Fifty-three percent of CEOs, CFOs, board members and VPs of Corporate Development and Strategy plan on increasing mergers and acquisitions (M&A) activity and 49% plan on increasing joint venture (JV) activity over the next two to three years, according to a recent study by Hewitt Associates.
Market access was overwhelmingly (74%) cited as a clear driver for their M&A initiatives, with the top five success measures being:
- Earnings growth – 24%
- Growth – 16%
- Achievement of stated synergies -13%
- Valuation – 11%
- Free cash flow – 9%.
However, respondents saw the top risk factors as culture fit (25%) financial impact/return on investment (23%), retention of key talent (16%), overpayment for the transaction (14%) and rapid implementation of business plan (9%).
Aside from the 49% of respondents that indicated a trend toward increasing JV activity, an additional 34% indicated that they would maintain their current level of JV activity. The responses for joint ventures were, for the most part, in line with those for mergers and acquisitions. The top three drivers for JVs were:
- Improved market access – 24%
- Shared know how – 21%
- Combined business creation 17%
Where key success metrics cited were very similar to M&A’s and included growth (24%), achievement of stated synergies (22%) and market position (17%). Culture fit and ownership structure of the new entity were considered the greatest risks in JVs.
However, despite the continued focus on growth strategies, the fact that many companies are not aligning their success measurements on their realization rate suggests that companies are missing key opportunities by focusing on the wrong things. One such factor forcing companies to focus on measures less tightly aligned with their primary drivers is market pressures, with 55% of respondents saying they begin to measure transaction success immediately. The survey also shows that companies are under increasing pressure to ensure that deals are immediately accretive to earnings.
This need to balance competing priorities may lead to other inconsistencies. For example, speed of execution is a critical factor in meeting Wall Street’s earnings expectations, yet only 2% of companies cite speed of execution as a primary success measure for M&As.
When asked how they can improve deals, 42% of respondents said more effective/efficient integration in the first 12 months was the area in greatest need of improvement, while only 12% selected thoroughness of due diligence and preliminary planning. When asked what deal practices they were most likely to change, the number one response (54%) was “start integration earlier.”
Additionally,32% indicated that they anticipate increasing their divestiture activity in the next two years, suggesting that companies may be looking to a more proactive view of asset and performance management.
The top three drivers for divestitures were:
- Isolation of under performers – 41%
- Return to core business 20%
- Value realization – 16%
Of those who chose isolation of under performers as their number one driver, 39% identified cost savings as the number one success measure. Additionally, the top three metrics used in determining the success of divestitures were valuation (24%), cost savings (22%) and free cash flow (20%). The greatest risks identified in divestiture situations were under valuation (33%) and financial impact/return on investment (22%).
Copies of the Hewitt survey, titled “Corporate Restructuring Strategy and Direction 2002-2003” are available by contacting the Publication Desk at Hewitt Associates: firstname.lastname@example.org .
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