Quick takes

Citation

(2002), "Quick takes", Strategy & Leadership, Vol. 30 No. 2. https://doi.org/10.1108/sl.2002.26130bae.003

Quick takes

Editor's note

"Quick takes" presents the key points and action steps contained in each of the feature articles. Catherine Gorrell prepares these summaries.

Page 5Escaping merger and acquisition madnessJohn G. Lynch and Barbara Lind

What marks successful acquisitions is a sure sense of purpose, an understanding of the type of acquisition, the reduction of uncertainty and the speed with which actions are carried out. The authors propose a model to enhance an understanding of the M&A implications and offer prescriptive behavior for assuring success.

To beat the dismal track record of previous M&A deals, companies need to improve in two key areas:

1. 1.

   Selection of acquisition candidates.

2. 2.

   Carefully directed post-acquisition priorities and behavior.

The authors' merger management model offers a way to improve in these two areas by defining four types of acquisitions. One type is not better than another is; they are simply different and, as such, require different selection and implementation approaches.

Four basic acquisition types

Consider two dimensions: "disparity" and "goodwill." The interplay of these makes a real difference in identifying candidates for acquisition, planning the acquisition, and carrying out the deal to best effect. Using these dimensions, the four types of acquisitions are:

1. 1.

   Plan and prosper: high goodwill, low disparity.

2. 2.

   Stand and hold: high goodwill, high disparity.

3. 3.

   Merge and grow: low goodwill, low disparity.

4. 4.

   Segment or sell: low goodwill, high disparity.

Integration actions

In the aftermath of the merger announcement, the implementers are faced with dozens of mini-mergers and acquisitions. It is the integration process that can make or break the deal's strategic benefit to increase shareholder value. Because actions need to be taken quickly and skillfully, it is wise to prioritize the steps according to the acquisition "type". In a plan and grow, attention needs to be on retaining goodwill by having in place employment contracts and compensation plans to retain people who have special market and customer value. In a merge and grow, the focus needs to be on putting reporting structures in place and acting swiftly and surely to retain customers while cutting costs. In a stand and hold, the key is financial reporting and analysis. These ensure that the investment is sound and remains on track.

Most important of all, however, is the attention management is willing to devote to assuring the real completion of the deal. While management's actions need to fit to the type of acquisition to achieve the best effect, the need for greater senior level focus on the integration process is universal.

Page 13How boards can improve the odds of M&A successEric Armour

Merger and acquisition (M&A) research studies show a dismal track record for most deals over the last two decades, with the bottom line being that a huge amount of shareholder value has been destroyed through M&A activity. Savvy directors on boards can improve their contribution by doing the following:

• •

  Hold high standards for value creation (does the size of the prize warrant the investment?) Raise the bar to ensure that the opportunity offers sufficient reward potential. An innovative way to think about the appropriate return on a merger or acquisition is to benchmark top-quartile shareholder performance in the company's industry. Briefly, this sets a goal of doubling the value of the business every four to five years. (An example is presented.)

• •

  Test the strategic rationale and benefits. Does the deal improve either the market economics (market profitability, size, or growth) or competitive position (relative differentiation or relative cost) of the business units? Probing the linkage between strategic position and financial performance can help to test whether a deal truly has the potential to create value. Raise the bar on strategic assumptions by using the reality tests and guidelines offered in this article. Compelling arguments can be made in support of M&A deals that fill in market gaps, accelerate growth in critical areas, or enhance the business model. In contrast, using an acquisition to fix an enterprise's business model often leads to value destruction, as shown in the specific company examples cited.

• •

  Ensure that the integration team's focus is on clearly defined and communicated high value opportunities (HVOs). Deals that delay integration for 3-6 months will often eliminate more than half of the value creation potential. Avoid this by focusing precious management time not on operational integration issues but rather on the 8-10 highest value opportunities.

• •

  Ensure that a common management model is part of the integration efforts. A "merger of minds" includes: a clear definition of what constitutes "success", agreement upon performance metrics and a common focus on the high value opportunities.

The framework offered by the author can help boards and management to be more effective in evaluating deals as well as more efficient in their interactions. And in doing so, fulfill their fiduciary duty to improve shareholder value.

Page 21The CEO's "how to" guide to crisis communicationsLoretta Ucelli

The 11 September destruction of the World Trade Center in New York City reaffirms and emphasizes the need for top management to be prepared to step into the spotlight when a crisis occurs. How a company responds (and how fast) is crucial to achieving a positive outcome and avoiding a disastrous one. A corporate reputation can be shredded with one callous or ineffectual response.

More difficult, more urgent

Widespread and profound changes have transformed the way that news is reported and disseminated. The "new" news environment includes:

• •

  there is no such thing as "local" news with the Internet;

• •

  news is 24 hours, instantaneous and continuously updated;

• •

  news is now "democratized" when live broadcasts and Webcasts put corporate representatives and their critics in direct contact with the public;

• •

  rumors and falsehoods can spread as fast and as widely as the truth on the Internet.

