Merger and Acquisition fever continues. Whereas the M & Aboom of the 1980s was driven largely by financial consider-ations, resulting in many leveraged buyouts and hostile take-overs, more of today’s mergers and acquisitions are friendlyand are motivated by strategic profit goals. Reflecting thistransition, marketing synergy has become a more relevant fac-tor in determining the ultimate success of contemporary merg-ers and acquisitions. This article reviews an empirically testedstep-wise approach for identifying, valuing, and realizing op-portunities for marketing synergy related to proposed or con-summated acquisitions. The approach focuses upon analyzing
Leveraged by technology and readily available capital,global overcapacity has developed in steel, paper, chemi-cals, airline seats, cars, commodities, livestock, telecom-munications, financial services, and many other industries.This overcapacity has caused intensive price competitionand a new drive for efficiency through consolidation.Companies in affected industries feel they will be left be-hind if they do not either quickly join forces with com-petitors or vertically integrate. High stock values have
Address correspondence to Dr. J.A. Weber, University of Notre Dame,College of Business Administration, Department of Marketing, Notre Dame,IN 46556.
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terminant of merger success or failure. Unfortunately,however, systematic assessment of prospective market-ing synergies is too seldom included in the formal mergerevaluation process. One reason for this continuing over-sight is the shortage of acceptable tools and measurementstandards. The approach reviewed in this article attemptsto help address this shortcoming.
Many Disappointing Mergers
In sharp contrast with intended goals, mergers and ac-quisitions have frequently resulted in market-sharelosses, skimpier profits, and, in the long run, less moneyfor shareholders. For example, one study of 150 mergerswith values greater than $500 million in the 1990s byMercer Management concluded that “50% were failures”when judged by their effect on stockholder wealth afterthree years. Evaluation of mergers from 1990 to 1995showed that 69% of companies making either no acquisi-tions or making acquisitions worth less than $5 millionoutperformed their respective S&P industry indices,while only 58% of companies making acquisitions ofover $5 million did better than their industry indices [5].A study by Sirower, summarized in his book,
The Syn-ergy Trap
[2], found that of 168 deals analyzed, roughlytwo-thirds destroyed value for shareholders. The studyconcludes that companies too often think they can gener-ate synergy faster and in greater amounts than is reallypossible. With the inflated prices of many deals now be-ing consummated [6], both merger stakes and associatedrisks are quickly rising.
While the causes of the merger disappointments are di-verse, integration problems are a factor common to manydisappointing mergers [2, 5]. A typical mistake is to as-sume that skills honed in one business can be readily ap-plied to another. Another critical error is to assume that
In today’s more strategically motivated mergers, marketing synergy is a
more critical determinant of
merger success or failure.
created abundant currency with which to finance thesenew deals.
1
The result has been an explosion in world-wide merger and acquisition (M & A) activity. The totalvalue of worldwide mergers in 1998 was $2.489 trillion,up 54% from 1997, while in the U.S., the total value rosean astounding 78% to $1.613 trillion according to Securi-ties Data Co. [1]. Between 1991 and 1998, the annualvalue of mergers in the U.S. increased more than tenfold(Figure 1).
Strategic Mergers
While varying in specifics, the motives behind today’smergers have several factors in common. They tend to bestrategic in nature, to be friendly deals, and to usuallyjoin companies in related businesses. The typical purposeis to increase profits by reducing costs (through achiev-ing economies of scale and slashing overlapping oper-ations) and boosting revenues (through adding newproducts and expanding market reach). These strategicmotives contrast with financially motivated consolida-tions that were more typical in the 1980s [2, 3]. Giventhis transition to more strategically motivated consolida-tions, marketing synergy is becoming a more critical de-
1
For example, stock transactions accounted for roughly two-thirds of thedeals in 1998, up from less than one-tenth 10 years earlier [4]. For a discussionof the trends in M & A activity over the past 20 years, see references [2, 3, 4].
JOHN A. WEBER is Associate Professor at the University of Notre Dame, specializing in Industrial Marketing and International Business. He has been active as a consultant with over 50 major corporations.
UTPAL M. DHOLAKIA is a financial and customer value analyst
with M & T Trust Company.
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competitors will stand still, which simply does not hap-pen [6]. Then too, conflicts in corporate cultures have of-ten hindered companies from fully realizing the synergis-tic benefits envisioned from acquisitions [7, 8].
Time pressure is another major factor contributing todisappointing mergers today. Many companies feel theysimply do not have adequate time to carefully evaluate
the full range of integration issues related to organiza-tional makeup and strategic marketing. Such time pres-sures increase the chance of rushing headlong into pre-mature closings of poorly planned mergers, leavingimportant areas of ambiguity unresolved in completedagreements [9–12]. Other impacting factors include as-suming a boom market will go on forever, straying too
FIGURE 1. Value of Mergers & Acquisitions 1990-98 (Bil $) (Securities Data Co.).
Companies think they can realize marketing synergies faster and in greater amounts
than is really possible.
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far afield from the company’s main business expertise,acquiring too large a company, and losing key managersin the acquired company [12, 14–19].
