1. Introduction- Why do mergers fail?
2. The challenge of merger control and success measurement “If you cant measure it, you cant manage it”
3. The Integration Balanced Scorecard
3.1 The Integration Dashboard
3.2 7 C Model
1. Introduction- Why do mergers fail?
The fourth Mergers & Acquisitions (M&A) wave1 is characterized by the extensive use of dept capital to finance merger deals and a very strong orientation on capital markets. During this development stakeholders became very influential and demanding actors- with great expectations of high returns and the accomplishment of transactions in an enormous speed. This causes a strong concentration on overestimated synergies and high yields2, but lead to an underestimation of functional and sustainable controlling systems, although they play a very important role in reimbursing expenses and capturing integration costs. These shortcomings are the main reason for mergers failure. But for many managers this fact still remains unrecognized and explanations are frequently seen in exogenous, environmental factors. Rather costs caused by coordination, agreement and inflexibility often reach an unpredicted height3. Their overwhelming impact on economic and integration success is the explanation why synergies projected for M&A are not achieved in 70-80 percent of the cases4. This proves why especially mergers and acquisitions require a higher degree of systematic controlling arrangements than other transactions. The Integration Balanced Scorecard is known as a multidimensional controlling system and includes the relevant factors for mergers, which shows the interdependencies that have the most striking impact on the effective and profitable utilization of supposed synergies and corporate advantages. This paper deals mainly with the Integration Balanced Scorecard as an approach to performance management with controlling and strategic elements by providing a balanced view of the organization and integration process. After this short overview I will additionally present the Integration Dashboard and the 7 C Model, which include critical aspects for Post Merger Control. Focusing on the difficulty of the localization, separation and final definition of ratios they will finally be examined on their strengths and weaknesses concerning their practical use in dynamic and sensitive Merger processes. Having regard on the extend of this paper, an in- depth analysis of this issue is left for further research.
2. The challenge of merger control and success measurement
“If you can’t measure it, you can’t manage it”
The challenge of post-merger integration is to carry out the transformation process from two different companies into one as smooth as possible. Therefore it is really surprising that about 14% see the necessity for the consolidation of documentation systems, further 9% for the formulation of common planning tools and finally 7% of a ratio-based post-merger audit system, but do not implement even one of them as a result of comparisons with other merger arrangements.5
The missing transformation in indicators that function as critical key issues provoke an unsatisfactory performance. Even if problems and misleading developments are recognized, many arrangements do not solve the problem because of the absence of a depentful flow of information and statements about cause and effect coherences. But a full localization of critical key issues is in case of the difficult separation of endogenous and exogenous influences rarely dependable. Using them as decision making basis either leads to stagnation or incrementalizm. Further reasons for non implementation are high costs and the time intensive architecture of a controlling system, although it avoids unpleasant and irreparable results for the newly merged company and ensures a foundation for business management. So having regard on the altitude of investment and transactions costs, the introduction of such a system should not be based on benefit- costs analysis. On the other hand, one major problem can arise: many key ratios for integration success are hard or even impossible to measure quantitatively6. Therefore, if quantitative indicators are used for integration success evaluation, it is critical to make sure that they really reflect the qualitative side and indicate large- scale changes. To reach a high degree of reliability, they must be primary based on the most important aspects for sustainability: the degree of goal achievement of integration, temporal aspects of integration and integration costs. At this point, different types of integration costs can be distinguished: coordination, complexity and inflexibility costs7, which are even harder to quantify as restructuring, consulting and adaptation costs. All of them can reach very high levels, so that it is indispensable to observe them in order to find out whether there are possibilities for rationalization. Characterizing them as time and resources consuming factors, post merger control represents an essential component for financial merger success. In sum there is a high practical need for methods that help do increase the plausibility of the developed key factors.
The following part deals with the examination of typical models, which are known as instruments for post merger controlling. After showing up the problems of reliable measurements, it is necessary to have a closer look at their internal construction in order to find out if they are nevertheless useful as a decisionmaking foundation and if there were gaps, which could be fulfilled by certain analysis methods.
3. The Integration Balanced Scorecard
After the transaction stage has been taken it is time to look at what has actually been done. The aim is to evaluate the purely economic success of the merger transaction in general and of the post- merger integration in particular. The connection of both are essential for clarifying the effectiveness as the degree of goal achievement by taking specifically determined periods of time and available resources into consideration. The main goal of integration control is to measure how productive the integration activities are. The pre- condition for this is the indemnification of consistence common targets and a functional process auditing8. The Integration Balanced Scorecard presents an approach to performance management and provides a balanced view of organization and integration process. It describes the integration of business strategy, vision of merger logic, objectives, measures, indicators, and adjustment actions with respect to the four merger perspectives: finance, organization and innovation, employees and customers. The financial perspective shows how the economic success of the company looks like by using such indicators as operating income, profits, the ability to raise funds, etc. Organization and innovation perspective is about ways for the improvement of overall post merger integration process and innovation potential. Employee perspective shows whether all capacities are used and what postmerger development means for the employees. Whether the merged company meets expectations of the customers and how the public opinion looks like is described by the customer and public perspective. The four perspectives need to be balanced with respect to internal and external, financial and non- financial, past and future performances9.
illustration not visible in this excerpt
Figure 1. The Post-Merger Integration Balanced Scorecard
Source: Jansen (2001, 238)
But during the conception one major problem can arise: many components of integration success, for example the employees’ adaption, are hard to measure quantitatively. Therefore it is critical to ensure that they reflect the qualitative side of their impact. The measurement of committed organizational behavior could be realized by consequent monitoring arrangements, primarily for the minimization of principal- agent problems, driven by the aim of securing that all delegated duties and responsibilities are located in the working unit of the actors and that they operate on full capacity utilization10 to raise the degree of efficiency of the transaction11. The operational capability could be ensured by developing a gap analysis, which determinates the differences between present achievements and arranged objectives concerning intended goals and gives the needed information for setting up a problem- oriented strategy for minimizing this gap.
One further challenge is the separation of key ratios from intervening variables, in order to establish dependable factors that cause value enhancement and value destruction12. This could be done by the value chain analysis13, which gives information for developing operative improvements in strategic decision-making processes. Hence the construction of the Integration Balances Scorecard requires detailed and separable information, which cannot be achieved with interview- based total analysis, whose results are subjective self- declarations14. Instead of this the use of normative reporting and documentation systems15 ensure a high level of objectivity and could be seen as the only reliable method. Taking this challenges and the variety of integration aspects under consideration, the evaluation of integration success should have the requirement to reach high valid and probable results, which can function as a reasonable judgment about integration effectiveness. In summary, the Integration Balanced offers a great system of checks and balances, but also has some gaps which have to be fulfilled in order to provide time based comparisons of actual results and the planned outcome with regard on clearly stated objectives appointed in the Pre- Merger phase16.
2 Jansen, 241
3 Jansen, 153
4 Mitleton-Kelly 2006, 36-37
5 Jansen, 203
6 Drews, 91
7 Drews, 91
9 Drews, 164
10 Wall, 101
12 Huch, Behme, Ohlendorf, 259
13 Gleißner, 127
14 Jansen, 111