Untangling Product Complexity in M&A
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Untangling Product Complexity in M&A

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Only 50% of mergers actually increase shareholder value. Why? Often, one of the culprits is product complexity. Companies that manage the complexity of a newly combined product portfolio can capture ...

Only 50% of mergers actually increase shareholder value. Why? Often, one of the culprits is product complexity. Companies that manage the complexity of a newly combined product portfolio can capture value, smooth the overall merger process

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Untangling Product Complexity in M&A Untangling Product Complexity in M&A Document Transcript

  • Untangling Product Complexity in M&A Addressing complexity before it strikes M&A is a powerful instrument. Acquiring another company is often the fastest way to gain access to complementary technology, channels and other critical assets without the risks or travails of organic growth. However, only 50 percent of mergers actually increase shareholder value. Why? Often, one of the culprits is prod- uct complexity. Companies that manage the complexity of a newly combined product portfolio can capture value, smooth the overall merger process—and deliver the full promise of M&A. M&A is a well-known avenue for im- However, numerous studies sug- Mergers and proving competitive position. Consider gest that mergers only have a 50 the acquisition of PeopleSoft by Oracle percent likelihood of achieving a sus- acquisitions are to gain access to customers and chan- tained increase in shareholder value. nels; the buyout of Organon by We believe that a key and often over- likely to increase, Schering-Plough to increase its large- looked culprit is increased product molecule R&D capabilities and increase complexity, the result of combining as companies that its product pipeline; and the merger of two companies’ products and services the Burlington Northern Railroad with and the processes necessary to manu- weather the down- the Santa Fe Pacific to realize scale- facture and deliver them (see sidebar: based operational efficiencies. Mergers Why It’s So Tough to Manage Product and acquisitions are likely to increase Complexity). Effective complexity man- turn will be on the in the current economic climate, as agement, challenging enough under companies that weather the downturn normal circumstances, becomes both prowl to acquire will be on the prowl to acquire weaker more crucial and more difficult during companies on attractive terms. a merger or acquisition. weaker companies In theory, M&A achieves value through top-line and bottom-line syn- Managing Product Complexity on attractive terms. ergies. Top-line opportunities include Can Pay Off cross-selling, product line extensions Addressing the underlying complexity and gaining access to new channels of the combined product (and process) and customers. Bottom-line synergies portfolio is at the core of M&A success. include rationalizing assets and capital, Cost savings is one reason: A company improving productivity, and improv- can cut costs by up to 30 percent as ing sales, general and administrative a result of complexity management (SG&A) costs. (see figure 1 on the following page). Let’s
  • FIGURE 1: Potential complexity management savings A clear plan for product integration across companies also makes custom- Automotive Chemicals ers less nervous: Will our product and industrial and process Consumer Financial continue to be supported? Will we Segment products industries goods services have to change dealers? What about Product development 10%-30% 3%-10% 3%-10% 5%-15% the upgrades we were counting on? Purchasing 5%-15% 3%-5% 4%-7% 5%-10% When these issues are resolved, cus- Production 10%-20% 3%-5% 3%-5% tomers are less likely to switch to a 10%-20% Logistics 5%-20% 3%-5% 3%-5% competitor (trading performance for predictability). Sales and marketing 3%-5% 3%-5% 4%-7% 4%-7% Moreover, properly managing Source: A.T. Kearney product complexity offers benefits for the broader M&A integration. When examine the advantages of properly systems, it needs fewer IT investments. product complexity is contained, com- managed product complexity: Maintaining an integrated manufac- panies experience fewer quality issues, From a bottom-line perspec- turing footprint is less costly, and sup- manufacturing delays and customer tive, well-integrated product portfolios porting fewer technologies or standards complaints. Management can focus on result in better-utilized manufactur- also requires fewer investments. accelerating returns from the new ing facilities, consolidated sourcing of From a top-line perspective, the combined business, rather than the raw materials and components, and impact is more subtle but equally squabbles that often occur when two streamlined production processes. An important. For example, a simpler com- companies struggle to integrate. infrastructure that supports multiple bined product range creates less con- products and variants also benefits fusion among salespeople. Confused Don’t Wait for Day One other functions. For example, since salespeople often sell the products they Creating a product complexity man- the company does not require more know instead of those that increase the agement blueprint before M&A offi- sophisticated control and reporting value of the new combined company. cially begins is vital. Armed with the blueprint, leadership can be ready before the post-close integration, when a flurry of tactical and emergency mat- Why It’s So Tough to Manage Product Complexity ters tend to engulf most companies. Why is managing product complexity so difficult during the M&A process? Before developing the blueprint, There are three main reasons: it is a good idea for the company to Product complexity is often overlooked even before an acquisition is assign ownership for the complexity decided. Few companies preemptively manage their product portfolio on a sus- management effort to an individual tained basis, either because they lack the tools to understand their true product leader from the acquiring company, costs, or for fear of hurting profitability by retiring older products. supported by a small team. Mergers exacerbate the complexity challenge, by amalgamating new prod- ucts, services, assets and processes in a daunting mix. Managers are fearful of Once this team is assembled, the making rushed decisions to simplify this mix that may harm future performance. company is ready to begin the M&A Management lacks incentives to tackle portfolio complexity early on in the complexity management process (see merger process. To show rapid value creation, the executive leadership gener- figure 2). This approach helps both ally focuses on low-hanging fruit with a proven track record of synergy, such as companies exchange information and procurement or SG&A rationalization. At the same time, leaders are generally prepare integration opportunities, while careful to show respect for the products of the acquired company as a sign of also remaining compliant with legisla- goodwill, thus delaying product rationalization. tion before the deal is officially closed. Even companies that are restricted from
