Getting Value from the Deal.
The insurance industry's consolidation is creating some impressive numbers: Since January, there have been more than 170 deals, with a cost of more than $60 billion. The numbers generated after mergers, however, are dismaying. A recent study by Booz Allen Hamilton concluded that 53% of U.S. mergers that closed in 1997 and 1998 failed to meet senior executives' expectations. The record for mergers within the financial-services industry is even worse than for the economy overall-roughly 70% of these fail to meet expectations.
Assuming the consolidation trend will continue within the industry, executives must address three questions before they engage in a merger: Why do most mergers fail to achieve management's objectives? What strategies increase the likelihood of a winning merger? And what are the strategic implications for acquirers?
Why Most Mergers Fail
Our research found a failure rate of 68% among mergers based on long-term strategic goals, such as adding capabilities or creating a new business model. The failure rate was only 45% for deals focused on achieving scale or growing existing business lines. The relative size of the companies in the deal is another key factor. A merger of equals fails almost twice as often as an acquisition of a small company by a large company. Furthermore, the study of what happens within the new organization after the merger reveals that integration problems caused two-thirds of the failures. These execution issues include loss of key staff, culture clash, poor due diligence, slow execution and poor/clumsy integration.
Increasing the Probability of Success
Based on our research and experiences with clients, winning mergers are based on four overarching principles, all of them driven by the chief executive officer.
* Communicate a shared vision for value creation. Every merger comes with a "sound bite" justification. Insurance mergers demand a more specific vision shared by acquirer and acquiree, one that identifies sources of value and sets aspirations for financial growth and synergy. A call for "greater cross-selling" is too vague to inspire action. But "leveraging Company X's variable-annuity relationships with broker-dealers to drive sales of Company Y's variable life products, which will be modified to incorporate the same underlying investment options" precisely defines the goals of the new company, as well as ways to achieve them.
* Seize defining moments to make explicit choices and tradeoffs. To have impact, the boardroom vision must lead to forceful decisions. Executives who use the vision to guide decisions-involving management, technology and other areas-will set the right tone for the post-merger era. Say, for example, that the vision calls for teams to draw on the best people in the new organization, regardless of their company of origin. The first and most visible application of that principle should be the composition of the new senior management team.
* Simultaneously execute multiple critical imperatives. Many actions clamor for attention when two companies are becoming one. During the transition period, executives often find themselves racing to create enthusiasm among different stakeholders, such as employees, Wall Street analysts, regulators and customers; capture the value of the deal; and sustain the core business-for example, retaining key distributor partnerships and paying commissions on schedule. Insurance executives must balance these to ensure that the merger proceeds as envisioned while the company's near-term financial results are protected.
* Employ a rigorous integration-planning process. Merger integration is an enterprisewide affair involving nearly every function and business unit. The planning process starts small, with a focused team that maps out the approach, team structure and resource requirements for integration. Senior managers lay the groundwork for a successful merger transition when they select the right people for this early planning. This small, highly skilled team ensures that the process is controlled and coordinated and reaches the right level of detail at each stage. These are essential tactics for capturing a merger's full value potential.
Implications for Acquirers
The likelihood of a successful merger increases when the projected benefits are tangible and connected to the acquirer's core business. The likelihood slips when management fails to pay attention to the execution. Doing the deal gets the energy and applause, but the detail work done after the public announcement and celebration dinner determines whether shareholder value is created or destroyed.
Larry Altman, a Best's Review columnist, and Gerald Adolf are vice presidents in the New York office of Booz Allen Hamilton.
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|Title Annotation:||insurance company mergers|
|Comment:||Getting Value from the Deal.(insurance company mergers)|
|Article Type:||Brief Article|
|Date:||Nov 1, 2001|
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