Tailoring
your integration approach to specific deals
Every
merger or acquisition is different, yet many companies stick to the same
integration playbook. Here’s how to tailor your approach.
Late Thursday afternoon, Carmela Jones sat at her desk reflecting on the
failed acquisition of ACME. Carmela had expected to retain most of ACME’s
leadership team, but they were fleeing, and customers were following suit. If
not stopped, this deal could destroy significant value.
How could this have happened? In her five
years as head of M&A, she had led the successful integration of over 50
companies. How did the same top-notch team, using the same well-developed
playbook and world-class tools, get it so wrong this time?
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After staring at the data and reviewing
all the deals the company had done, Carmela finally realized what had happened.
The vast majority of earlier deals had been product bolt-ons or roll-ups of
small competitors.
The ACME deal was different. It fell
outside the company’s typical bailiwick, and the company was counting on ACME
to help transform key businesses—making them faster and more entrepreneurial.
Of course, in hindsight, Carmela saw that this acquisition required a totally
different approach.
Tailoring
the integration approach to deal specifics
Like any muscle, integration requires
practice to build both strength and agility. Practice also builds muscle memory
that can last for a long time.
Companies doing their first deals can
learn much from active acquirers that have experienced M&A deal teams and
sophisticated integration playbooks to get integration off to a fast start. But
even active acquirers may stumble, as their experience may encourage
overreliance on a standard approach (the muscle memory built by long practice).
This one-size-fits-all mentality can be particularly risky in today’s
environment, where deals are increasingly bigger, more complex, and focused on
revenue growth, not just cost synergies.
Serial acquirers can learn much from agile
acquirers. Our research shows that serial acquirers do not outperform
first-time acquirers unless they consistently tailor their integration approach
to the specifics of each deal.
To understand whether, when, and how
M&A-driven companies tailor their integration approach to deal rationale
and sources of value, we surveyed 638 experienced merger-management leaders
across a broad range of company sizes, industries, and geographies. We also
assessed the impact of tailoring on the deal performance reported by the
companies.
Whether
to tailor
We found that more than half of M&A
top performers (those that consistently achieve revenue and cost objectives)
tailor their approach to deal rationale and sources of value.
This is especially true of top performers
that pursue multiple types of deals (at least three distinct types), as the
deals’ different sources of value are likely to require different integration
approaches. For example, the goals and integration requirements look very
different for deals to consolidate company presence in mature markets, deals to
expand geographically, and deals to place strategic growth bets on new
businesses. According to our research, among companies that report doing
several deal types, low performers are 44 percent more likely to follow a
standard approach than adapt their approach to the specifics of each deal.
When to
tailor
Not surprisingly, top performers said that
three factors signal the need to tailor their integration approach:
·
The cultures of the target and the acquirer differ
significantly—the values they stand for and the way they get things done are
materially different.
·
The target’s core business is relatively unrelated to the
acquirer’s core business.
·
The target is large relative to the acquirer.
These factors reflect the complexity of
integrating two companies that differ markedly in fundamentals like culture,
business focus, or size. Top performers emphasized the importance of change-management
efforts in these situations.
What to
tailor
More than 80 percent of the top performers
reported that they always or very often tailor their approach to five critical
dimensions of integration:
·
governance: who leads and how they do it
·
Integration management office (IMO) architecture: who coordinates
the integration effort and through what organization
·
scope: what to integrate and to what extent
·
speed and pace: how fast to go and how coordinated the effort
should be
·
culture and talent: how to handle people
Governance
Top performers adjust the allocation of
decision-making authority between acquirer and target management to fit the
objective of the deal. They likewise structure the leadership of the
integration teams to help them meet that objective.
For example, a large deal that would
require building a new culture and fostering collaboration might call for
organizing the integration-management teams to include mirrored leaders from
the two organizations and splitting decision-making authority equally. But a
deal done primarily to retain the acquirer’s culture and operating model would
probably see most integration teams and decision-making authority assigned to
the acquirer’s leaders.
