While much attention has been focused on the Internet's role in e-commerce transactions among external parties, Web technology has been quietly having a revolutionary effect on the internal communications processes of large corporations. Using Internet technology, these companies are creating standard platforms to collect and process massive amounts of data and share information among far-flung locations, in turn helping senior executives and managers to make better, faster strategic and operational decisions. The Internet's capacity to do this makes it ideal for helping change the way complex mergers are implemented.
As we saw in working with the former British Petroleum Company PLC in its union with the Amoco Corporation to create BP Amoco PLC (since renamed BP), relatively simple and inexpensive Internet-based technology — what we call e-merger — can jump-start a meticulously detailed post-merger integration planning process well before closing. This acceleration — consider it pre-merger integration — should go a long way toward realizing the merger's full value. E-merger has particular utility in mergers of large multinational businesses in which information is highly fragmented by location, accounting definitions vary, and other inconsistencies exist.
The Costs of Delay
If there's one subject that has rivaled the development of the Internet in the world's business pages over the past decade, it's the extraordinary pace of corporate merger-and-acquisition activity in virtually every industry. Whether in financial services, manufacturing, or telecommunications, mergers are seen as a shortcut to entering new markets, acquiring vital new capabilities, and solving problems of excess capacity.
Yet, despite more merging and consolidating now than at any other point in history, around half of all mergers fail to create shareholder value relative to industry peers. Our research shows that among 160 deals in 1996 and 1997 worth more than $250 million, 92 lost value compared with their peers. The average merger lost 3.6 percent. (See Exhibit 1, below.)
Although many obstacles undo the best-laid plans of executives and their investment bankers, the problems often boil down to one thing: time — or, rather, the cost of taking too much time. Completing the actual merger takes months, sometimes more than a year, which is understandable, given the complexity and volume of the information-intensive tasks that must be done. There's the assessing of personnel needs, rationalizing of benefits plans, zero-basing of budgets and performance targets, integrating of computer systems — the list goes on. The challenges are so daunting that management will typically tackle only one area at a time when it should be doing all of them simultaneously.
But given the average state of information technology, one challenge at a time is all management can handle. The result is burdensome financial and human costs, as well as a lack of clarity regarding exactly where, when, and how the synergy prize will be captured. This can shave hundreds of millions of dollars from the value of a large-scale merger.
Time works against mergers in a number of different ways, affecting the corporations' internal and external constituencies. The first major cost is reduced synergistic value. The penalty is the cost of capital multiplied by each day of delay during the interval between the announcement of a merger and its consummation. This covers not just the closing period but also the time for realizing the projected economies of scale and theoretical strengths of the combined organization. These synergies often can be worth a significant sum of money — so a few days delay can be significant even at a modest cost of capital rate.
Then there's the internal human capital costs to consider. Delays take their toll on employees' morale, commitment, and sense of purpose. People in the acquired organization — and many in the acquiring organization — need three questions answered: Will I have a job? What will I get paid? And to whom will I report? The longer they have to wait for answers, the more likely they are to seek opportunities elsewhere. The more top performers who leave — those people who would have provided the greatest value in achieving projected synergies — the greater the loss. Uncertainty in early post-merger days often leads to organizational lethargy and inaction among the employees who remain. The longer such lethargy goes on, the higher the hidden costs.
Outside the corporation, uncertainty and delay affect a company's relationships with its suppliers as they begin to wonder about the future of their contracts and the complexity of their product lines. Will the newly merged entity begin to consolidate its spending and eliminate multiple designs in favor of greater simplicity? If so, over what period of time, and what should the supplier be doing to prepare? What about pricing? If both merger partners are customers of the same supplier, one may be paying a premium for the same components or commodities. Sooner or later, the supplier will have to homogenize its pricing, but when? If the supplier is forced to accept lower prices, how will it replace lost income?
The companies' own customers are obviously affected by merger delay, too. Commercial customers may face months of delivery disruption. They may have to restructure their procurement procedures and acquaint themselves with new sales interfaces. Retail customers may face branch closings in their neighborhoods, product line changes, and diminishing service quality during the early days of merger integration. Meanwhile, competitors won't idly wait for the dust to settle. They will leap into the frenzy to pick off any disgruntled customers they can.
