The Art (and Science) of Acquisition Integration

Companies worldwide closed or announced $3 trillion worth of acquisitions in 2017, with North America leading the transaction value by more than 50 percent, followed by Europe and China. It was a bumper year for mergers and acquisitions (M&A), and the new tax laws passed in the United States are encouraging companies to repatriate more than $1.5 trillion in stranded cash from overseas accounts, which is further expected to increase the M&A trend in 2018 and beyond.

Experts are attributing the increasing trend toward M&A to technology and business model disruptions that are taking place, from the retail industry to industrial sectors. The same experts also predict that approximately 50–70 percent of these transactions will fail to add shareholder value. Beyond the strategic intent of doing a transaction, acquisition integration (AI) plays a big part in the success of a deal.

In the recent past, many deals have failed, rather spectacularly[1], to achieve value committed during the transaction phase. Value creation work and integration planning does not start when the deal is announced. In fact, it starts when a company’s CEO and board members first start discussing a potential transaction.

A strong board will ask all the tough questions starting with the big “why.” Why are we considering this transaction? How is this going to add value to our current portfolio and customers? How does this transaction fit into the overall strategy and vision of the company? Finally, how are we going to integrate this new company, and who will manage the integration process?

The AI process consists of two parts: One is the tactical element of integration (science), such as making sure employees get paid the first month after the deal closes. The second element of the AI process is the strategic element (art) of achieving the intended purpose of the transaction and adding shareholder value. This article deals with that second element.

Leaders and organizations that are adept at change management thrive in the M&A world. In the past, the realm of M&A used to be the big blue-chip companies, but today, the M&A process is ubiquitous and senior leaders are expected to know the tricks of the trade. What used to be the big corporate M&A team consisting of dozens of professionals who help the business unit presidents acquire and integrate, has typically whittled down to a very small team. The presidents and general managers are now expected to pick up both the front-end deal negotiations and the back-end integration process, with limited help from corporate.

After spending a decade in corporate development roles in large industrial companies integrating and managing cross-border deals, I have come to appreciate what it takes to integrate a company. Further, I have been on both sides: acquiring and acquired. I have experienced mergers, divestments, de-mergers, reengineering, restructuring, reorganization, and the creation of tax-efficient models. Throughout all these corporate ventures and adventures, one thing has been constant: change.

There are a million things to consider during the integration process, but if you are the CEO or a board member of the acquiring company, I recommend that you first concentrate on a few critical factors that will have a disproportionate effect on value — both positive and negative. Let me highlight below the top three considerations in the art of AI where you manage the strategic elements of the AI process.

  1. Managing Value Creators and Value Destroyers

When a deal is presented to the board for approval, the presenter articulates the strategic value of the transaction. In all cases, a dollar amount is attributed to these value creation ideas. In M&A lingo, these value creation ideas are called synergies. Typically, these synergies are sales synergies (top-line growth), cost synergies (profitability growth), and sometimes, negative synergies, where you might lose sales synergies because of certain market conditions.

Instead of allowing attention to get misdirected and bogged down by a dozen synergy ideas, I recommend that the integration leader list the top five value creators with tangible values and assign it to specific individuals to plan and deliver. One example of this could be the two merged companies jointly bidding on active large projects by pulling in each other’s products and services to increase the probability of winning a project.

Every transaction is accompanied by a host of risks, and if the risks are not managed properly, they start to erode the value. Again, the CEO and board should request a list of the top three value destroyers and manage it effectively to avoid or mitigate unforeseen risks. An example of this could be loss of sales because of a potential new customer who also happens to be a potential competitor of the acquiring company.

In an example of a similar situation, the CEO of a large industrial company personally visited its impacted customers within the first 30 days of announcing the deal, to assure them that they would be served with the highest level of integrity and that any information provided to them would not be used for any competitive reason other than serving them. The CEO was able to retain at least 80 percent of the business, although the company still lost some because few customers wanted to diversify the supply base.

  1. Integrating Culture and People

Once you get past the equipment, intellectual property, and various other line items on the acquired balance sheet, the most important asset that comes with an acquisition is people. Understanding the culture of the acquired company during the entire deal process and getting to know the senior leadership of the acquired company is an important task – not simply for the human resources department, but also the entire senior management.

What do I mean by culture? By its simplest definition, culture is how a company operates and does things on a daily basis. It can be as mundane as putting up (or not putting up) Christmas decorations in the lobby. One has to study the cultural dissimilarities between the two companies and prepare the combined team to deal with potential issues, both big and small. These factors need to be addressed early in the integration process to avoid any long-term damage to the combined culture.

