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

1. 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, the culprit is product 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 this is due to increased likely to increase,
Schering-Plough to increase its large- product complexity, the result of com-
molecule R&D capabilities and increase bining two companies’ products and as companies that
its product pipeline; and the merger of services and the processes necessary to
the Burlington Northern Railroad with manufacture and deliver them (see
weather the down-
the Santa Fe Pacific to realize opera- sidebar: Why It’s So Tough to Manage
tional efficiencies. Mergers and acqui- Product Complexity). Effective complex-
sitions are likely to increase in the ity management, challenging enough
turn will be on the
current economic climate, as compa- under normal circumstances, becomes
nies that weather the downturn will be both more crucial and more difficult
prowl to acquire
on the prowl to acquire weaker compa- during a merger or acquisition.
nies on attractive terms.
weaker companies
In theory, M&A achieves value Managing Product Complexity
through top-line and bottom-line syn- Can Pay Off on attractive terms.
ergies. Top-line opportunities include Addressing the underlying complexity
cross-selling, product line extensions of the combined product (and process)
and gaining access to new channels portfolio is at the core of M&A success.
and customers. Bottom-line synergies Cost savings is one reason: A company
include rationalizing assets and capital, can cut costs by up to 30 percent as
improving productivity, and improv- a result of complexity management
ing sales, general and administrative (see figure 1 on the following page). Let’s
(SG&A) costs. examine the advantages of properly

2. FIGURE 1: Potential complexity management savings across companies also makes custom-
ers less nervous: Will our product
Automotive Chemicals continue to be supported? Will we
and industrial and process Consumer Financial have to change dealers? What about
Segment products industry goods services
the upgrades we were counting on?
Product development 10%-30% 3%-5% 3%-10% 5%-15% When these issues are resolved, cus-
Purchasing 5%-15% 3%-5% 4%-7% 5%-10% tomers are less likely to switch to a
Production 10%-30% 3%-5% 3%-5% competitor (trading performance for
10%-20%
Logistics 5%-30% 3%-5% 3%-5% predictability).
Moreover, properly managing
Sales and marketing 3%-5% 3%-5% 4%-7% 4%-7%
product complexity offers benefits for
Source: A.T. Kearney
the broader M&A integration. When
product complexity is contained, com-
managed product complexity: Maintaining an interconnected manu- panies experience fewer quality issues,
From a bottom-line perspective, facturing footprint is less costly, and manufacturing delays and customer
well-integrated product portfolios result supporting fewer technologies or stan- complaints. Management can focus on
in better-utilized manufacturing facili- dards also requires fewer investments. accelerating returns from the new
ties, properly diversified sourcing for 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
systems, it needs fewer IT investments. A clear plan for product integration blueprint, leadership can be ready
before the post-close integration, when
a flurry of tactical and emergency mat-
ters tend to engulf most companies.
Why It’s So Tough to Manage Product Complexity
Before developing the blueprint,
Why is managing product complexity so difficult during the M&A process? it is a good idea for the company to
There are three main reasons: assign ownership for the complexity
Product complexity is often overlooked even before an acquisition is management effort to an individual
decided. Few companies preemptively manage their product portfolio on a sus- leader from the acquiring company,
tained basis, either because they lack the tools to understand their true product
supported by a small team.
costs, or for fear of hurting profitability by retiring older products.
Once this team is assembled, the
Mergers exacerbate the complexity challenge, by amalgamating new prod-
ucts, services, assets and processes in a daunting mix. Managers are fearful of company is ready to begin the
making rushed decisions to simplify this mix that may harm future performance. JumpStart approach to M&A com-
There are few incentives to tackle portfolio complexity early on in the plexity management (see figure 2).
merger process. To show rapid value creation, the executive leadership gener- This approach helps both companies
ally focuses on low-hanging fruit with a proven track record of synergy, such as exchange information and prepare
procurement or SG&A rationalization. At the same time, leaders are generally integration opportunities, while also
careful to show respect for the products of the acquired company as a sign of
remaining compliant with legislation
goodwill, thus delaying product rationalization.
before the deal is officially closed. Even
companies that are restricted from

3. FIGURE 2: Complexity management timeline ucts, components, functionalities and
cost elements. A picture will begin to
M&A planning timeline emerge of which products or compo-
nents from each company deliver the
Target ID Due diligence Financing and negotiations Integration
most value.
The assessment allows the organi-
0 3 6 9 zation to see the end-to-end “cost pic-
Form 1. 2. 3. ture” of any product. This picture cuts
team Assessment Mapping Blueprint design across P&L and reporting lines and is
Source: A.T. Kearney often the first time the organization
can assess the true cost of complexity.
Blueprint design. The product
interacting in the pre-merger phase Assessment. Once the product profiles are the foundation of the inte-
can use a “clean room” to strengthen universe is mapped for each company, gration blueprint. For all products
and accelerate their integration plan- product variants are assessed to create planned to be part of the combined
ning. Integration teams may wish to a database of “product profiles” that is portfolio, this blueprint defines the
host small synergy summits to build used to identify best-of-breed prod- optimal combination of components
relationships and plot product port-
folio integration strategies.
The following offers more details
of the three-step process: What the Leaders Do Right
Mapping. The M&A team devel- There are significant complexity challenges in M&A, but best-practice companies
ops a map of product complexity for are able to counter them. How do they do it? There are four traits that leading
the acquiring company and the target companies share:
company, simultaneously. This map Address common issues in M&A. Leading companies never succumb to
creates a picture of the universe of poorly planned integrations no matter what the reason: lack of M&A experi-
ence; entrenched resistance to rationalization on either side; or the acquirer’s
product variations, options and sub-
reluctance to quickly launch a critical product review for fear of destroying
components for each.
goodwill toward the acquired company. Leaders address such issues well before
Although mapping may seem the deal closes.
easy, we find that only 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
never 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.

4. and features, and corresponding cost- prehensive view of product com- sition. Companies that engage in this
to-serve. plexity and its associated costs and process early will see multiple benefits:
The blueprint has an outward performance impact across both orga- cost savings from well-integrated pro-
focus, factoring in market coverage, nizations. This avoids cultural and duction processes, increased value in
product substitution and customer perception biases, and the preferential the product portfolio, and in-depth
preferences; and an inward focus, treatment of the acquiring company’s collaboration between the acquirer
accounting for cost and performance products, which are all-too-common and the acquired. Ultimately, success-
data on the product portfolio. Finally, in M&A. fully managing complexity will ease
a detailed scenario analysis is used to the integration process and increase
quantify the impact of the blueprint Losing Complexity, Gaining the odds of a successful merger.
as it relates to the merger’s objectives. M&A Value
A key advantage of this approach Managing product complexity adds
is that it develops an objective, com- 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
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