Profitable Growth by Acquisition 589differences are present. Because they are difficult to measure and to some ex-
tent intangible, cultural differences are often ignored in the pre-acquisition
due diligence. This is unfortunate since they can ultimately be the most costly
aspect of the implementation process. In mergers where the firms have similar
cultures, the rapid combination of the two organizations can actually be easier.
However, where there are large cultural differences, executives should con-
sider keeping the entities separate for some time period. This allows each to
operate comfortably within its own culture while at the same time learning to
appreciate the strengths and weaknesses of the cultural differences between
the organizations. Such an arrangement may delay the realization of certain
synergies but, in the end, is the most rationale plan. The key is that culture can
have a huge impact on value (both positive and negative), and therefore needs
to be part of the planning process from the very beginning—even before any
acquisition offer is made.
To ensure success, the postmerger implementation process must be care-
fully planned and executed. Even when this is done, there will undoubtedly be
surprises and unanticipated problems. However, a well-thought-out plan should
minimize their negative impact. The most important parts of the plan are
speed and communication, which are critical weapons in the fight against suc-
cessful implementation’s main enemies—uncertainty, anxiety, and an in-
evitable drop in productivity. A plan conceived and implemented swiftly by
the firms’ executives, with their full and active leadership, improves the
chances for a successful transition. As always, we urge acquirers to seek the ad-
vice of knowledgeable experts on the implementation process.
SUMMARY AND CONCLUSIONS
Mergers and acquisitions are a popular way for firms to grow, and as economic
globalization continues, there is every reason to believe their size and fre-
quency will increase. However, it is not that case that profitable growth by ac-
quisition is easy. The empirical data presented in this chapter makes it clear
that corporate combinations have historically failed to meet the operational
and financial expectations of the acquiring firm’s managers and shareholders.
While target firm shareholders typically earn 30% to 40% premiums, M&A
transactions do not create value on average for the acquirer ’s stockholders.
This information should make it clear that a carefully designed acquisition
strategy, realistic estimates of the potential synergies, and an efficient imple-
mentation plan are critical if the historical odds are to be overcome.
Managers must understand that the only source of incremental value in
corporate mergers and acquisitions is incremental future cash f lows or reduced
risk. These cash f lows can come from increased revenues, reduced costs, or tax
savings. The sum of the potential value created from these incremental cash
f lows is called synergy. For a deal to be successful financially the premium
paid and the costs of the transaction must be less than the deal’s total synergy.