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The most beautiful diamonds are cut in an intricate pattern of multiple facets. Under a spotlight, each facet plays upon every other to create the most radiance. The gem cutterâs expertise shines through when the design is perfectly planned and the facets skillfully cut to elicit the utmost light and brilliance from the stone. Strong business leaders in the consolidating world are much like the expert diamond cutter. Managers must understand the multifaceted nature of their competitive arena and craft strategic and operational plans to create the best chance of success for the business and wealth for shareholders. They must be able to see facets their competitors ignore. They must be armed with an array of tools and use them in the proper combination to capture the vast opportunities served up by the consolidating world.
A CRUCIAL CAUSE OF MERGER FAILURE
According to a Boston Consulting Group study, many firms fail to do adequate pre-merger integration planning.1 They found that eight of ten acquiring companies do no pre-merger planning or analysis of the target companyâs business practices, staff, skills, structure or organization design, sources of core competencies, and its range of tangible and intangible resources for growth. Most mergers underperform because top managers fail to consider the specific steps required to integrate an acquisition into their company or analyze how they will maximize their joint potential. You donât need to dig too deep to uncover an eerie correlation between the 80 percent of firms who do no pre-merger planning and the almost 80 percent of mergers that fail to meet their minimal financial goals.
Rampant merger failure presents your firm with a new wealth of strategic opportunities. Our strategies are your key to achieve and maintain your escape from the swarm of direct market competitors. These six strategies will enable your firm to profit from all consolidationâboth yours and your competitorsâ.
STRATEGY 1: THE MAGNET STRATEGY
Poorly planned and badly executed merger integration creates fear, anger, and uncertainty among employees and managers. Employees of the acquired firm often feel theyâve been sold out. They need someone to want them and to reestablish a trusting bond. This someone can be a strong competitor firm like yours which is not involved in merger mania.
Your firm can use the magnet strategy to attract a merging competitorâs top talent who are often so anxious to flee their companyâs merger chaos, they may actively seek out your team. This strategy generates key additional human and intellectual resources that give you the ability to stride ahead while simultaneously hollowing out the talent pool of competitor firms, pushing them further back into the pack.
For example, in late 1998, just after Deutsche Bankâs chairman Rolf Breuer boldly announced, âThere will be no autonomyâ for its Bankerâs Trust/Alex Brown acquisition, many acquired employees used this suffocating statement as their rallying cry to escape the merger chaos. They ran into the arms of welcoming competitors, including Credit Suisse First Boston, Tucker Anthony Inc., and T. Rowe Price. Six out of eleven of BT Alex Brownâs highest ranking executives, along with entire branch offices and practice groups, were easily recruited away by direct competitors.
The magnet strategy creates a double winâyour competitor is weakened at the same time your firm gains strength. Drawing highly capable people directly from your merging competitors is a much more powerful win. In fact, even a start-up company can be staffed directly from the talent pools of competitor firms mired in merger chaos.
In Chapter 2, we show how huge firms like Procter & Gamble, General Electric, and Citigroup, along with small firms like Houston Community Bank and Sassaby, Inc., can either use or fall victim to the magnet strategy. Houston Community Bank increased its business by 33 percent in just one year using the magnet strategyâall at the expense of larger banks in the midst of merger chaos.
STRATEGY 2: ATTACK WHILE COMPETITORS ARE DISTRACTED
Another vital non-merger strategy firms can use to beat their merging competitors is to time strategic attacks against them precisely when those firms are most vulnerableâwhen they are floundering in the chaos of merger or acquisition integration. Most merging companies lose their ability even to seeâmuch less to respond toâanother firmâs sudden strategic attack against their business. Such well-timed attacks on stalled mergers can steal market share, customers, suppliers, distributors, and alliance partners, transferring critical velocity directly to your company. While Boeing was struggling in near total chaos with its McDonnell Douglas acquisition, Europeâs Airbus Industrie quickly attacked Boeingâs huge market share. Within twenty-four months Airbus completely reversed the market dominance in this worldwide duopoly. When Boeing bought McDonnell Douglas, it owned 65 percent of the entire commercial aircraft market. In the first six months of 1999, the attacks on Boeingâs leadership position allowed Airbus to capture 66 percent of all orders in the world.
The difficult work of merger integration can be all-consuming, and the normal tendency in combining firms is to lose at least part of their external vision because they are forced to focus inward on immediate acquisition or integration problems. Just as in war, your corporate attacks are most effective when the enemy isnât looking, is distracted, or canât respond. As demonstrated in the Introduction, a great portion of Dell Computerâs recent overwhelming success has come directly at the expense of Compaq, as that firm struggles to digest Digital Equipment Corp.