As an example, in one of my previous companies, we had zero tolerance when it came to legal compliance. Through a series of events, we discovered and terminated the head of sales on Day 1 because of compliance reasons. Despite the impact we knew it would have on first-year sales, we were sending a powerful message to the entire organization about our values and beliefs and how we wanted to manage the combined company going forward.

When the first rumors of a merger-in-the-making come out, they send shock waves through the organization. The first question that comes to employees’ minds is whether they will have a job after the deal is closed. The level of uncertainty and ambiguity that surrounds the deal process will have huge psychological effects, and those can and do affect people’s performance. It is vitally important to have a formal communication plan that keeps the teams updated on the deal progress and to be intentional about killing any rumors that are affecting the company negatively. The one piece of advice I have often given to my team to alleviate their fear and ambiguity during a deal process is “Keep doing your job and use the merger to create personal growth.”

The senior leaders of the acquiring company should spend a disproportionate amount of energy addressing the people issues; that critical task should not all be left to the HR department. Having open and transparent communication, building trust during interactions, managing power struggles, avoiding leadership ego trips, and preventing the loss of key employees becomes one of the most important leadership accountabilities during the early stages of integration.

  1. Addressing Change Management

A big part of AI planning and execution is about the change management process. In my observation, many senior leaders are ill-prepared and trained to effectively execute a change management strategy.

There are various change management models, but I have successfully used this self-developed simplified three-step process—what I call the three Ds—:

  1. Discovery Stage: Understand the need to change and build a baseline on what to change and how fast to change.
  2. Developmental Stage: Build a business case for change by including the stakeholders. The plan needs to have a starting point and an ending point with measurable metrics.
  3. Deployment Stage: Launch the plan with open and transparent communication, seek buy-in, and manage resistance at all levels. Finally, measure the progress, and continue to revise the plan and re-deploy it where necessary.

I was involved in a change management process where the company wanted to reorganize the business from a regional structure to an end-market-structure. The CEO invited 90+ senior leaders from all over the world for an intensive, hands-on workshop where we launched the three-stage change management process described above. It was highly effective as we were able to manage resistance in the breakout sessions, come to agreements on change priorities and timelines. By the time, 10 days later, the leaders went back to their regions, they were able to effectively and consistently communicate and cascade the plan to the next level. This was a costly and time-consuming exercise, but as we demonstrated, when done properly, it delivers solid results.

How Do You Know It When You See It?

In terms of the Acquisition Integration process, the senior leader(s) who sponsor the transaction manage the critical steps and they are actively involved through out the deal process. Success demands that the leadership clearly understands the value drivers and value destroyers and prepares the team to address them in the early stages of integration. The CEO or Deal Sponsor can articulate the acquisition rationale in simple terms, and the leadership team knows where and how the business will be integrated well before the transaction closes.

It is my observation that High-performing companies and serial M&A dealmakers hire general managers who have not only executed transactions but have successfully integrated them. They don’t use a generic integration playbook for all the deals; each plan is carefully customized to each transaction, with the value drivers clearly identified.

Between the steering committee, deal sponsors, external advisers, subject matter experts, functional leaders, regional leaders, and the teams — from both the acquiring and acquired company – the size of the integration team can, at times, be unwieldy. Smart companies keep the team size to a manageable few who are directly involved in delivering results. Further, they seldom use outside consultants to come up with synergy estimates, and it is all done internally with the help of the chief commercial officer (CCO). Off late, many companies are hiring CCO who manage all aspects of growth from strategy, marketing, e-commerce to M&A/Integration.

When, at the CEO and board level, leadership is focused on strategic aspects of the integration and regular reviews are held to make crucial decisions, you start to see value creation at work. Synergy assumptions are tested and retested during the entire deal process, and when the assumptions are wrong, the leadership is bold enough to drop a synergy and pick another synergy to replace it. The leadership team keeps a close eye on cost synergy, which is the controllable piece of the synergy book, which is executed flawlessly according to the plan.

Synergy goals are well articulated and driven to different business units and regions with clear execution plans and defined milestones on the way to achieving the results. Activities are prioritized, such as finance closing the books, so that the resources are effectively deployed to deliver value. Leaders keep a hawk eye on the value creators and destroyers, and they come up with contingency plans quickly if something is not working.

A good acquisition integration plan is simple, measurable, and executable, and delivers the intended value. In the art of AI, the senior leaders concentrate on the value drivers and destroyers, culture, and people, and build capabilities around a change management process to create value for the business.

The Bottom Line

Simplicity is the soul of efficiency. —Austin Freeman

[1] A few examples are Daimler–Chrysler, AOL–Time Warner, and HP–Compaq.