Importance of Synergy in Strategic Mergers
With the growing importance of strategic mergers, thesuccess or failure of many acquisitions today may be de-termined as much by the ability of the merged firms torealize synergistic benefits as it is by financial criteria perse [12–17, 20–22]. Synergistic benefits can come in a va-riety of areas such as technology, R & D, production, andmarketing. AT&T’s $5 billion acquisition of IBM’s Glo-bal Network in late 1998 promises an integration of com-plementary technologies, with AT&T instantly gaining5,000 employees skilled in managing a vast array of net-work technologies. The deal also promises to instantlytransform AT&T from a domestic long-distance com-pany into a global communications provider [23]. MicronTechnologies hopes that its 1998 acquisition of Texas In-struments semiconductor memory business will positionMicron as the cost leader in DRAM memory [24]. Na-tional Steel’s ventures with Robinson Steel and MarubeneCorporation promise to expand National Steel’s productmix while at the same time providing National with in-stant capacity for producing steel blanks for the automo-bile industry.
In the area of marketing, while sitting around a board-room table, it is easy to envision how a prospectivemerger might help the parent firm quickly gain a host ofmarketing-related competitive advantages. Unfortunately,however, because of the competitive pressures in today’smarketplace, many mergers are consummated with toolittle formal planning regarding specifically how thecombined company can actually realize the synergisticmarketing benefits envisioned. Thus, many unforeseenpost merger integration problems are marketing related,
for example, Philip Morris’s difficulties in trying to le-verage its brand management skills in an unsuccessful at-tempt to turn 7-Up into another Coca Cola.
Current Merger Evaluation Approaches
Despite the transition to more strategically motivatedmergers, the formal acquisition evaluation process stillbegins and ends far too often with the analysis of finan-cial indices such as stock price, earnings, tangible and in-tangible assets, and investments [25, 26]. Financially fo-cused acquisition analysis has been facilitated to aconsiderable extent by the proliferation of financial data-bases resulting in the ability of merger analysts to accessand manipulate financial data more easily and effectively[e.g., 27–29]. Thus, today’s acquisition analysis models areexpansive and quite sophisticated [e.g., 22, 25, 27, 30, 31].
Unfortunately, however, with few exceptions [e.g.,32], the primary analytical dimensions of these modelsstill tend to focus on financial parameters, excluding sys-tematic frameworks for searching out and evaluating pro-spective opportunities for marketing consolidations andsynergy. This failure to adequately plan for the realiza-tion of merger-related marketing benefits can doom astrategic merger to failure from the very beginning [5, 12,15, 33]. One reason why the analytical bases used forevaluating prospective acquisition candidates have notbroadened to systematically incorporate marketing vari-ables is the shortage of acceptable tools and measurementstandards. The approach reviewed below attempts to helpaddress this shortcoming.
Expanding Merger Evaluation to Include More Analysis of Marketing- Related Dimensions: An Overview of the Proposed Approach
The proposed approach involves a two-phase processfor evaluating prospective or actual merger partners from
Formal merger consideration still begins and ends far too often with the analysis of
financial indices.
161
a marketing point of view. The scheme is designed tohelp analyze potential marketing consolidations and syn-ergy of partners whose core businesses are similar–thatis, strategically driven, complementary mergers.
Phase One is an exploratory process involving a broad-based assessment of areas in which a partnership or ac-quisition might enhance marketing effectiveness. In thisphase, managers develop a checklist of potential dupli-cated marketing-related resources, where synergistic ben-efits might result from consolidation. These might include:duplication of products, brand positions, warehousing andphysical distribution facilities, customer service facilitiesand programs, advertising and sales promotion efforts,product development efforts, marketing staffing, directsales force personnel, distributors, merchants, and othersales representatives.
Once such a list has been created, managers can beginto identify and evaluate specific opportunities where po-tential benefits from integration might enhance a com-pany’s overall competitive position. Planners should tryto map out the nature of each aspect of potential consoli-dations, the potential related economies, and the potentialmarketing gains. They should also think about how eachpotential consolidation might help the combined organi-zation move toward becoming the
premier competitor
inthe markets of greatest interest. When combined withPhase Two, this preliminary analysis provides valuableinput for prioritizing and implementing operational plansto address the practical challenges related to alternativeprospective opportunities for marketing consolidations.
Phase Two uses an empirically tested marketing audit-ing procedure, called Path Marketing Analysis (or PMAor PATHMOD), to develop integrative “PMA marketprofiles” for each affected core product and market of theparent company and prospective partner. Each profileprovides a compact, visual and quantitative summary ofthe marketing weaknesses of each partner. The idea is todetermine the specific weaknesses or “gaps” faced byeach company in a given market, and then to determine
whether and how a merger or acquisition might addressthem. Developing a PMA market profile requires a sys-tematic analysis of the breadth of product line, thestrength of market position at different price points, thesize and effectiveness of the sales force, the relativestrength of each distribution channel used, and the depthof brand awareness and loyalty among target customers.Once developed, PMA market profiles of the prospectivepartners are hypothetically joined in order to provide be-fore-after comparative perspectives on the would-becombined company’s market position and sales.