Finally, there are the investors. They are usually willing to grant a grace period to companies struggling to consummate an announced merger, but if uncertainty persists, and if that hurts stock performance (as it often does), investors will eventually lose their patience.
The Obstacles to Integration
An important source of delay in completing the merger process lies in the fact that the two parties to the merger are legally prevented from exchanging confidential information prior to approval by the regulators in various jurisdictions. For example, in mergers involving a U.S. company, the U.S. Federal Trade Commission and the Department of Justice, which must investigate antitrust implications, impose a minimum waiting period of 30 days before such information can be shared, which begins only after the regulators feel they have enough documentation to decide if the merger violates antitrust laws. The waiting period can be extended repeatedly as the regulators demand more data.
The approval process is complicated by the multiple jurisdictions involved in a multinational merger, on top of the multiple accounting systems, different tax regimes, and additional organizational and legal complexity. Under ordinary circumstances, this means the meter is running for a considerable time before the hard part starts — reconciling accounting systems and making business decisions based on a new set of performance numbers for the merged organization. The e-merger approach provides a fast track around these delays while complying with the regulatory requirements.
Beyond regulatory obstacles, merging disparate and usually incompatible IT systems is also a monumentally difficult task that can be a huge time and cost sinkhole. The combined organization is generally a Tower of Babel of conflicting corporate terminology, mismatched hardware and software of varying vintages, and diffuse layers of IT infrastructure that have accumulated over the years. At the very least, merging companies need to be able to think in a common corporate language with systems that can communicate with each other before the new organization can even begin to realize the estimated gains that were the basis of the merger.
Achieving the requisite commonality via traditional systems integration methods can be difficult even when both parties are committed to the process, which is not always the case. A major U.S. bank spent more than a decade building a nationwide diversified financial services organization through an aggressive acquisition program, yet it never attempted to reconcile its multiple IT systems. Each acquired institution functioned for years as a separate operating unit, creating costly overhead. Accountants were forced to reconcile results by hand for reporting purposes. This structure also handicapped the bank strategically because it was slow to achieve projected synergies. By the late 1990s, investors grew impatient, and management was forced to improve the company's performance, which included a difficult integration of highly fragmented IT systems.
On the other hand, doing too much at the outset can create as many problems as doing too little. For example, merger partners sometimes plunge in and try to reconcile their management information systems at a detailed level before they have given sufficient consideration to all of the business differences. This is a mistake for two reasons. One is that the choice of one system over another in such a case is based largely on faith, with no factual foundation. The other reason is that the reconciliation process becomes a technical task performed by technical people, without adequate reflection upon the business implications. As a result, instead of strategic information that is meaningful to management, the information that emerges tends to be inconsistent and/or patchy. From that, management can't see the forest for the trees. They can't even see the trees for the lumber that comes out of the sawmill.
While the object is to gather pertinent information with common definitions from both organizations before the merger transaction is complete, to do so in the traditional client-server environment would be prohibitively costly, if it can be done at all. Merely canvassing the two organizations to find out how many different types of desktop systems are in use around the company — PCs and Macs, which operating systems they are using, and what versions — might cost hundreds of thousands of dollars and take months. Once the personal computer inventory is complete, there would be the problem of creating software that could operate on all legacy systems and aggregate the data.
The Internet-Enabled Merger
Applying some of the Internet's magic to the merger integration process can move the merger along faster. It can also greatly improve the likelihood of creating a stronger company that will increase shareholder value.
The appeal of initiating the merger process in advance of the closing is obvious. It has the potential to cut down on the time needed to gather the proper merger data post-approval. As soon as approval is given, management can begin using information already gathered to make decisions. This should produce considerable savings because changes can be completed faster and, ideally, more effectively. Moreover, it ameliorates some of the human problems that arise in periods of prolonged uncertainty. The sooner the dimensions of the new organization are defined and merger-oriented activity begins, the sooner people can start to identify with the new environment and commit themselves to their work.
Our research, based on a 1997 survey of 34 companies, showed that successful mergers are characterized by a number of factors that can benefit directly from expediting the capture, analysis, and distribution of information. These include early planning, focusing resources on the most promising lines of business, positive changes in attitude and cultural identification as employees devote themselves to meaningful activity, and the ability of senior management to demonstrate commitment to the integration process.
