, Winter 2008: How CFOs can be more effective merger strategists, synergy managers, and business integrators.
  3. Robert Hertzberg and Ilona Steffen, editors, The CFO as Deal Maker: Thought Leaders on M&A Success (strategy+business Books, 2008): In-depth interviews with 15 leading chief financial officers on successful M&A. Source of several quotes in this article.
  4. For more business thought leadership, sign up for s+b’s RSS feed.
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