PHASE ONE: IDENTIFYING AND PRIORITIZING AREAS FOR POTENTIAL MARKETING CONSOLIDATIONS AND SYNERGY
Phase One involves a search for areas where marketingconsolidations might be feasible for prospective partnerswith similar core businesses. This exploration might beinitiated by either company but should eventually evolveinto a cooperative investigation by the marketing plan-ning teams of both firms. Conducting such a study as acooperative venture can provide more objective analysiswhile also providing premerger contacts between keymarketing personnel of both companies. These early con-tacts and cooperative discussions can help smooth con-solidations once the merger is consummated. A reason-able starting point for the study itself is to develop achecklist of marketing-related areas of potential duplicateresources, where synergistic benefits might result fromconsolidation. Among others, these areas might includethe following (presented in no particular order):
1. Duplication of products—potential consolidation2. Duplication of brand positions—potential consolidation3. Duplication of warehousing and physical distribution
facilities—potential consolidation4. Duplication of customer service facilities and pro-
grams—potential consolidation
A two-phase process for evaluating prospective or actual merger partners
from a marketing point of view.
162
FIG
UR
E 2
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xam
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ase
On
e: T
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fo
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pp
ort
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arke
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163
FIG
UR
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.
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FIGURE 3. (A): Traditional view of the marketing mix. (B): Alternative view: A PMA market profile presents mar-keting mix elements and related market share growth opportunities in a hierarchical structure. (C): Two PMAmarket profiles are built for each segment.
5. Duplication of advertising and sales promotion ef-forts—potential consolidation
6. Duplication of marketing planning, organizing, andstaffing—potential consolidation
7. Duplication of direct sales force—potential consolidation
8. Duplication of distributors or merchants—potentialconsolidation
The initial exercise involves identifying and evaluatingspecific opportunities where potential benefits from inte-
165
gration might enhance the combined firm’s overall com-petitive position in relevant core businesses. When com-bined with Phase Two, this preliminary analysis providesvaluable inputs for prioritizing and designing operationalplans to address the practical challenges related to alter-native prospective marketing consolidation opportuni-ties. To facilitate implementing Phase One, the discus-sion of each area should include four dimensions:
1. Description—the nature of the specific potential con-solidation effort
2. Economies—how each potential consolidation mighthelp to provide economies for the company
3. Marketing enhancement—how each potential consoli-dation might help to improve the company’s market-ing effectiveness for the product line in question
4. Competitive position—how each potential consolida-tion might help the combined company move towardbecoming the premier competitor in relevant markets.
The intention of this exploratory process is to identifythe most important potential synergistic benefits of eachpossible consolidation strategy. Emphasizing the positiveat this early stage can aid and energize this explorationfor prospective synergistic marketing benefits. Figure 2provides an example of the preliminary analysis.
At this point in the analysis, a company has no need toconsider the inherent difficulties or specific costs in-volved in designing and implementing plans to carry outthe various potential consolidation opportunities identi-fied. That analysis awaits the completion of Phase Two.
PHASE TWO: MICRO-MARKETING ANALYSIS OF CORE BUSINESS AREAS BY USING PATH MARKETING ANALYSIS (PATHMOD)
In addition to the search for synergistic benefits frompotential marketing consolidations with a merger partner
(i.e., in Phase One), a more focused micro-marketing au-dit and analysis of the core businesses of each companyinvolved is also appropriate. Phase Two uses a before-afterbasis for assessing the core businesses likely to be mostdirectly affected by the partnership. This appraisal usesan integrative, hierarchical marketing auditing procedure,called Path Marketing Analysis (PMA or PATHMOD) todevelop PMA market profiles for each affected coreproduct and market of both the parent company and themerger partner. Each PMA market profile provides acompact, readily comprehensible, visual and quantitativesummary of the marketing weaknesses of a company ineach market considered.
Comparative PMA market profiles for the parent andthe prospective (or actual) new partner are joined to pro-vide hypothetical before-after visual and quantitative per-spectives on the would-be combined company’s marketposition and sales—reflecting whatever marketing con-solidation assumptions the planning team would like totest. The framework is also suitable for assessing the pro-spective results of alternative potential marketing consol-idation strategies under different assumption sets (“whatifs”) regarding the environment (e.g., hypothesizing al-ternative potential strategies by competitors or alternativepotential scenarios related to technology, law, or theeconomy).
Overview of Path Marketing Analysis (PATHMOD)
An incipient version of this hierarchical planningmodel was presented in the literature previously [34, 35].It was initially referred to as “Growth Opportunity Anal-ysis,” later as “Gap Analysis,” and finally, today, iscalled Path Marketing Analysis (PMA or PATHMOD).Over the past 20 years, through trial and error applicationwith over 200 groups of managers from 65 major indus-
Phase One involves developing a checklist of duplicated marketing resources, where synergistic benefits might
result from consolidation.
166
FIGURE 4. Market profiles for the acquiring firm.
167FIGURE 5. Market profiles for the prospective or actual partner.
