In recent years hospitality organizations have relied on mergers and acquisitions to build critical mass, forge ahead of the competition, and acquire skills and technologies. These transactions can be great vehicles for promoting a company's growth or investment strategy. But the data on mergers and acquisitions is conclusive: even the best-laid plans frequently fail to realize expectations. Failure in mergers and acquisitions results in enormous risk, and can prove to be disruptive, costly and emotionally wrenching experiences.

In a recent survey, nearly 50 percent of companies involved in mergers and acquisitions indicated that they did not gain access to new markets, grow market share or add products three years after the close of the transaction. Additionally, more than half of these same companies under-perform relative to their peers. Less than a quarter of all acquisitions provide expected financial returns after five years.

So what makes the difference between a successful transaction and one that fails to realize all the promised synergies? Much of the answer lies in taking an integrated approach to planning, executing, integrating and evaluating a merger or acquisition. It involves looking beyond the current managerial environment and the financial numbers to the full array of issues that will impact the success or failure of the transaction. Our firm's research and experience in thousands of transactions has shown that a deliberate. proactive merger and acquisition strategy and implementation process dramatically improves the probability of realizing goals and objectives. We've found that success in mergers and acquisitions correlates directly with the level of planning that goes into them. By establishing a fully integrated process, companies will achieve optimal results and maximize the opportunities in their strategic transactions.

To address these issues comprehensively, Arthur Andersen has developed a merger and acquisition best practice methodology that is powered by an interactive Web tool. eMerge by Arthur Andersen serves as a touchstone for organizations during a merger or acquisition process. It is designed to keep participants in the process grounded and in constant communication. This technology tool facilitates knowledge sharing and collaboration and enables real-time review and coordination of transaction documentation. It is a methodology and a set of deliverables that codify Arthur Andersen's approach in supporting clients as they go through a merger and acquisition process.

The Merger & Acquisition Process

In our experience working with companies during mergers and acquisitions, we've encountered a broad spectrum of failures. The root causes of these failures are often unclear operating strategies, incomplete due diligence or incompatible cultures. Furthermore, when one considers the complex environment of mergers and acquisitions within the hospitality industry (i.e., integration of multiple properties, systems and operating processes), these causes become even more pronounced.

The high failure rate results from weaknesses in one or more of the four interdependent components of the merger and acquisition process:

  • Planning
  • Execution
  • Integration
  • Evaluation

These four components coexist in a dynamic, iterative environment. Elements of one process often take place concurrent with elements of another process. In this complex interaction, information flow among the process elements is essential. Continuity and planning are crucial. Attempts to segment these components into discrete steps become a systemic cause of failure.

Planning

Merger and acquisition success correlates directly with the quality of planning involved. Companies often spend insufficient time analyzing and anticipating current and future market trends. It is common for companies to forego an objective analysis of their strengths, weaknesses, opportunities and threats. Too often, insufficient resources are allocated to establishing strategic objectives. In other cases, acquiring companies fail to achieve buy-in from all key stakeholders.

Before even contemplating specific deals, a company should initiate a planning process by articulating its corporate strategy and goals. Only then is it in a position to consider mergers and acquisitions to fortify weaknesses, fill gaps or take advantage of opportunities to jump ahead of the competition. A company should establish a business case for pursuing an acquisition. and then it must clearly outline a strategy for achieving the desired objectives.

Before a search for a merger or acquisition target commences. a company should establish its financial and tax parameters and perform preliminary cultural and operations assessments. Then, it should create a database of target companies and a contact log.

This deliberate process is quite the opposite of the opportunistic or emotional one that unfolds when companies embrace targets that seek to be acquired. It is inevitable and probably desirable that opportunistic deals surface. However, it is critical that all acquisitions be considered within the company's established strategic architecture as soon as possible so as to clearly identify the strategic goals they may help achieve and to ensure they are consistent with criteria established for acquisitions.

Once a specific target partner has been identified, a company's agreed - upon criteria should be used to set the specific goals and objectives of the transaction. These goals will be used throughout the merger and acquisition process to evaluate the transaction. Once merger or acquisition discussions are opened. a process of checks and balances should take place. An acquirer should constantly compare and bring the goals and objectives of this particular transaction into alignment with its original merger and acquisition strategy.

At the end of the preliminary analysis, a short but high-level risk assessment should be conducted. External risks (competitive, regulatory and shareholder) as well as operational risks (cultural, financial and management) must be documented. At this stage. risk assessment is often more instinctual than quantifiable. But if performed by the right people at the right level, risk assessment is of immeasurable value in determining whether negotiations should be opened, and if opened, how those risks will be mitigated or managed throughout the acquisition process.

Execution

Once a deal is struck, the execution phase of many mergers and acquisitions suffers from being rushed, with insufficient due diligence performed on a target. Once the egos and emotions of top management become involved, it is difficult to stop an acquisition as it roars down the track toward completion. In fact, not enough transactions are halted during due diligence. Often due diligence is perfunctory-financial statements are analyzed, assets identified and projections made.

In fact, after an agreement in principle is reached, a more formal, comprehensive due diligence process should commence. Due diligence is and should be a formidable task. It should start with the foundation of information gained during the search, preliminary analysis and risk assessment. Then a company should study operational matters under a microscope. and identify the challenges to making the merger or acquisition work. A company should identify the spectrum of risk it will have to overcome in the transaction. It may not have time to address all the details, but by bracketing the scope of what it defers to address later, it can determine the true costs and barriers to integration.

Operational due diligence should include a broad understanding of the target company's cultures, systems and processes. In today's environ-ment, two areas in particular require extensive review:

First, the company must develop a clear understanding of the target company's technology. A target company's technology can provide a strategic edge. However, Y2K complications can cost millions of dollars to fix, as can incompatible accounting or central reservation systems.