In an e-merger scenario, the Internet technology that establishes a common platform and user interface for sharing data can be developed rapidly. This allows merger partners to generate quickly precisely the kind of information management needs to make strategic decisions with a minimal amount of training or change in the professional routines of both organizations. Instead of refitting a hydra-headed organization with uniform hardware and software, management can make use of any desktop system. The Internet is, in effect, a predeployed universal infrastructure that allows the creation of databases into which pertinent information can be entered and subsequently retrieved from every conceivable workstation through an Internet browser.
E-merger may not be appropriate in every deal. It hasn't been tested in the kind of classic conglomerate merger in which cultures, core competencies, and compensation are very far apart. For the immediate future, it is most promising for mergers that consolidate companies in the same line of business. E-merger may have particular utility in Europe, where cross-border and cross-regional mergers are at an all-time high, and where business information complexity is compounded by cultural and language differences, as well as varied regulatory and accounting processes that must be reconciled.
In the case of consolidations, some companies are less concerned than others with cost- and time-efficiency, as we learned when one company chose to put an army of accountants and consultants on the phone instead of going the e-merger route. To this particular firm, the cash outlay for its army of information gatherers and the time lost were not important. It would have taken just three weeks to get the e-merger technology infrastructure running smoothly — instead of the months it took to get the same output manually. In most transactions, however, the money-is-no-object approach is not an option, and e-merger represents a cost-efficient and reliable way of starting the integration as soon as possible.
The BP Amoco Case
In a sense, the 1997 merger of the Boeing Company and the McDonnell Douglas Corporation pointed the way for e-mergers. With the help of Internet technology, upon the union of the two companies all employees were given new identification badges, their e-mail was switched to a single system, and they were put into the loop on the company's plans through a combination of e-mail and video communications.
Yet, although a new communications system helps with some of the human aspects of forging the identity of a combined organization, a merger can be only as successful as the messages that are sent, and they depend on the decisions that senior managers make about the new company's future. The coherence of those decisions, in turn, can be only as good as the information on which they are based.
The merger of BP and Amoco in 1998 was an ideal situation in which to apply the Internet's information integration capabilities to help unite the two large companies, which ultimately created the world's second largest oil company (after the Exxon Mobil Corporation). Since its reorganization in 1992, BP's share performance had been outperforming the industry by increasing margins, in substantial part because of a willingness to use electronics to acquire and share knowledge. Having employed a company intranet for years in collaborative work on complex engineering problems, BP's management was attuned to innovative uses of the Internet, and was proposed the e-merger concept.
When BP and Amoco agreed to terms in August of 1998, their management teams recognized that although the two organizations were in the same industry, and their businesses overlapped a good deal, a smooth transition was not guaranteed. BP had a heritage of extensive decentralization, whereas Amoco was centralized, relying on a shared services model for human resources, accounting, and other functional departments.
Despite their differences, BP and Amoco succeeded in closing the deal expeditiously, only 100 days after the merger announcement, compared with 170 days for the merger of the NationsBank Corporation and the Bank of America Corporation, and 189 for Daimler-Benz AG and the Chrysler Corporation. Because of BP and Amoco's use of the e-merger approach, senior management was able to make some critical decisions as soon as Federal Trade Commission approval came. It made these decisions by using aggregated operational and financial information that had been held by independent third parties — a "clean team," which had legal clearance to view such data in advance of the merger's close. The clean team used the information to define budgets and synergy targets for the newly formed business units and to make available consistent baseline information to serve as a starting point once the merger was formally approved. In the BPÐAmoco merger, Booz-Allen & Hamilton consultants were joined on the clean team by people from McKinsey & Co. and Andersen Consulting, each of whom had a special concentration in a particular area.
To facilitate the entire process, the basic e-merger applications were developed in a matter of weeks for a fraction of the cost of trying to achieve comparable results in the same time frame using the client-server model. A "base" e-merger system connected the clients' desktops to neutral clean-team servers hosted by Booz-Allen & Hamilton.