168
FIGURE 6. Leveraging company sales through the acquisition (how 13% 1 13% might add up to 35%) combinedmarket profiles, including synergistic benefits.
169
Consider how each potential consolidation might help the combined organization move
toward becoming the premier competitor.
trial companies, the specific components (“gaps”) ofPMA market profiles and the application of the approachto help plan market share growth have been significantlymodified, refined, and enhanced. A number of new usesfor PATHMOD have also been developed. A full-scaleversion of the enhanced model is presented in a recent is-sue of
Industrial Marketing Management
[36]. Empiricalevidence shows that application of PATHMOD canproject a close approximation of growth anticipated fromplanned marketing strategies [37].
The essence of the PATHMOD framework is that ittreats marketing mix elements [38, 39] in a hierarchicalmanner (Figure 3 A–C). The resulting format is referredto as a PMA market profile. Each PMA market profileprovides a compact visual and quantitative summary ofthe share growth opportunities available for a company ina targeted segment. More specifically, a profile summa-rizes growth opportunities (“gaps”) related to captivesales, breadth of product line, price positioning, distribu-tion effectiveness, and promotion.
Identifying PMA Market Profile Gaps
To start building a PMA market profile, the planningteam first segments the relevant market and then esti-mates current annual industry sales (IS) and the firm’ssales (FS) for the target segment. For prospective mergerpartners, it is important that both companies begin withsimilar product market definitions and boundaries, sothat market size estimates and subsequent projections donot conflict. This can best be accomplished as a coopera-tive process among key marketing personnel from bothcompanies. Fewer conflicts are likely to result if primaryshared markets are segmented and estimated according tobenefits sought [e.g., 40]. Next, the planners of eachcompany try to explain all portions of the overall compet-itive gap (i.e., industry sales minus firm sales). As the ex-planations emerge, they take the form of PMA marketprofile Gaps (or, simply, “gaps”). The challenges in-
volved in identifying individual gaps and estimating theirsize have been considered elsewhere [36]. The first set ofgaps together constitute the “unserved market” (USM).Each gap identified as part of the Unserved Market repre-sents a potential share growth opportunity for which thecompany is not currently competing. Included in the un-served market are four fundamentally different kinds ofgaps: captive sales, product, price, and distribution gaps(as shown later, the promotion gap is treated as part ofthe served market).
Appendix A reviews different types of PMA marketprofile gaps and provides general perspectives regardinggap identification and gap size estimation. A PMA mar-ket profile can have several gaps of each type (e.g., sev-eral captive sales gaps, several product gaps, etc.). In thecompact summary and example presented here, how-ever, the number of gaps of each type are kept to a mini-mum to focus coverage on how the hierarchical frame-work can provide marketing-related insights for acquisitionanalysis.
Applying PATHMOD for Merger Analysis
Applying PATHMOD for merger analysis begins bydeveloping two PMA market profiles, one for companyone (the acquiring firm, Figure 4, 1A), and another forcompany two (the merger partner, Figure 5, 2A). Theseprofiles summarize the current weaknesses (i.e., gaps) ofeach company in the relevant market prior to the prospec-tive merger. See the examples in Figures 4 and 5.
P
ROJECTING
F
UTURE
M
ARKET
P
ROFILES
FOR
E
ACH
C
OMPANY
—A
SSUMING
N
O
M
ERGER
. Market profilesand related gaps are then projected for each partner forseveral years into the future (e.g., year 3), while assum-ing no new strategies by either company. Projecting theseprofiles stimulates planners to consider how the marketitself is likely to change over the next several years, thusestablishing a base for evaluating the effects of potential
170
Phase Two involves a micro-marketing audit and analysis of the core
businesses of each company.
marketing strategies, including related potential market-ing consolidations. Market dynamics incorporated withinthe projected profiles include forecasted changes in in-dustry sales, demand patterns (e.g., different productvariations, price sensitivity and competition, distributionmodes, etc.), competition, technology, the economy, andother potential changes in the environment.
Building projected future market profiles (Figure 4,1B, and Figure 5, 2B for the parent and merger partner,respectively) begins by projecting industry sales severalyears into the future (e.g., year 3) for the relevant market.Gap sizes are then identified and estimated independentlyfor the parent company (Figure 4, 1B) and the prospec-tive partner (Figure 5, 2B). Gap size estimates for theprojected profiles (Figure 4, 1B and Figure 5, 2B) shouldassume no new strategies by either company, but shouldfully incorporate projected changes in demand patterns,competition, technology, etc., as described above (i.e.,the most likely environment).
C
OMBINING
THE
M
ARKET
P
ROFILES
OF
THE
P
ROSPEC-
TIVE
M
ERGER
P
ARTNERS
. Once current and projectedmarket profiles have been developed independently forthe two companies, the challenge is to hypotheticallycombine them, while assuming alternative potential mar-keting consolidations between the partners. An exampleappears in Figure 6. Figure 6 presents the current marketprofile for the parent company today (Figure 6, 1A) and anew consolidated profile, assuming a merger between thetwo companies (Figure 6, 3B). The combined profile(Figure 6, 3B) assumes implementation of selected post-merger marketing consolidation strategies between themerger partners. As shown in the example, current andprojected firm sales for companies one and two are simi-lar before the merger (Figure 4, 2A, and Figure 5, 2B).Each company is shown with a 15% share (60 M units) inthe current year. Assuming no new strategies, the sharefor each is projected to decline slightly to 13% (approxi-matley 58 M units) over the next several years (by year
3). Therefore, were they to remain independent, the twocompanies together would account for a 26% share (c.116 M units) in year 3.
