(004-005) Q4-ThisQ v5 9/25/00 11:16 AM Page 4

4 T H E M c K I N S E Y Q U A R T E R LY 20 0 0 N U M B E R 4

This Quarter

After the merger

Last year broke records in mergers and acquisitions. More than 28,000
deals, worth a total of over $3.2 trillion, were struck—an increase in value of
one-third over the previous year’s deals and nearly six times the value of deals
completed in 1994. The sheer number suggests a variety of purposes behind
the agreements. Many of today’s most successful companies, including Cisco
Systems, use mergers very effectively to improve their skills. Others, such as
Swiss Bank Corporation and Union Bank of Switzerland, reenergize them-
selves by merging and making follow-on acquisitions. Deals between chem-
ical and pharmaceutical companies are fundamentally altering the shape of
those industries, while mergers such as those between America Online and
Time Warner and between Citicorp and Travelers Group create whole new
industries.

Despite all this activity, many academics, analysts, regulators, and consul-
tants challenge the value of mergers. At McKinsey we believe that mergers
do create value, but only if the right deal is struck and integration is tailored
to the situation and managed well.

If a deal has been misconceived, no degree of brilliant postmerger integra-

tion will clean up the mess. And even if a deal has been well thought out,
the participants can stumble. Many key operational decisions must be made
in the months following an announcement, but it is easy to get caught up
in the excitement and demands of deal making and to fail to think clearly
about what comes after. Chief executive officers are under pressure from
shareholders, boards, and often the investment community to justify their
strategies. They must also manage regulators whose say-so can break a
whole deal, as the recent collapse of the WorldCom-Sprint merger and of the
international three-way merger of Canada’s Alcan Aluminium, Switzerland’s
Algroup, and France’s Pechiney reminded us.

Even in the best of transitions, mistakes are made, important issues are over-
looked, and alternatives are left unconsidered. The three articles that make
up our feature section are devoted, in different ways, to those things that
mergers too often miss.
(004-005) Q4-ThisQ v5 9/25/00 11:16 AM Page 5

THIS QUARTER 5

“The people problem in mergers” recognizes that while plenty of attention is

paid to the legal and financial side of deals, they stand or fall on the strength
of their human side. When, as today, a company’s highest return ratio is the
“return on talent,” the company must ensure that it still has the people it
wants when the smoke clears. Authors Ira Kay and Mike Shelton explain how
a well-chosen and -managed employee-selection process, including frequent
and open communication, can allay a staff’s anxiety about the future. Their
analysis is confirmed by an interview with CEO Jon Boscia, who discusses
how his company, Lincoln Life Insurance, managed people issues when it
bought the life insurance business of CIGNA.

While planners might think too little about people, they certainly do think
about synergies, which are the obvious source of near-term value creation
in mergers and fundamental to the value of a deal. Although much is made
of cost reduction, increased purchasing power, and a lower cost of capital,
few notice the enormous potential of pricing. This is odd, since even small
pricing changes can have a dramatic effect on the bottom line. The authors
of “The hidden value in postmerger pricing” ponder the neglect of the sub-
ject and then go on to explain how a combined company can optimize its
pricing.

Finally, “When to think alliance” reminds us that mergers are not the only
way to obtain synergies, know-how, and access to new markets. Long con-
sidered a kind of stepsister to full-blown M&A, alliances have become more
prevalent as a result of the effect of the Internet on interaction costs and the
demands it creates for speed. But, although there has been much research
into the value of M&A, there has been little study of alliances. The authors
of this article draw on a study of the market’s reaction to more than 2,000
alliances and reach a number of conclusions about when alliances are to be
avoided or embraced.

The market does notice when alliances happen, and it cares—often, quite a
lot. The authors advise management to consider alliances when it works in
or with fast-moving industries, when it ventures into uncharted terrain, and
where M&A is for whatever reason not feasible. But about joint ventures,
a more committed form of alliance, the market tends to be skeptical. The
authors stress the importance of considering the complete range of options
in an unbiased fashion and keeping all stakeholders fully informed. Which
might be to say that alliances are not so different from mergers and acquisi-
tions after all.

David Fubini
Director, Boston office