Last year the value of mergers and acquisitions involving U.S. financial services companies exceeded $221 billion.

While M&A activity lagged in the first quarter of 2001, it has surged in the banking sector with the announcements of the Allianz-Dresdner transaction as well as First Union and Wachovia's planned merger. Many view these transactions as a prelude to increased strategic alliances and partnerships in the sector.

Still, the vast majority of mergers and acquisitions have failed to meet their primary objective: increasing shareholder value. In fact, post-merger studies show that 50% of all mergers actually erode shareholder returns, 33% produce marginal returns, and only 17% contribute to shareholder value.

What's going wrong? Why do financial services companies continue to pursue some form of corporate combination - merger, acquisition, strategic alliance, sale, or outsourcing - and how can the industry improve its chances of success when entering into corporate combinations?

We recently conducted telephone interviews with one third of the 1,000 largest global financial institutions. Here's what's not working and how to fix it.

Saying one thing and doing another. When asked "Which is the best way of providing shareholder value?" 64% of the North American respondents ranked organic growth first. And yet the corporate combination boom continues.

The survey revealed dissonance between what companies say and what they do. For example, in an era when everyone is talking about the global economy, North American respondents preferred regional (51%) and local (8%) corporate combination partners to global players (31%).

To avoid falling into this trap, first clearly articulate a corporate strategy and commit to it. Second, review each potential combination candidate line by line to see if each of its businesses serves the overall strategy and if the two companies are synergistic on the whole. Third, be willing to walk away from any combination that looks attractive on the surface but doesn't fit the firm's overall strategy.

Finally, look at the trees as well as the forest. Some financial services companies should strengthen themselves within the local market first, become more efficient, and thereby develop the currency to move successfully into the global market.

Choosing the wrong partner for the wrong reasons. When asked to identify the most important tactical considerations for a corporate combination, 44% of the respondents ranked "strategic fit" first, and 17% ranked it second.

But when choosing a partner for corporate combinations, the majority (54%) looked for customer- and product-related assets, which far eclipsed any other category. Moreover, rather than looking for a strategic fit - that is, companies whose strengths and weaknesses complemented their own to improve their tangible and intangible assets - the survey respondents favored a pairing of like strengths.

Basically, while companies recognize their internal weaknesses, they often ignore these self-assessments. Rather than looking for firms that can help them improve something like their employee and physical assets, so they can successfully exploit their customer base and product range, companies just look at who is left.

To choose the right partner for the right reasons, financial services companies should first assess the strengths of their tangible and intangible assets relative to their competitors and identify areas of weakness to be mitigated by the strengths of a new partner. That assessment can then be used to decide the most beneficial type of combination and the partner that will best meet internal and external needs.

Measuring success incorrectly. One of the most troubling survey findings is the dissonance between what the respondents said they wanted to achieve in a corporate combination and how they measured success.

In general, companies fail to measure the physical, customer, employee/supplier, and organizational results that drive a combination's success, partly because they lack effective or credible ways to measure them. And because of this lack, many analysts force them into a more narrow view.

Seventy-one percent of the respondents focused on traditional financial measures when assessing a combination's success - share price (25%), cost reductions (25%), and cost effectiveness (21%) - even though most firms said they combined to enhance customer base and product breadth.

The survey also revealed that most companies do not value or measure two critical components in the success of any corporate combination: retention of customers (12%) and of skilled employees (6%).

While share price performance remains an important measure of achievement, internal factors deserve as much focus.

The market can and increasingly does look at a broader range of shareholder value measures, including customer and employee retention and market share. If management focuses on the right measures - those that track real value in the business - the combination has a much greater chance of success, and share price performance will improve.

To better measure - and communicate - the combination's success, clearly state the firm's growth objectives with achievable measures for market share and share of customer wallet. Give the analysts a way to measure your success that also manages expectations, by undercommitting where possible and overdelivering.

Then, set milestones as events or performance measures, not dates on a calendar. Dates slip; success measures don't. For example, rather than setting a specific date, declare a merger complete only when certain targets are met.

Similarly, don't lock yourself into quarter-by-quarter improvements. Instead, give the market analysts ranges and run rates.

Mr. Teplitz heads Andersen's global financial services industry mergers and integration practice in New York.

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