Second. the acquiring company often underestimates cultural differences. But the company should investigate the strengths of an organization and the values of its people.

During due diligence, the company should develop a formal process for identifying red flags. This will avoid situations in which staff find crucial information but are afraid to bring it forward. Mergers embody a strong emotional momentum driven by executives. The challenge for a company is to leave the door open for staff to communicate operational challenges they discover. At the end of due diligence, another risk assessment should be conducted and documented. The top ten risks should be brought to the attention of top management along with risk-mitigation plans to be carried out during the integration process.

Integration

The opportunity for mergers to fail is greatest during the integration process. Top management is intimately involved in negotiating a transaction. But once a deal is signed, top management's focus shifts away. Integration tends to get delegated. In fact, the failures that manifest themselves during the integration phase often can be identified and addressed with foresight during the planning and execution phases.

For success in integration, a dedicated cross-functional integration team should be released from usual duties to devote undivided attention to integrating an acquisition. When an integration team is staffed on a part-time or spare-time basis, integration becomes delayed or its success diminished.

In fact, integration should be divided into two carefully orchestrated steps: 1) planning for integration; and 2) implementing integration. The degree of integration should be dictated by a company's original merger and acquisition strategy. The level of integration should be coordinated with the transaction objectives. Integration planning should begin by identifying stakeholders and drafting key messages and communications. Project team members, including a merger coordinator, should be identified, team structures finalized and roles and responsibilities defined. A formal master integration plan should be established with dependencies and timeframes attached.

As companies integrate they must first articulate a new mission and business plan to support that mission. This strategy needs to address how the organization will integrate brands, build market presence and refine service and product offerings. Then, the new organization must integrate core processes, technology (Property Management, Sales. P0S, ERP, HR and Central Reservation systems) and back office facilities (i.e., accounting). The objective should not be to just "combine" the entities, but rather integrate the entities by implementing "best practices" where applicable. Difficult decisions must be made regarding which leaders will assume control, what core technologies will be preserved and what service standards will be followed.

During integration, companies also must resolve cultural and operational conflicts expeditiously. Even delayed introduction of change results in cynicism and discontent. Delayed and uncoordinated communication to customers, suppliers and employees causes uncertainty. Customers may defect to the competition because of concern about consistency of service. Disparate compensation packages cause employee dissatisfaction, both within senior management and front line hotel employees. Dissimilar information systems and processes retard integration. Planning for all the details of merging two businesses can help a company avoid integration disaster.

Evaluation

Companies often find it difficult to quantify their success or failure in the acquisition arena. When performance measures and evaluation metrics are poorly defined, results aren't measurable. This becomes a critical problem for acquirers because so often the public perception of success is as critical as success itself. Evaluation criteria am critical for quantifying communications to such key audiences as Boards of Directors, shareholders and financial markets. In fact, evaluation is an inherent part of each step in the acquisition process. Evaluation involves identifying and prioritizing the vital measures required to determine merger and acquisition success. It should consist of both hard and soft measures and tie back to the company's original strategic objectives.

In evaluating acquisitions, companies define their measures of success by looking back to the strategic goals for acquisitions that were articulated in the planning phase. Performance measures and evaluation metrics can be divided into four categories: financial, customer, operations and human capital. Financial metrics include revenues and operating costs relative to budget, return on assets, return on equity and strategic value-added, which measures real profitability and is an effective measure of wealth creation. Customer measures include the satisfaction of customers, customer retention and customer profitability. Operational measures include occupancy, RevPar, administrative and general expenses per employee, and operating margins. Human capital measures include employee retention, average productive hours per day and upward feedback indices.

Historically, mergers and acquisitions have been viewed as a series of segmented events rather than as an integrated, multi-disciplinary but unified process. eMerge by Arthur Andersen represents the first attempt in our industry to integrate all the pieces in the merger and acquisition process. The methodology breaks out the steps of articulating a merger strategy, targeting the acquisition search, planning and executing due diligence, establishing a negotiation team and then a transition team and many other aspects of the process. It provides a format for evaluating people, processes and technology issues. The tool also outlines a risk matrix that prompts those responsible to focus on the critical components that must be addressed to make a particular merger or acquisition work. eMerge by Arthur Andersen enables companies to fully assess opportunities, by providing the information and metrics required to assemble the right offer at the right price at the right time.

As a fully integrated methodology, the technology tool addresses the traditional financial, legal and tax issues of a transaction in concert with the soft issues of integration. We recognize that operating issues are most likely to affect the success of a transaction. The solution empowers companies to reduce operating risks by specifically including the cultural aspects of a transaction. This distinguishes our approach from a purely historical, financial, legal and tax approach to transactions.

The interactive Web tool eliminates the need for binders, CDs and other media that easily become outdated and are difficult and expensive to keep current. Because eMerge by Arthur Andersen is Web-enabled. everyone involved in a transaction can track the progress of activity at all times from any location. The integrated nature of this technology solution allows quick and easy access to past transaction information, facilitating the leveraging of past efforts. As a company and its transaction advisors use the tool, it becomes the company's own knowledge repository. This fluid methodology can be customized and expanded as needed to fit a particular transaction or management approach.

Using eMerge by Arthur Andersen enables a company to overcome the obstacles to its success at times in the transaction when it is still possible to address major challenges. By thinking of the merger process as a whole, management can overcome these barriers and increase a company's probability of success in the high-stakes arena of mergers and acquisitions.

by Willian Johnson and Deborah Tonnemacher

Willian Johnson is a Senior Manager in Arthur Andersen's Business Consulting practice. He is based in Los Angeles.
Deborah Tonnemacher is a Senior Manager leading the eMerge methodology development efforts. She is based in Los Angeles, with firmwide responsibilities.