Once the e-merger technology was in place, the priority was to redefine the business units of the two companies within a single company structure to eliminate glaring overlaps and to capture synergies. The organizational boundaries were recast so that profit centers in the same line of business from each company could be consolidated under the new organization in preparation for collecting management data. People in the various businesses thus learned quickly where they fit in the new integrated structure. Likewise, business and functional cost centers were reallocated to the relevant business units or corporate structures. All data could then be routed automatically to the appropriate new organizational unit.
The next challenge was creating a baseline for reporting operational and financial data so that when the organizations were merged, they could make meaningful comparisons. That meant creating consistent activity-based accounting definitions. For example, some business units managed their payrolls at the plant level. Under the activity-based definition, however, these plant personnel needed to be included under the rubric of payroll accounting in the functional sense. This was particularly relevant in the field of information technology. IT activity embedded in businesses was 20 to 50 percent of that in the central support function. Without this complete information, cost comparisons would have been misleading.
Straightforward templates were created for desktop computer screens, based on Web formats, to allow data entry by the business units or cost centers, as defined by their place in the new organization. General categories of templates fell into financial and head count. Operational driver data allowed performance indicators to be calculated for comparison with best-practice benchmarks.
In most cases, individuals or teams from the merger partners were designated to enter business unit data into each template for each reporting period. Each team "owned" the relevant information, and access was restricted to owners. This method involved a large number of people, each responsible for a small amount of data.
At the same time, the clean-team consultants had access to the combined information, while assiduously maintaining the integrity and confidentiality of the databases (stringently complying with legal restrictions). This privileged access did, however, allow them to look for areas that were likely to yield dramatic strategic results, and to prepare for assisting senior management in the post-merger approval period.
Part of the process was trial and error. For example, when certain classifications that made sense in the design phase proved unrealistic, adjustments were made. One invaluable hallmark of e-merger technology is its flexibility. When some Amoco personnel insisted on using their customary spreadsheets for reporting, instead of adopting e-merger templates, a software patch was constructed to translate the information into the new consolidated Web-based database format.
As stated earlier, one of the greatest impediments to the effective implementation of any merger lies in the cultural differences between the organizations. Given the decentralized culture of BP and the centralized culture of Amoco, this was a particular concern in combining the two. The baselining process helped to forge a new identity and introduce its performance management framework. Teams from both companies met to determine formats and definitions for collecting and storing information.
This was not just a matter of training one side or the other to restate its financial results according to the Generally Accepted Accounting Principles used by the other, although that was a particular issue since the two were domiciled on opposite sides of the Atlantic. It also entailed creating a common language and standards for inventory valuation, cost allocation, intercompany sales, and many other measures that varied considerably between operating units — even within the same company. Within upper management, discussions about the data helped executives get to know one another better, while they were also familiarizing themselves with the new business processes and creating a common vocabulary. Working relationships began to form around this common view of the future, at many levels and across the 500 or so different organizational units and locations.
At the business-unit level, controllers were introduced to the new standards, and they played an active part by actually entering their information in the new templates. As their data was combined with that of other business units, they could access the aggregated information up to their level of clearance, along with whatever nonproprietary data there was from the rest of the organization. The widening circle of early participants had a direct payoff in alleviating some of the anxiety that often accompanies a merger.
The information baselining exercise also proved useful in bringing new levels of transparency and revealing opportunities. For example, BP, which owed much of its success to a decentralized structure, lacked the ability to assess the true total costs of operational and supporting functions. Business-unit heads had been given targets and left alone to meet them. This exercise provided BP with another way to identify opportunities to eliminate duplication and enhance performance.
As information accumulated, various consultants identified areas where they thought the organization could gain from sharing information in advance of regulatory closing, and approached corporate counsel to establish protocols for allowing the walls to come down early on a limited scale. The attorneys were necessarily very conservative, but worked out with the consultants thresholds for controlled distribution of certain kinds of information (e.g., support service head counts by location). This is where the Web provided unique value. Only those directly involved in the specified areas were cleared to receive the information, and the technologists were able to restrict distribution accordingly. The integrity of the e-merger process was audited regularly to provide a high degree of assurance on its security.