The PATHMOD framework serves as a logical tool fordirecting the discussion regarding the likely synergisticimpact of potential marketing consolidations between theprospective partners. For example, Figure 6 assumes amerger and some marketing consolidations between thetwo firms. In that example, joining companies one andtwo into company three yields a significantly higher mar-ket share of 34% (vs. 26%) and higher sales of 155 Munits (vs. 116 M units) than if companies one and twocontinued as separate entities. The next section reviewsthe particular marketing consolidations assumed in theexample and comments on their potential synergistic im-pact upon the combined company’s sales and marketshare. In the example, the gap reductions shown are as-sumed to reflect the planning team’s detailed discussionof the potential marketing consolidation alternatives un-covered in the broader based analysis in phase one.
Marketing-Related Synergistic Benefits Assumed in the Example
C
APTIVE
S
ALES
G
APS
. Captive sales refer to salesnot available to a company’s brand because of predeter-mined buyer commitments to competitors’ brands. Suchcommitments exclude simple brand loyalty, referringrather to phenomena, such as long-term contracts, com-patibility requirements, specified requirements for brandchoice diversity, or in-house allocations (e.g., GeneralMotors reserving a certain portion of its parts businessfor GM owned affiliates). The example assumes thateach firm has a projected captive sales gap of 10%,caused by long-term contracts in both cases.
Direct Benefit.
Of the acquirer’s (company one) 10%captive sales gap, 3% was captured by the prospectivepartner (company two). Through the acquisition, there-
171
fore, company one’s projected gap will decline from 10%to 7%.
Potential Synergistic Benefit.
Joining the two com-panies (into company three) may result in a firm that canbid more competitively, has better service and respon-siveness, and is perceived as more stable by contractingagencies and the 7% of buyers making up the remainingcaptive sales gap. The example projects a 2% gain fromthese synergistic benefits, leaving combined company threewith a projected residual captive sales gap of only 5%.
While the nature of and logic for the various gap sizereductions in the consolidated firm (company three) aredescribed and justified in this section, the specific size ofgap reductions flowing from assumed marketing consoli-dations (vis a vis captive sales and all other gaps) are esti-mated through judicious interpretation of the planningteam’s detailed discussion of each potential marketingconsolidation alternative uncovered in the broader basedanalysis in Phase One.
Tangible Product Gaps.
Tangible product gaps in-clude relative brand weaknesses related to product dimen-sions such as size, capacity, technology, range of opera-tion, specific tolerances, or other concrete measuresregarding the physical, performance-related characteristicsrequired by certain subsets of buyers. Color is a tangibleproduct gap in the example. The acquiring firm (companyone) is projected to have a 20% color gap in three years,versus a 12% gap for the merger partner (company two).
Direct Benefit.
If the merged firm would continue tocarry two separate brands, simple cross-branding or “pri-vate” branding by company two’s production facility tomake its full spectrum of colors available to companyone would result in a color gap for the merged firm of
only 12% (i.e., the size of company two’s projected colorgap). If the two brands are merged into one, the samebenefit would result. If company one has special produc-tion requirements for its brand and/or company two hasproduction capacity limitations, then production rational-ization by the two companies could still yield the sameresidual color gap (12%) for company three, even with-out adding any new colors.
Potential Synergistic Benefit.
Joining the two com-panies (into company three) may enable company threeto rationalize its production facilities, concentrating theproduction of certain colors in certain plants, therebyfreeing up production capacity. This new capacity couldbe used to broaden the spectrum of colors offered bycompany three. For more technical product gaps (none inthis example), joining the research and development re-sources and expertise of the two companies to eliminateredundancies would free resources to develop appropri-ate responses to reduce important technical product gapsnow projected. The example projects that three-fourths ofcompany three’s color gap before production rationaliza-tion would be addressed by pursuing these synergisticbenefits, thus reducing company three’s projected colorgap from 12% to 3%.
Intangible Product Gaps.
Intangible product gapsinclude relative brand weaknesses related to quality, ser-vice, aesthetics, etc. Service is an intangible gap in theexample. The acquiring firm (company one) is projectedto have a 20% service gap in three years, versus a 12%projected gap for the prospective partner (company two).
Direct Benefits and Potential Synergistic Benefits.
Merging and integrating two firms can provide severaldirect and indirect opportunities for improving service.
Comparative market profiles for the partners are joined to provide before-after quantitative
perspectives on the would-be combined
company’s market position and sales.