Five key planning steps

The best way to manage a crisis is to plan for a variety of emergencies. Being prepared and regularly rehearsing is the best defense against a wide range of possible risks:

1. 1.

   Assess the risks – examine emerging issues, trends, business developments with an eye toward how it will affect your particular company.

2. 2.

   Determine preparedness – who does what, when.

3. 3.

   Design strategic initiatives and programs – there are six elements.

4. 4.

   Set up a monitoring and early warning alert system.

5. 5.

   Create a system for responding.

When a crisis occurs ... rules to guide actions:

• •

  The CEO must be front and center.

• •

  Response must be quick, in the first 24 hours of the event.

• •

  The one interviewed must not speculate on the facts not yet known or knowingly mislead journalists. Nor should they sugar coat the truth. Speak out with one voice. All department heads and top-level executives must have coordinated messages to unify both internal and external communications.

• •

  Err on the side of "over" communications with frequent updates. You cannot overprotect your reputation.

• •

  What you say illuminates what you do; actions must be consistent with words.

• •

  Talk to all stakeholders, not just the media.

• •

  Use crisis as an opportunity to demonstrate leadership.

Page 25Loyalty as a philosophy and strategy: an interview with Frederick F. ReichheldWilliam Finnie and Robert M. Randall

In this interview, business strategy guru Fred Reichheld offers several insightful and succinct premises for long-term business success:

• •

  Loyalty is the fuel that drives financial success. There can be no long-term success without investing to gain the loyalty of employees and customers because beneficial relationships can only be built on trust between employees, customers, and suppliers. Bain & Company research shows that a mere 5 percent increase in customer retention generates 30-40 percent increase in a customer's lifetime profitability in several industries and as much as 90 percent gains in financial services and advertising.

• •

  Loyalty is about putting principles and relationships first. It is common belief that you cannot grow without customer loyalty. But it is also critical to understand you cannot build customer loyalty without loyal employees.

• •

  It is hard to know how successful you/your company is unless you have the courage to take Bain's "loyalty acid test" survey of both customers and employees. The key question: "I believe that (name of company) deserves my loyalty." Respondent's answers reveal a striking difference between high "loyalty leader" companies (72 percent answered positively) and typical companies (45 percent answered positively).

• •

  A mutually beneficial relationship demands employees deliver value so that customers want to come back for more. Only teams that make buyers long-term customers will have successful economics and improving job opportunities.

• •

  To make sure the rewards are appropriately balanced between the generation of profits and the creation of customer value, have the front line teams use tools – such as the loyalty acid test – to show them how well they are serving customer interests (and repeat the test regularly).

• •

  When asked if it is possible to have loyal customers without loyal employees, Reichheld contends that it is only through employees that the leader can change the customer's experience. Bain research found that half of all front line employees in the USA do not believe their employer is worthy of their loyalty. Consequently, the challenge of building customer loyalty is enormous in the average company.

The last thought: loyalty is the acid test of leadership. It is the best way to know whether you – as a leader – are achieving financial results through success of employees and customers or at their expense. So, what is the loyalty score in your company?

Page 32How top wholesalers succeed: secrets of a brutal businessSam Rovit, Ken Sweder and Jed Buchanan

This article has value for leaders in all industries. The research that is presented demonstrates the need to be constantly diligent in reviewing the marketplace, keep focused on knowing the critical success factors of competitive excellence, and holding a constructive distrust of conventional wisdom. The adage of "don't wait until it is broken to fix it" is quite applicable to continuously refining your company's strategies.

The wholesale distribution industry is the subject of the strategy research conducted. Wholesaling is a brutally competitive business. Only 20 percent of all wholesale distributors managed to beat the S&P 500 over the last five years, while more than 50 percent consistently destroy shareholder value. To understand what drove a 1,000 percent difference in return between the best and worst distribution performer, the author interviewed the managers of firms that have consistently outperformed the market.

One counterintuitive insight: distribution must focus on local business. Local, not national, market share drives profitability. A second insight: the best distributors share a three-legged strategy:

1. 1.

   Relative market share: they focus investments to gain high market share relative to competitors, with share measured at the local level.

2. 2.

   Gross margins: they select their service offerings carefully to pump up gross margins. Providing a service offering that yields gross margin relative to your competitors requires you to perform a service more cost-effectively or efficiently than your suppliers and customers.

3. 3.

   Efficient operations: they slice operating expenses to the bone. That is, they manage assets (inventory routes, distribution centers, sales forces, etc.) more effectively than the competition.

Research has further shown that if companies lead in only one of the three components, they still post average shareholders return below the mean for their industry segment. Companies that succeed at two or three dimensions realized average returns above the mean for their industry segment.

In the wholesaling business, the company that best demonstrated the three-pronged approach was Sysco. This company has executed simultaneously all facets of the three-part strategy in order to be successful. Other successful companies implementing two of the three parts of were Syncor ("market power"), Gibraltar Steel ("differentiator"), and United Stationers ("large and lean").