  • FIGURE 2: Complexity management timeline ucts, components, functionalities and cost elements. The database also cap- M&A planning timeline tures the consumer view of products, based on customer switching history, Target ID Due diligence Financing and negotiations Integration price sensitivity and category growth projections, which helps determine which products are must-have instead 1. 2. 3. of merely nice-to-have. Assessment Mapping Blueprint design The assessment allows the organi- Source: A.T. Kearney zation to see the end-to-end “cost pic- ture” of any product. This picture cuts across P&L and reporting lines and is interacting in the pre-merger phase Assessment. Once the product often the first time the organization can use a “clean room” to strengthen universe is mapped for each company, can assess the true cost of complexity. and accelerate their integration plan- product variants are assessed to create Blueprint design. The product ning. Integration teams may wish to a database of “product profiles” that is profiles are the foundation of the inte- host a series of synergy summits to used to identify best-of-breed prod- gration blueprint. For all products build relationships and plot product portfolio integration strategies. The following offers more details of the three-step process: What the Leaders Do Right Mapping. The M&A team devel- Managing product complexity, difficult enough under normal circumstances, ops a map of product complexity for becomes even more challenging during the turbulent M&A process. Yet, best- the acquiring company and the target practice companies are able to handle these issues effectively. There are four traits company, simultaneously. This map that the leaders share: creates a picture of the universe of Address common M&A issues early. Leading companies anticipate and plan for M&A risks such as lack of M&A experience; entrenched resistance to ratio- product variations, options and sub- nalization on either side; or the acquirer’s reluctance to quickly launch a critical components for each firm. product review for fear of destroying goodwill toward the acquired company. Although mapping may seem easy, Ideally such risks are considered when creating the original business case for the deal. we find that only a few best-practice Understand reasons for complexity and its impact. Best-practice compa- companies, even in manufacturing, nies are fully aware of the complexity of their products or services and employ maintain a complete and current view complexity management initiatives that usually uncover many more product or of their product and component vari- service variations than the company was aware of. In fact, variant trees designed ants and combinations (see sidebar: to graphically represent products or services variations never fail to astonish exec- utives who thought they knew the extent of their product portfolio inside-out. What the Leaders Do Right). A detailed Increase transparency. Lack of information and data transparency at the map ensures that these companies enterprise level hinders executives’ ability to measure the firm’s product and don’t underestimate the complexity of service complexity. The best firms uncover buried data from across the IT systems their product portfolio—a widespread of different departments and use it to create a platform for effective data synthe- problem in manufacturing, and even sis and analysis. Enterprise-wide transparency provides a thorough view of the more so in service industries where complexity landscape. there are no SKUs to identify a partic- Own the complexity management process. Product complexity often has ular service. many masters, with little perspective on their interplay. A best-practice company makes a point to assign owner(s) to the complexity management process. In so The map also accounts for future doing, complexity never slips through the cracks of the due diligence process. product changes and new products in various stages of development.
  • planned to be part of the combined A key advantage of this approach sition. Companies that engage in this portfolio, this blueprint defines the is that it develops an objective, com- process early will see multiple bene- optimal combination of components prehensive view of product com- fits: cost savings from well-integrated and features, and corresponding cost- plexity and its associated costs and production processes, increased reve- to-serve. performance impact across both orga- nues and profit potential from the The blueprint has an outward nizations. This avoids cultural and product portfolio, and in-depth col- focus, factoring in market coverage, perception biases, and the preferential laboration between the acquirer and product substitution and customer treatment of the acquiring company’s the acquired. Ultimately, successfully preferences; and an inward focus, products, which are all too common managing complexity will ease the accounting for cost and performance in M&A. integration process and increase the data on the product portfolio. Finally, odds of a successful merger. a detailed scenario analysis is used Losing Complexity, Gaining to quantify the impact of the blue- M&A Value print as it relates to the merger’s value- Managing product complexity adds creation objectives. tremendous value to a merger or acqui- Authors Joachim Ebert is a partner in the Chicago office and can be reached at joachim.ebert@atkearney.com. Olivier Aries is a principal in the Cambridge office and can be reached at olivier.aries@atkearney.com. Michael Hu is a consultant in the Chicago office and can be reached at michael.hu@atkearney.com. A.T. Kearney is a global management consulting firm that uses A.T. Kearney, Inc. 1 312 648 0111 strategic insight, tailored solutions and a collaborative working Marketing & Communications email: insight@atkearney.com style to help clients achieve sustainable results. Since 1926, we 222 West Adams Street www.atkearney.com have been trusted advisors on CEO-agenda issues to the world’s Chicago, Illinois 60606 U.S.A. leading corporations across all major industries. A.T. Kearney’s offices are located in major business centers in 36 countries. Copyright 2009, A.T. Kearney, Inc. All rights reserved. No part of this work may be reproduced in any form without written permission from the copyright holder. A.T. Kearney® is a registered mark of A.T. Kearney, Inc. A.T. Kearney, Inc. is an equal opportunity employer. 4-09