A global information company set its
sights on acquiring a slightly larger target with a much stronger international
presence. The acquirer expected the deal to achieve significant cost synergies
but also saw retention of the target’s mid-level and top talent as critical to
future international business success.
Therefore, the acquirer gave target
executives considerable leadership responsibility, during and after the
integration. A target executive led the integration effort and, months before
close, was announced as the new COO. Leadership of the IMO work streams was mirrored,
with each coleader given a fair shot at the final job. These efforts paid off
handsomely, as the combined company realized synergies rapidly, increased
market share over the number two player, and retained all critical talent.
IMO architecture
Top performers tailor three key aspects of
IMO architecture to deal specifics:
·
size of the IMO (number of staff and funding level)
·
use of dedicated and specialized teams (dedicated to value
capture, clean team, change management, culture, or communication)
·
structure of the integration teams (by geography, business unit
(BU), function, or a hybrid)
A serial acquirer in the pharmaceutical
industry typically acquired relatively small companies that marketed products
in a similar therapeutic area. This acquirer typically staffed a small IMO team
and assigned integration responsibility to ongoing business owners so they took
control of the target as soon as possible.
Preparing to acquire a high-growth
specialty pharma company with a stronger reputation in certain disease areas,
the company realized that disturbing the target’s commercial relationships
would put significant value at risk. To avoid that risk, the acquirer organized
a larger IMO, including a clean team tasked with assessing the degree of
physician overlap and the strength of relationships of both sales forces. The
company then organized three commercial teams focused on key account retention,
contracting review, and sales redeployment. This tailored approach minimized
disruption to relationships and captured incremental synergies.
A top biotech company acquired a similarly
sized player in the space. While setting up the integration team, the acquirer
realized that the two companies had very different operating models. The
acquirer was organized geographically, with a small corporate center, while the
target had a global business-unit structure.
The acquirer decided to roll out a new
matrix-based operating model. Recognizing the tension this would create, the
acquirer created an organizational-design team in the IMO, with a dedicated
business partner for each integration team. The responsibilities of the
business partner included rolling out the new structure, managing talent
selection, and communicating the operating principles of the new model. The
company moved quickly to the new structure, announcing the top three layers of
management before deal close (and only two months after deal announcement).
Scope
As appropriate to deal specifics, top
performers tailor decisions on the breadth and depth of integration required
for critical capabilities, such as sales and marketing, R&D, and product
development.
For example, deals to access new
technologies or enter high-tech product areas often require decisions on
whether to leave the target alone, integrate selectively (in some HR and
business-support functions), or integrate fully to bring the acquired product
to new levels rapidly (when the target’s product concept is relatively close to
acquirer products).
When a large, mature, industrial
conglomerate acquired a small, innovative growth engine, the last thing the
acquiring CEO wanted was to crush the target’s unique capabilities. He
delivered an edict: no one would visit, meet with, or call the target without
his personal written consent or face termination. A favored global functional
leader who ignored the edict was terminated immediately, setting an example for
the rest of the company’s leadership.
A large universal bank opted for selective
integration when acquiring a specialized financial-services company. The
acquirer achieved expected cost synergies by fully integrating most target
support functions and several BUs but took a different approach to two major
BUs.
For one BU where attrition as high as 70
percent looked likely, the integration leader postponed all action until he had
met with every team around the world. This delayed integration for two months
but limited attrition to a much more manageable 30 percent and prevented
significant disruption of BU activities.
The acquirer transplanted the target’s
core BU virtually intact in order to preserve a product line new to the bank
and take advantage of the BU’s access to capital. The protected BU
flourished—launching new products while the integration proceeded elsewhere,
losing no key employees, and increasing revenue 20 percent over the next three
years in a declining market.
