In the wake of big mergers engineered last year by Travelers Group and Conseco Inc., cross-selling is suddenly in vogue again in financial services. For these and many other acquirers, the basic problem is a seeming failure to construct acquisition strategies that truly build advantage. The synergistic benefits touted by merger partners rarely seem to materialize. Unless valuations and post-merger integration plans are driven off such a strategy, subsequent performance is likely to disappoint.
Many deals destroy value right from the beginning.
Executives must begin by recognizing that every acquisition must pass two tests before it creates value for shareholders. Since investors have already priced hefty future expectations into today's valuations, the acquirer's stock price will suffer if there is any indication of flagging performance at either of the combining businesses. Second, an acquisition must change the economics of either the acquirer's or the target's business. True merger synergies consist of performance gains exceeding those already priced into the predecessors' stand-alone values. Therefore, the benefits to be derived from combining businesses must more than justify the premium paid to execute the transaction.