Acquisitions: Structuring Integration To Capture Business Value

by Evan Smith and Greg Collins, Featured Contributors

OVER THE LAST 20 years, most acquisitions have failed to deliver the business value executives and investors have used to justify the deal – AND most executives, leaders, and consultants Acquisitionswith history in the field know this.  Recent indications are that the rate of reported “success” remains shockingly low – with failure rates running somewhere between 50 and 80%. Even in many of the “best” examples, organizational friction, waste, demoralization and other factors cause declines in productivity that blunt or wholly offset desired synergies, cost savings, and creation of business value.  And everyone knows that failure in integration after the deal means real pain:  loss of market value, loss of critical talent, declines in profit, loss of market share, and – perhaps most importantly – loss of customer goodwill, and loss of confidence from the markets.

    “The race is not to the swift, nor the battle to the strong – but that’s the way to bet.”

– Damon Runyon

Most business strategies are built on an inexorable need to grow – so companies boldly pursue inorganic growth in spite of the odds. If your company is one that “must” grow, and growing via acquisition is one of the approaches you’ll use, the questions become: how will you prepare yourself and your organization, how will you structure not just the transaction but the activities that follow it, and how will you engage others, in order to position acquisition initiatives for success?

Deals never fail in the “financial projections” phase; they fail when the implementation and business improvement stages do not deliver the expected results.  In our experience, successful acquiring firms and their leaders commit to the rapid-step, upfront planning and close-quarters teamwork required to maximize the probability of achieving the operating and financial objectives on which they’ve based the projections and the deal value.  If the firm and its leaders don’t commit, the implementation will not succeed.

Some companies have developed reputations as successful acquirers.  They follow a financially-driven, solidly pragmatic, results-oriented approach to accelerating change—an approach focused on creating economic value and stakeholder opportunity. In general, they also make acquisition integration a core capability—structuring resources, setting process and marshalling talent—so that they are ready when acquisition opportunities appear. They practice – often – on small deals so that they learn what works in their businesses and industries – and build skills from experience among their key decision-makers and implementers.

The Traditional Approach:  The Problems

The traditional approach might be best characterized as “post-merger integration” – because serious work on integration typically does not begin until after the deal is Traditonal PMI Imagesubstantially complete – and the approach generally moves through three sequential stages.  As we explore these stages, you’ll see how poorly this traditional approach sets the foundations, weakening the subsequent deal structure and follow-on integration activities – making the resulting organization a “house of cards”:

  • Formulation of M&A Strategy:  In the first stage, the senior leadership attempts to articulate answers to the question of why the company seeks acquisitions and what the targets are. For many firms, whole sets of decisions around “why/what we’re acquiring” may be more opportunistic than deliberate.  But whether deliberate or opportunistic, the participants in this stage are generally few in number (due to required secrecy): senior leadership, a “trusted few” outside advisors, lawyers, and bankers.
  • Transaction:  During this stage, the small group places big bets based on many rough and untested assumptions, exploring an array of financial engineering options, a limited number of scenarios, and a limited view of critical customer, strategic and operational information.  Together, they:
    • Determine the deal structure and timing
    • Perform due diligence to identify deal risks and opportunities – from arm’s length
    • Negotiate to reach agreement on deal valuation
  • Operation:  During the “ownership” and operation stage, the management team combines the businesses to realize the value assumed in the deal price.  However, by this time, many of those involved early (in “Formulation” and “Transaction” phases) have moved on to other work (except for the investment bankers, who are already TWO deals down the road).  The senior team’s attention has likely shifted to thinking about the next acquisition opportunity, or other major business challenges.
  • To carry on the real work of realizing the assumed acquisition deal value, the complexities of integration and ownership of the merged assets typically get delegated to a broader and more junior array of stakeholders—many of whom were not involved in the early thinking and discussions, and may not fully understand the deal rationale. Because these new and less senior staff are responsible for “delivering the value”, and because the work is often complex, they move slowly, and tentatively; they take time to move up the learning curve; they may respond differently than senior executives expected.  They also have different information – because they’re often quite a bit closer to the “front lines”.  They’re able to see trees, without necessarily understanding the scope of the forest they’re operating within. Because they don’t want to fail, they labor to understand the original thinking – and sometimes to “poke holes” in it to protect themselves from accountability for a train wreck that appears possible down the road.  This breakdown in the “hand-off” might be the single greatest contributing factor to failed integrations.

Another Way – That Creates Business Value

Missing in this traditional approach are several key elements, and an overall organizational approach – which makes the difference between success (defined Five Frogs Quoteas capturing of business value approximating the value of the deal premium) and failure.  These key elements are:

  • A substantial linkage built between the identification of deal value and the clear and prioritized assessment of value drivers to deliver outcomes that justify the deal price.
  • A prioritized action plan that delivers the value drivers – along with clear decisions and first results against deal value fast, within 100 days.  This robust planning supports how the team will implement key integration tasks.
  • Enough capable and cross-functional resources dedicated to due diligence and the subsequent integration planning and implementation – including a queued, ramped-and-ready program team to manage the integration and deliver the value, coordinating the activities of small, fast-moving transition teams.
  • A clear, capable and politically-supported integration leader.
  • Detailed and upfront planning for employee transition and culture integration
  • A strong communication plan supporting all initiatives – that directly addresses key stakeholders and their WIIFMs (“What’s In It For Me?”).  This plan is built on “straight talk”, and guided by four firm rules:  no secrets, no surprises, no hype, no empty promises.  Importantly, the plan also includes feedback loops to ensure that messages are heard/received, and that disagreement/misalignment is surfaced, heard and addressed.

Stages Image

This alternative overall approach is not just a thoughtful, deeper, analytical planning exercise – although good planning is important. This approach engages both the acquiring and the acquiree organizations –– their staff, customers and suppliers – in a tightly orchestrated cadence of results-focused project work that helps people learn what it will take to integrate, delivers results and feedback to let people know that they’re on course, and creates successes that they can celebrate.  In subsequent writing/ articles, we’ll explore further what these key elements look like – and how they play out in practice.

Smith-Evan-web-photo-150x150EVAN Smith is a member of our BizProphets Panel and a Senior Partner with Schaffer Consulting; his affiliation with the firm began during his time as a client in the early 1990s.  Trained as an industrial engineer who also took deep dives into social sciences and liberal arts, he has been helping leaders to deliver measurable results by fostering successful organizational and individual change for more than 20 years. His consulting clients have included major pharmaceutical, medical devices, financial services, chemical, automotive, technology, energy, and professional services companies, among others.

0433825GREG Collins is a member of our BizProphets Panel and an affiliate of Schaffer Consulting. Greg is a management consultant and leadership coach who helps clients develop, articulate, and successfully communicate growth strategies, and build teams capable of implementing those strategies to achieve sustainable revenue and profit growth.  His work focuses on aligning the members of the client’s leadership team as a critical step in clarifying and then implementing any strategy.  In doing so, Greg focuses on both individual and organizational change as the means of delivering results.

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