Put it All on Red

The cost of a proper integration process is sometimes off-putting to executives. The problem is that – like many professional services – the ROI is pretty squishy.

That’s just a stupid excuse, in the very humble opinion of The Merger Verger.

The integration effort needs to start soon, ramp up big and go long. That all costs money. Sometimes Big Money. Estimates in the range of 10% of deal value are fairly common.

Executive: “Ten percent? Are you kidding?”

Verger: “No. Face the facts.”

The facts are that well over half of all deals fail to achieve their intended results and many actually destroy shareholder value. Failure percentages range as high as 70-90%. That’s horrible.

So look the old Verger in the eye and tell him that you’re willing to invest 100 cents on the dollar for a deal with a 70-90% likelihood of failure but not 110 cents on a deal that might actually work?

roulette_wheelA thorough, effective integration process is an insurance policy … insurance against decades of past failures. That’s the problem: how do you measure the ROI on an insurance policy where the payoff is not measurable at the outset?

You don’t. But you’re corporate executives; it’s your job to make decisions on imperfect information.

That said, there are some proxies to consider:

  1. Try this out for a measuring stick. Go home and tell your wife that you’re going to cancel all your life insurance policies because the returns are just too hard to assess positively. She’ll kill you. What’s your return on that?
  2. Take a look at the cost of your car insurance as a percentage of your purchase price. It can be 25% or more. Not only that but you hope you’ll never use it! Sure makes paying 10% for something that you will actually use and benefit from seem like a bargain.

Recommendation:

If you are not willing to fund a thorough integration process, go to the nearest casino and put the deal’s purchase price on red. Your chances of a positive return are higher.