172
For example, a merger may enable moving productionprocesses closer to customers, integrating physical distri-bution and warehousing, and realigning service person-nel to specialized customer areas. All of these strategieswould improve a company’s responsiveness to custom-ers, thus enhancing service. Furthermore, the larger sizeof the merged firm and the consolidation of service re-sources and expertise can improve quality and respon-siveness in company three’s dealings with customer in-quiries, order taking, delivery, and postsales activities—all important overall elements of the service dimension.Reflecting such possibilities, and the fact that companytwo is already providing better service than company one(12% gap for company two versus 20% for companyone), the example projects that company one’s gap willbe reduced to only 8% in merged company three.
Price Gaps.
Price gaps appear next in the marketprofile. A profile can have several different types of pricegaps, for example, a low price gap, a price quality gap,and a composite of other price gaps related to discounts,special deals, etc. For example, that portion of industrysales accounted for by the low price segment of a marketwould constitute a low price gap for any company nothaving a product entry competitively priced for that seg-ment. Sales lost to competitive brands specifically be-cause a company’s product is not priced competitivelywithin certain grades of the product line constitute a pricequality gap. The example assumes that company one hastwo projected price gaps, a low price gap of 20% and aprice quality gap of 15%, while company two has no lowprice gap, but a price quality gap of 25%.
Direct Benefit.
Given that company two has no lowprice gap, the merged firm will participate in the low
price segment without any changes, thus eliminating thelow price gap for company three (0% low price gap).
Potential Synergistic Benefit.
Joining the two com-panies (company three) may enhance the firm’s pricecompetitiveness in several ways. First, the rationalizationof production, distribution, warehousing, and servicingfacilities plus new scale economies stemming fromgreater purchasing leverage and higher volume sales canall work to improve the firm’s cost structure. Trimmingredundant facilities and personnel can further enhancethe firm’s cost competitiveness. Also, Company Three’simproved cost position can enable it to compete more ef-fectively on a price basis in price sensitive segments (i.e.,improve share in low price segment). Furthermore, qual-ity improvements brought about by rationalization andspecialization can improve the firm’s competitiveness invalue segments (i.e., reduce the company’s projected gapin the low, medium, and high-end value [price/quality]segments). With more potential brands in its mix, com-pany three also has the alternative of repositioning spe-cific current brands to compete more effectively in nar-rowly defined price segments. Also, with more productioncapacity, company three might have the option of target-ing one or more brands (manufacturer’s brand or privatedistributor’s brand) specifically for price sensitive na-tional accounts. The example projects a significant price/quality gap reduction from these synergistic benefits,leaving company three with a projected price quality gapof 10% and a 0% low price gap.
D
ISTRIBUTION
G
APS
. Several different methodolo-gies can be used to estimate a company’s distributiongap. In situations where a company’s presence is consid-erable stronger in some sections of the country than oth-
Using a structured premerger marketing analysis can expedite
developing coherent consolidation plans to take advantage of anticipated
marketing synergies in more timely fashion.
173
ers (e.g., a significantly higher market share in the North-east than in the Southwest), a “regional approach” isoften useful for estimating the distribution gap [34, 35,41]. In the example, company one is assumed to havebetter overall distribution than company two (projectedgaps of 25% and 40%, respectively), but each firm is as-sumed to have its best distribution in a different region.For example, company one, with a 15% overall marketshare, may have a 25% share in the Northeast, but only a5% share in the Southwest. Conversely, company twomay have a 25% share in the Southwest but only a 5%share in the Northeast.
D
IRECT
B
ENEFITS
. Through the historical strengthsof individual partners in different regions of the country,the combined firm (company three) should have an op-portunity to obtain good distribution in all regions. Forexample, company three may be able to extend some ofcompany one’s historical strength with distributors in theNortheast over to the new product offering added bycompany two in the merger. Similarly, company threemay be able to extend company two’s strength in theSouthwest to company one’s offerings.
P
OTENTIAL
S
YNERGISTIC
B
ENEFITS
. Improving dis-tribution in all regions is most likely to occur if companythree actively takes advantage of potential distribution re-lated synergistic benefits of the merger such as the fol-lowing. Some distributors and national account retailersprefer to deal with fewer, larger suppliers. Companythree will be in a better position than either company oneor company two to compete for this business. Becausecompany three will have smaller product, service andprice gaps (see above), it will appeal to more and betterdistributors by offering a wider variety of products, moreresponsive service, and better value in pricing. The ex-ample projects a very significant distribution gap reduc-
tion from pursuing these synergistic benefits, leavingcompany three with a projected distribution gap of 10%.
Promotion Gaps.
The proportion of industry salesremaining after subtracting the gaps for captive sales,product, price, and distribution is referred to as the servedmarket in the market profile. The ratio of the firm’s ownsales (FS) over the served market is referred to as theshare of served market (SSM). Efforts to increase SSM,thus reducing the direct competitive gap, typically focuson refining and/or expanding promotion efforts. There-fore, this gap between the served market and the firm’ssales is labeled as the “promotion gap” in the marketprofile. The example assumes the two companies havesimilar direct competitive positions, with year 3 projectedshares of served market of approximately 44% and ap-proximately 41% for companies one and two, respectively.