Significantly, separation remained absolute until the regulatory closing, when dramatic pieces of news could be revealed to management. The day the transaction was approved, for example, management learned that functional costs, for areas including accounting, finance, human resources, information technology, and facilities management, stood at over $5 billion for the combined organization. CEO Sir John Browne and the leadership team were able to focus immediately on the delivery of promised savings and to target unforeseen opportunities. Sir John had a detailed breakdown of this base cost by function, organizational unit, location, and activity — information that previously would have been difficult and costly to ascertain so quickly for a newly merged entity.
A similar story was repeated over and over again at lower levels in the organization. Controlled information transparency can have an amazingly invigorating effect — triggering peer-to-peer challenges and internal benchmarking of performance. E-merger provided a detailed snapshot of the new organization based on input by hundreds of people into hundreds of templates. The stark reality of hard numbers provided the basis for fast and effective decision-making. Pockets of redundancy and inefficiency that escaped management's attention for years were suddenly in the spotlight. Wide discrepancies in costs and margins were revealed. Benchmarks and best practices were identified.
Learning from E-merger
The BP case has provided a wealth of knowledge that should be considered by any company contemplating a merger.
The e-merger applications, developed in just a few weeks, cost only a fraction of what it would take to achieve comparable results using the client-server model. Once custom applications are built to serve particular purposes, they can be downloaded to desktops around the world in a matter of minutes.
The problem of confidentiality during the pre-approval period is solved by the participation of a clean team and the fact that data is stored on third-party servers and can be viewed only by personnel with the requisite clearances. Thus, the senior management of the merging companies can view all their own data, but they cannot cross information lines until cleared by counsel.
When the merger is approved, melding the data is a simple process of completing some keystrokes to combine the databases, just as the first transcontinental railroad in the United States was completed with the driving of the golden spike. We learned, however, that it is critical to adjust the detail of that data according to the individual organization's culture. On one hand, granularity and comparability must be refined enough to identify credible synergies and to quantify performance potential. On the other hand, the data must not be so dense that it inhibits effective management use. As noted, BP's decentralized culture had played a great part in its success. The availability of too much information easily could have led headquarters to micromanage business units that were accustomed to a good deal of latitude, and the loss of autonomy would have jeopardized their successful formula. Some sense of proportion is necessary.
As powerful a tool as it is, e-merger is only part of the story, and given the steady advances in technology, it is the easiest part. The greater challenge in any merger is, and will remain, the human and cultural elements that are different for every company and in every merger.
As we look ahead, we can envision how other organizations that use e-merger technology could make it the foundation of an ongoing management reporting function. The same systems that have been used to crunch numbers so effectively in the pre-merger phase can continue to be employed as the backbone of reporting for the merged entity. While the information might not play a role in day-to-day management, having it available could save a great deal of time in managing crisis or leading step change.
In an environment where mergers and alliances will play an ever-greater role in the business strategies of most companies, firms must do everything they can to increase their chances of success. The stakes and the chances of failure are high, and there is no greater enemy than time in the battle to achieve business objectives. Applying the e-merger solution is not a panacea. But it clearly offers a major opportunity to contribute to the process of making highly complex and difficult transactions simpler to execute and more financially rewarding.
Reprint No. 00406
Art Fritzson, [email protected]
Art Fritzson is a vice president with Booz-Allen & Hamilton in McLean, Virginia. He specializes in e-delivery capabilities (Web design, portal, and application development) used to complement strategy consulting required for e-business initiatives.
Robert Lukefahr, [email protected]
Robert Lukefahr is a vice president with Booz Allen Hamilton in Houston. He has extensive experience in helping clients in energy and other industries with corporate growth strategies and long-term strategic plans.
Amy Asin, [email protected]
Amy Asin is a principal with Booz-Allen & Hamilton based in San Francisco. She plays a leadership role in identifying trends and best practices in post-merger integration.
Sanjay Bhatia, [email protected]
Sanjay Bhatia is a senior associate at Booz-Allen & Hamilton based in Housl. He focuses on pre- and post-merger integration work.
Viren Doshi, [email protected]
Viren Doshi is a senior associate in Booz-Allen & Hamilton's Paris office and heads the energy practice in Europe and the Middle East. For several years, he has worked mostly with companies in the oil industry, and has managed global transformation projects that leveraged Internet technology.