Speed and pace
Integrating as quickly as possible usually
maximizes value, but not always. Top performers take deal specifics into
account as they make decisions on which processes and systems to maintain, how
long to evaluate alternative systems in order to find the right answer, how
quickly to proceed with integration, and how to pace the integration of each
function into the organization. Almost half of top performers (43 percent)
called tailoring integration extent and pacing, function by function, critical
to their integration approach.
To capture the value of cost synergies,
companies tend to make decisions on talent selection and organization well
before close, execute right after close, and integrate the target into the
acquirer’s systems and processes as fast as possible without slowing to
evaluate “best-of-both” opportunities across the two organizations. But this
approach can destroy key capabilities or slow business momentum if not aligned
with the deal’s sources of value.
For example, when a multinational energy
corporation acquired a software firm to manage smart-grid equipment, leadership
realized that a one-size-fits-all approach to integration would undermine deal
value. Back-office integration started in September, but the acquirer shielded
target commercial capabilities until the new calendar year to avoid disrupting
the target’s annual revenue cycle. The target sold software through annual
subscriptions, and most clients renewed their contracts in November and
December.
Many companies launch activities to
capture revenue synergies, while delaying cost-integration efforts due to
regulatory factors (such as workers’ council review) or reputational factors
(such as union relationships). In a recent airlines merger, the company rapidly
introduced new alliances and routes, revamped network planning, and revised the
customer loyalty program, while slowly integrating day-to-day operations.
Culture and talent
As warranted by deal specifics, top
performers tailor decisions on which employees to retain and how to align
company cultures. Almost half of top performers (47 percent) called efforts to
align cultures critical to their integration approach.
In a transformational or new white-space
deal, the integration approach usually includes broad retention programs and
measures to protect the target’s culture. But in a deal to improve a target’s
underperforming operations by strengthening management and introducing superior
processes, the integration effort typically moves to capture cost synergies
quickly and fold the remaining target employees into the acquirer’s structure
and culture.
When two retail banks with
high-performance track records and strong results-oriented cultures merged,
leadership paid little attention to culture because the banks looked quite
similar. But the planning/budgeting process uncovered two very different
cultures—one focused on cost management and the other on growth. The new
company had to weather a long, painful change management effort, including a
new incentive and compensation structure and training programs, to align on a
new dual mission.
Later, this same retail bank did a deal to
expand into a new geography. Recognizing its limited relationships in this
region, the acquirer was determined to retain 100 percent of target staff and
so let cultural integration proceed gradually. For a year, the acquirer treated
the target as a bank within the bank, operating with considerable autonomy,
while the acquirer slowly added key executives to target leadership in order to
start the transformation from the top. Today, the bank enjoys growth in the
region 1.5 times the rest of the industry and has lost no key management staff
to competitors.
The examples outlined above show some of
the real challenges posed by integration and the choices that companies must
make to address the challenges. Many merger management leaders who have tackled
these challenges call the effort a career-defining moment that pays huge dividends
down the road. Their experience suggests the value of putting integration
agility on the agenda of every integration leader.
Carmela learned that lesson the hard way
in the ACME acquisition. She set her playbook aside and brainstormed with her
team a simple list of questions to ask themselves before launching the
execution of any deal:
·
Do we understand and agree on our reasons for acquiring this
target?
·
What distinctive capabilities do we have that will add value to
the target?
·
What distinctive capabilities does the target have that will add
value to us?
·
Do we understand how the deal will create value (for example,
increase sales, cut costs, leverage capital)?
·
Do we know which BUs or functions will account for most of the
value created? Do we know which BUs, functions, or processes (if any) we should
shield from disruption?
·
Do we know when we should integrate each department, function, or
geography and why?
·
By Jeremy Borot, Oliver Engert, Sean O’Connell, and Pablo Salazar
http://www.mckinsey.com/business-functions/organization/our-insights/tailoring-your-integration-approach-to-specific-deals?cid=other-eml-alt-mip-mck-oth-1701
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