Direct Benefits and Potential Synergistic Benefits.
The merger will enable company three to consolidatepromotion efforts for the brands of both company oneand two. The best promotion personnel and programsfrom each firm can be combined. If any brands are con-solidated, more promotional resources will be availablefor remaining brands. Sales increases stimulated throughother consolidation efforts (already reviewed above) willmake more promotion resources available to enhancepromotion exposure, build brand loyalty, and more effec-tively communicate the many new improvements in com-pany three’s marketing offerings (resulting from themerger, as described above). Both this improved attrac-tiveness of company three’s market offerings and its in-creased promotion budget will enable the firm to negoti-ate with agencies and media for better promotion ratesand placements. The larger company will also providemore opportunities for cross-promotions of CompanyThree’s broader market offerings. Reflecting all of these
The approach can also help realize more synergistic
marketing benefits from previously
consummated mergers and acquisitions.
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opportunities for improved promotion, the exampleprojects that these synergistic promotion related benefitswill enable company three to improve its share of servedmarket from slightly under the current 46% for indepen-dent company one to slightly over 50% for combinedcompany three by year 3.
As indicated earlier, estimates of the specific size ofgap reductions flow from the judicious interpretation ofgap discussions in Phase Two combined with the plan-ning team’s earlier detailed discussion of potential mar-keting consolidations during Phase One.
BENEFITS AND LIMITATIONS
Using a more structured premerger integrative market-ing analysis can facilitate objectively evaluating the com-parative marketing strengths and weaknesses of prospec-tive partners. This, in turn, can expedite developing coherentconsolidation plans to identify and take advantage of an-ticipated marketing synergies in more timely fashion—starting on the very first day of the merger. Using theproposed approach can provide the following benefits.
• It can help the parent company become more familiarwith key marketing personnel, distributors, and cus-tomers of the potential partner before the merger.This familiarity, coupled with the specific marketingknowledge garnered through such contacts, can makeit easier to integrate marketing more quickly once themerger is consummated. It can also help to establishcommunication links between key personnel of theparent and acquired firms, thus reducing anxiety anduncertainty about the transition period following themerger.
• It can give both companies a more objective view ofeach other’s actual marketing weaknesses and strengths,thus enabling the acquirer to set more realistic objec-tives vis a vis the likely realization and timing of post-acquisition consolidation and related synergistic mar-keting benefits. Such gains are realized most readilywhen the two parties work together to build and inter-pret market profiles.
• It can help planners to set timed objectives for consoli-dating specific marketing resources with an acquiredpartner. Subsequent monitoring of specific gaps aswell as changes in market share can also help manag-ers determine how well the merger’s performance istracking against projections.
• It can help managers make more objective compari-sons among alternative acquisition candidates.
• It can help realize more synergistic marketing benefitsfrom previously consummated acquisitions, by usingessentially the same two phase analysis as when evalu-ating prospective partners.
The structured scheme reviewed is no panacea for en-suring the success of marketing consolidation efforts, asthat success is highly dependent upon a number of otherfactors as well. For example, coordinating the strategicobjectives of the merger partners is highly desirable inorder to build a spirit of cooperation in both planning andimplementing marketing-related consolidations. Further-more, well thought out, politically sensitive personnelplanning is required to merge the skills and energies aswell as to integrate the cultures and work ethics of keypersonnel in the two organizations [7, 8, 42, 43]. Elimi-nating functions or departments can pose particularly dif-ficult challenges, calling for judicious redeployment ofvaluable personnel within the merged company and tact-ful downsizing through natural attrition and creative out-placement strategies. Strategic integration of the infor-mation systems of the two companies can also influencepost acquisition performance [31]. All in all, however,when used judiciously, the procedures outlined can helpfirms assess potential merger partners more objectivelyand realize potential marketing-related benefits of an ac-quisition more readily.
SUMMARY AND CONCLUSIONS
In today’s fast-paced, environmentally dynamic, glo-bally competitive markets, speed and innovation have be-come pivotal determinants of corporate success. In thisenvironment, mergers and acquisitions have become anincreasingly attractive strategic alternative. Thus, manyof today’s mergers are driven primarily by strategic goalssuch as the quest for market access, new technologies,critical mass, and growth. Reflecting this transition, mar-keting synergy has become a more important element inthe evaluation of potential acquisition candidates and inthe integration of already acquired partners.
This article presented a two-phase approach for identi-fying, valuing, and prioritizing opportunities for marketingsynergy related to proposed or consummated acquisitions.Used as a complement for more traditional financial analy-sis, the proposed approach can help improve the chancesfor more successful mergers and acquisitions.
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APPENDIX A
PMA Profile Components and General Perspectives on Identifying Profile Gaps and Estimating Profile Gap Sizes
GAP ORDER. The summary of the framework pre-sented in this article assumes the specific gap ordershown. Because of the “chain ratio” or decompositionmethod used to adjust gap sizes, as one moves down thehierarchy of opportunities (gaps), the order in which aspecific gap appears in the profile does not affect the in-cremental served market and the potential new marketshare represented by that gap. Therefore, if logic dictates,gap order can be modified without affecting the implica-tions of the framework. Importantly, recognizing and in-cluding a specific gap does not in and of itself imply thatthe company should pursue the related share growth op-portunity. Indeed, one important insight from PATH-MOD is to help the firm to prioritize alternative opportu-nities (i.e., gaps) in order to decide which, if any, areworth pursuing.
