October 2015 | 

Want a Successful Merger? Plan for It

Want a Successful Merger? Plan for It

Two major mergers are looming in the American health care industry. If they take place, there will be only three major health insurance providers in the nation. As the story plays out, we get a glimpse of impending doom from Congress, which is holding hearings on the mergers, from lobbyists, who warn of rising consumer prices, and from the Justice Department, which is looking at possible anti-trust lawsuits.

Is this just another cautionary tale for U.S. companies eyeing a merger? Wharton management professor Harbir Singh says the story has much wider implications — ones that businesses around the world need to pay attention to.

“These potential mergers are reflective of broader economic forces that are driving increasing economies of scale in many industries, including financial services, pharmaceuticals, and automotive,” explains Singh. “Decision makers need to be equipped not only to react to proposals, but to understand these forces and anticipate the direction of their industry.”

Singh, who teaches in Wharton’s Mergers and Acquisitions program, says although we can’t know exactly what lies ahead, we can prepare for change. “Prepare for the evolution of your industry, and be aware of possible transactions and partners. Think more globally about your industry and where activity may occur.” He explains that the global mindset is critical because over the past five years, M&A activity has grown around the world, both across borders and within them.

But planning for a merger takes more than understanding and taking into account large economic forces and industry trends. Once a potential candidate is identified, Singh says you need a structured method for evaluating that candidate and the drivers of economic value.

“In Mergers and Acquisitions, we show you how to get a better sense of how value can be created,” he notes. “You have to assess, in a systematic way, the actual assets and activities of both organizations. We offer a framework for decision-making that allows you to create a checklist of key analytics you need to do before getting to the transaction.” In other words, if you can’t make the case for potential long-term value — and many firms considering mergers can’t — you should not be at the table.

Planning and evaluating potential drivers of value should continue for post-merger integration, says Singh. Even if a firm is a good match on paper, integration is very complex. But how can you “preview” and plan the integration process? “You have to anticipate where there may be conflict or some other challenge, such as stakeholder resistance. Then, identify ways of addressing it.”

Likewise, he says, you have to identify the positive benefits of the merger. Then, don’t sit back and wait for them to happen. Instead, put into place structural ways of generating those benefits. “Success can depend on creating and executing an integration plan for both taming the negatives and enhancing the positives.”