In Chapter 3, we look at how many firms, including Airbus, Pepsi-Co, Wal-Mart, and Burlington Northern Santa Fe, have used precisely timed strategic attacks to gain critical velocity needed to outrun competitors paralyzed in merger turmoil.
STRATEGY 3: JUMP START VITAL INTERNAL CHANGE
Your team must use the threatened mergers by your direct competitors to jump-start major change inside your firm. Often, there is no more powerful force to drive your entire companyâs vital update and transformation than a direct competitorâs merger announcement. This strategy is specifically designed to power your firmâs forward momentum by maximizing your own teamâs current internal resources, talents, and motivation. For example, AT&Tâs new CEO Michael Armstrong used the powerful direct threat created by the mega-merger of MCI and WorldCom as a catalyst to energize AT&T into action like no other time in the companyâs history. The entire organization attacked out-of-control costs, eliminating $5 billion per year of unnecessary expense. This allowed AT&T to free up huge cash flow for many major global initiatives, including joint ventures, acquisitions, and technology upgrades.
Chapter 4 shows how the remarkable transformation at corporate giants Ford, AT&T, Honda, and Toyota was triggered by the threat created by combining competitors. These companies propelled themselves into market-leading positions in market share, profit, or shareholder wealth by jump starting critical internal changes.
STRATEGY 4: MERGER ALTERNATIVES
Your firmâs joint ventures, strategic alliances, franchising, and licensing agreements often multiply your potential universe of resources by leveraging those of all your partners. These key coventures quickly help your firm to accelerate its forward momentum because many different agreements can be entered into simultaneously. The benefits from such partnerships are often derived much faster, cheaper, easier, more profitably, and without the debilitating conflict and turmoil when compared to a typical merger or acquisition. Microsoftâs huge dominance over Apple Computer was a direct result of Microsoftâs abilityâand Appleâs inability or unwillingnessâto forge a massive network of joint ventures and licensing agreements.
In most mergers the acquiring firm buys the equivalent of a six-foot-long sandwich which contains certain desired items, but also numerous undesired items which either must be sold off, carried at a loss, or thrown away. These undesired parts of the acquired company may confuse the buying organization and distract top management attention. More important, these non-core, largely extraneous parts often force the acquirer to bid an excessively expensive price for the acquisition, not because they ever wanted to buy those pieces, but because those pieces are deemed to have a current market value to other potential bidders. In contrast, most strategic alliances, joint ventures, or licensing deals are focused only on the needed pieces of the business. They normally do not require expensive investment bankers, are negotiated directly by the two companies, and do not involve extraneous items or non-core businesses, nor the payment of exorbitant acquisition control price premiums. Firms can âcherry pickâ desired items and specifically exclude others in order to build a mutual competitive advantage.
In Chapter 5, we explore the merger alternative strategies that have propelled many firms into market leadership, including Microsoft, Motorola,NEC, and the members of the giant global airline Star Alliance.
STRATEGY 5: FAST-TRACK MERGER INTEGRATION
No manager has ever overestimated the difficulty of integrating two companies. Merger integration is so very difficult because you only get one chance to do it right. There are no test runs. By streamlining and accelerating the process, you minimize the loss of key managers and skilled technicians, the erosion of morale, and the likelihood of merger chaos. When your firm executes a fast-track, well-planned merger integration, you multiply its chance of success when compared to the typical merging firm. Your teamâs critical forward momentum will be accelerated through a planned fast-track integration, allowing a faster escape from the grasp of market competitors. General Electricâs market leadership in all areas of its business and stratospheric $500 billion market value have been a direct result of successful integration of over six hundred acquisitions during the watch of CEO Jack Welch. Through its comprehensive strategy of lightning-quick acquisitions, Cisco Systems surpassed Microsoft to become the worldâs most valuable company in March of 2000. Both Cisco and GE created fast-track integration processes which they both continually improve as a corporate core competency that allows them to stay ahead of their competitors. Many firms are now copying their merger models.
Fast-track integration directly attacks two key reasons for merger failure. First, they are often entered into with no clear plan for how to best integrate the people, systems, and operations of the two firms. Second, most merger integrations take far too long. And the longer they take, the more nonproductive energy the combined organization uses up, the higher most workersâ uncertainty, the greater the distraction of top leadersâ attention from productive work, and the greater the probability of failure. Merger failure guarantees a huge additional gravitational force bearing down upon your firm, preventing forward momentum and profitability.
Expertly executed merger integration clearly defines the exact business units, systems, and practices that will be melded into one. Of equal importance, the business components that will remain autonomous are also clearly planned and communicated to the new organization. Chapter 6 introduces a full array of foundations and integration tools you must use to createâin advance of the merger announcementâa crystal-clear plan integrating the two firms quickly and successfully. We look at examples of companies, including General Electric, Southwest Airlines, and Swiss Bank Corp., that executed their merger and acquisition integration and actually accelerated their forward momentum, achieving the necessary speed to outrun the competition.