GENERAL PERSPECTIVES ON ESTIMATING GAP SIZES.The process of estimating gap sizes for the PMA marketprofiles is facilitated if one thinks about the size of eachgap only for the industry sales remaining after all previ-ous gaps have been subtracted from initial industry sales.For example, a firm should consider and calculate pricegaps only for portions of industry sales accounted for byproduct line elements offered by the firm (i.e., for por-tions of industry sales for which the firm has no captivesales or product gaps). Depending upon what assump-tions are appropriate regarding the independence of eachgap, a gap appearing lower in the market profile may ormay not apply equally to industry sales above and belowthat specific gap (see discussion regarding “equal propor-tional dependence” elsewhere [36]. When estimating gapsizes initially for any profile, a conservative approach isrecommended—favoring smaller gap size estimates. Asone gains more familiarity with the process of buildingPMA market profiles, and as related data inquiries ex-pand, the accuracy of a firm’s profile data quite naturallyimproves, thereby providing more credible and usefulstrategic insights from the profiles over time.2
Most often, a well-designed marketing planning teamcan develop reasonably good initial market profile esti-mates in short order by drawing from its own collectiveexperience. A systematic plan can then be developed togradually improve key data over time. For example, inmost product markets, the marketing team has ready ac-cess to informal networks of key brand specifiers (e.g.,distributors and end users) that selected team memberscan query on a regular basis as a normal part of ongoingbusiness relationships. Through a formalized plan to takethe pulse of key specifiers as an integral part of doing ev-ery day business, the marketing team can gain better in-formation each operating period on key profile parame-ters. One of the initial benefits that can be realized fromapplying the hierarchical audit process is that market pro-files themselves can provide important insights for deter-mining which data estimates are most important and whichare relatively unimportant—thus helping to make subse-quent formal market research inquiries more focused andefficient.
GATHERING INFORMATION FOR ESTIMATING GAP
SIZES OF ACQUISITION CANDIDATES. Part of the pro-cess of estimating the shortcomings (market profile gaps)of a company’s own marketing offerings involves tryingto objectively compare the firm’s brand(s) against indi-vidual competitive brands. Therefore, the company’s re-search used in building its own profiles can provide auseful starting point for developing comparative marketprofiles for competitive brands (i.e., prospective or actualpartners). To supplement this information, an ideal situa-tion for the acquiring firm is to have open access to keymarketing personnel, distributors, and customers for eachof the acquisition candidate’s key product markets. Theacquirer can then systematically query these groups byusing the framework to complete the market profiles foreach relevant product market segment of the candidate.Even in friendly acquisitions, this process can be useful,as it helps to ensure an objective assessment of the realmarketing strengths and weaknesses of the candidate—
2For example, as a company gains experience with the approach andbecomes more confident in the quality of its data, the analysis can be expandedand refined to incorporate stochasticity. For example, opportunity sizes(“gaps”) can be considered as random variables, with probability distributionsbeing used to characterize expected opportunity size value in the base
framework. Alternatively or additionally, the planning team can runsimulations by using risk analysis software programs (e.g., @Risk software,Palisades, Inc.) to estimate the values of the variables. A Bayesian learningmodel approach similar to those used to model the information integrationprocess in marketing science and consumer behavior can also be used toupdate and improve opportunity size estimates over time. Furthermore, gametheory can also be used to systematically evaluate a wide range of potentialcompetitive reactions in the analysis—within the constructs of the hierarchicalshare planning framework. For further discussion, see reference [36].
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rather than making unwarranted, and sometimes pre-sumptuous, assumptions.
Unfortunately, in many situations, access to key inter-nal marketing personnel and closely linked distributorsmay not be available (e.g., in hostile takeovers). In suchinstances, the acquiring firm can again start with the re-search used to build its own profiles, as this already in-corporates indirect estimates of the weaknesses (gaps) ofeach competitor. Carefully structured field interviews ofthe acquirer’s own customers and distributors can pro-vide supplementary inputs for making gap estimates forthe relevant competitor’s brand(s). Useful secondary in-formation may be gathered through actively monitoringpress clippings, government reports, trade journals, busi-ness and technical journals, 10-Ks, annual reports, Dun& Bradstreet reports, and outside industry experts. Activeinformation gathering at trade shows can also be very in-sightful. Competitive intelligence gathering is being fur-ther leveraged by the information revolution, especiallythrough the proliferation of public and private computer-ized databases. Today, the Internet and various on-linebusiness information services facilitate gathering this in-formation, and now virtually any company can easilygain direct access to these sources or farm out this workto competitive intelligence professionals [for further dis-cussion, see 28, 44–47].
For more background on the hierarchical market auditprocess, including further discussion on identifying gapsand estimating gap sizes, refer to reference [36].
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