M&A – To Integrate or Leave Alone?

Depending on your measure of success, anywhere from 5 to 9 out of every 10 acquisitions fail. Despite the risk, companies continue to consolidate, merge and buy at record pace, fueled by cheap capital, market pressures, and the rush of a deal.  In 2015, companies spent a record $3.8 trillion on mergers and acquisitions, putting the collective price of failure at an all-time high.

The reported causes of M&A missteps are varied – everything from poor leadership and inflated deal pricing to inadequate focus on the customer and ineffective communication.  While all of these factors surely contribute to the outcome, paramount to the success of any acquisition is how you handle integration.

The biggest decision to make is whether to fully integrate, or leave an acquisition alone.  Arguably, there is also a hybrid approach, but for simplicity sake this article focuses on the two options.

The key to determining the right approach is rooted in the reason why you acquired the company:

  • You bought it to compliment your existing business and hopefully boost the current financial performance of your company
  • You bought it to transform your business and drive long-term financial growth

Reasons to fully integrate:

If you bought the company to extend your existing business model with the hope of boosting your near-term revenue and/or profits, then the likely scenario is to fully integrate the target into your business. Typically, when you fully integrate, the buying company either eliminates or fully assumes its brand, culture and people.

In the full integration scenario, the following rules should hold true:

  1. Short-term financial gains are considered the top priority.
  2. The customer base, the product and/or the technology are the key assets (and you don’t need to retain all the talent that created that technology to maintain its success or build upon the asset)
  3. Technology of the acquired company enhances the technology of the buyers company such that the development team needs to be integrated to deliver a consolidated platform or product.
  4. The two companies have considerable redundancy both in the back office and in sales and R&D, and the main purpose for the acquisition was to build upon the buying company’s customer base while cutting its fixed cost.
  5. The internal talent of the acquired company is weaker than that of the buying company.

Reasons to leave the company alone:

It is best to leave the acquired company alone when you are looking to transform your business by leveraging a track record of innovation and talent of the acquired company.  The business model is different and potentially disruptive to your legacy business.  You are looking to transform or expand your existing business model, and the people at the acquired company are critical to its potential success. When you keep an acquisition separate, you typically maintain its brand, culture, people and organizational structure.

In the leave alone scenario, the following rules should hold true:

  1. Innovation and technology results are a priority over short-term financial gains.
  2. People are the key asset.  If you lose key people, the value of what you purchased goes to zero.
  3. Technology of the acquired company expands market reach, spares the acquired company of becoming commoditized, or potentially disrupts and/or replaces the legacy technology of the buyer’s company
  4. A full integration would place too much risk to the momentum the acquired company, driving its key people to leave.
  5. The corporate culture of the target company is incompatible with the corporate culture of the buying company.
  6. You do not require much in the way of synergy savings outside of obvious back office functions and duplicative public company and/or outside costs to make the acquisition accretive.
  7. You require speed, momentum and continuity of the acquisition in its stand-alone state

Regardless of the approach, there are several success factors to acquisition integration that tend to be universal:

  1. Ownership.
    • Every deal needs an executive leader who not only sponsors the deal pre-acquisition, but also owns the integration and who is accountable to the success of the resulting business entity.
    • The same owner that sponsors the deal when you are convincing your Board to approve it, should be accountable to delivering the results once the deal is closed
  2. Speed.  Whether you are leaving the acquired company alone or integrating into your organization, it is important to move quickly.
    • Be decisive about staffing decisions and communicate your plan quickly to ensure that you retain top talent
    • Establish a clear, combined company plan with roles and responsibilities communicated as of day 1
    • Set combined company targets, milestones and deadlines that are clear and measurable
    • Designate an integration leader who ensures that every process has an owner, a project manager, and a sponsor at the leadership level who will hold people accountable
    • Task each functional owner with defining the end state of integration for his/her function, and the mechanics of achieving that end-state
    • Hold those owners accountable to an integration plan, and measure success by their ability to deliver a successfully integrated process on time
  3. Compatibility.  Do not under-estimate the importance of “cultural fit.”
    • Avoid friction and decision paralysis by establishing clear ownership early and over communicating.  Management by consensus will not work.
    • Avoid delays by ensuring all parties who are responsible for delivering have clear incentives in place to do so.
    • Take time to listen to the subject matter experts of the acquired company.  Whether they are staying or going, there is a benefit to their experience and expertise.  Don’t assume that you know better or more than they do.
    • Respect ideas that may be different from your way of doing things.
  4. Clarity.
    • Establish clear, achievable goals and an action plan for executing them.
    • Over communicate with your employees.
  5. Measurement and incentives.
    • Measure success with clear key performance indicators, reported regularly
    • Have positive incentives in place for achieving targets
    • Ensure that your targets align with the model that was used to support doing the deal

Corporate leadership too often neglects integration, moving on to the next big thing in the wake of the close.  Other times, leadership prioritizes profits over product, control over collaboration, or precision over speed when it should be the reverse.

While there is no simple formula, success can be achieved when the underlying goals of the acquisition are clear, and the integration approach aligns with those goals.  In all cases, establish clear ownership, make decisions quickly, ensure an environment of teamwork, communicate, and measure performance against a plan.

By | 2017-02-16T08:19:11+00:00 April 27th, 2016|Uncategorized|0 Comments

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