STRATEGY 6: COMPOSITE STRATEGY
The best global growth firms simply cannot sprint past their competitors using a single strategy. The world is far too complex and fast-changing for any old-fashioned static strategy to work. Thus, your firmâs selection of the best composite strategy is the ultimate weapon to captilize on merger chaos. To most effectively profit from all aspects of rampant consolidation, you must link together the key set of dynamic strategies available to your firm. Your team can exploit othersâ merger chaos and keep those firms pushed into the pack of market competitors while simultaneously driving forward your own winning mergers, acquisitions, or merger alternatives. By executing two or more clear strategies that others tend to ignore or execute poorly, you gain speed to race faster than the competition.
In todayâs technologically fast-changing business environment, the windows of opportunity for strategic attacks often are open only briefly and close quickly. More importantly, if you do not exploit an opportunity, your direct competitors will. This turns the tables, giving them additional resources, time, market share, and profits. There are no neutral choices here.
Complex competitive multinational environments, in particular, always require a composite strategy to vault beyond the pack. In just eighteen months, Michael Armstrong completely transformed AT&T from a slow-moving long-distance telephone bureaucracy into a potential Internet juggernaut, using a complicated series of acquisitions, global alliances, strategic attacks, internal changes, and several key merger alternatives.
Todayâs rapidly converging industries drive the momentum of change and, for most firms, create an imperative for flexibility and require a multiple strategy approach. By learning how to use and to combine the options available in our first five key strategiesâ(1) creating a magnet strategy to exploit merging competitors, (2) attacking while competitors are distracted by merger chaos, (3) jump-starting internal change, (4) using multiple merger alternatives, and (5) fast-track acquisitions or mergersâyou develop essential skills for dynamic flexibility. However, you and your team must create a unique composite strategy by combining two or more of these strategies to best exploit the vast array of current opportunities offered in your industry. You can only win in the consolidating world if you accurately identify, assess, and implement the most appropriate specific strategy for each market. You must develop the versatility to combine different groupings of our strategies, coupled with others unique to your situation, simultaneously when necessary.
Chapter 7 demonstrates how market leaders, including The Home Depot, Toyota, Procter & Gamble, AT&T, British Airways, and General Electric, all depend upon complex composite strategies. They exploit every opportunity to both capitalize on merging competitors and drive forward with their own consolidations.
THE DOUBLE-EDGED SWORD
These six strategies are your key for exploiting the vast new opportunities created by record levels of mergers and acquisitions. But you must embrace a panoramic perspective of the world around you. An âeat or be eatenâ outlook guarantees you will miss out on many prime strategic opportunities created by many consolidating industries. These strategies are your key for racing past and staying ahead of the competitionâyour key to profit from tidal waves of consolidation.
In the combining industry, you must succeed and you must not fail. The rewards of successful mergers, merger alternatives, and non-merger strategies can be so enormous and the damage of losing so destructive that you must be ever-vigilant to do bothâwin and not lose. Much like the hand-to-hand, to-the-death gladiator battles of times past, often there is only one outcome that will allow your firm to become a market leader.
When your firm wins on the consolidation battlefield you are rewarded with a major source of competitive advantage. But severe injury results from failed mergers and you place massive self-imposed gravitational forces on your firm. The merger process confronts any company with a risk-versus-reward tradeoff that is like a dynamic fulcrumâwith diametrically opposed outcomes.
If your firm effectively navigates the tidal waves of consolidation, your benefits are doubledâyou are strengthened financially, organizationally, and reputationally while your competitors are simultaneously weakened. You are handed a double-edged sword, the greatest new strategic weapon in your arsenal.
But this double-edged sword can work against you just as it can work for you. When you fail in your strategic and operational navigation you hand the sword to your competitors, who then benefit directly at your expense. They steal your momentum, initiatives, and your best employees and block your opportunities. Your mistakes fuel their forward thrust while your firm suffers as a market follower.
THE GREAT ACQUIRER
Your merger or acquisition must be properly planned and executed. Not only do financial benefits come sooner, but the risks of a confused organization and financial losses are minimized and the flight of your top talent can be prevented. Yet the more powerful, far longer-term benefits your firm derives from successful acquisitions stretch well beyond simple rates of return or market share gains. You can virtually create a new vital core competency as a âGreat Acquirerâ with financial, managerial, and reputational benefits that cascade into the future.
What are the far-reaching advantages to General Electric, Cisco, and Ford, all possessing well-known track records of merger and acquisition excellence? The Great Acquirer gains a âhalo effectâ w...