Keep Strategy Front and Center in Merger and Acquisition Integration

FOREWORD: For over 20 years Focus Enterprises has maintained that strategy should drive M&A activity, not the reverse. In the article below, Mitchell Lee Marks focuses on the characteristics of successful integration and persuasively argues integration aspects of the same case. Reprinted with the permission of the author, this article also appeared in The Deal on January 17, 2003.

It has become common knowledge that the majority of mergers and acquisitions fail to achieve their financial objectives. What is less well known is the why there is such a dismal track record in post-merger success. Over the past twenty years, my colleague Philip Mirvis and I have consulted to or researched over 100 combinations. We find that the failure to keep strategic intent front and center during the integration is a key problem that afflicts most combinations.

In typical combinations, much of the emphasis as the deal is being conceived and executed is on the financial implications. Buyers concentrated on the "numbers": what the target is worth, what price premium, if any, to pay, what the tax implications are, and how to structure the transaction. The decision to do a deal typically is thus framed in terms of the combined balance sheet of the companies, projected cash flows, and hoped for return on investment.

Two interrelated human factors added to this financial bias. First, members of the "buy team" in most instances come from financial positions or backgrounds. They bring a financial mindset to their study of a partner and, as a result, their judgments about synergies are mostly informed by financial models and ratios. They often do not know very much about, say, engineering, manufacturing, or marketing nor do they bring an experienced eye to assessments of a partner's capabilities in these regards. Second, there is a tendency for "hard" criteria to drive out "soft" matters in these cases. If the numbers look good, any doubts about, say, organizational or cultural differences tend to be scoffed at and dismissed.

In the successful cases, by contrast, buyers bring a strategic mindset to the deal. But there is more to it than an overarching aim and intent. Successful buyers also have a clear definition of specific synergies they seek in a combination and concentrate on testing them well before momentum builds and any negotiations commence. Sensible buyers consider carefully the risks and problems that might turn a strategically sound deal sour. This does not mean that the financial analyses are neglected or that they are any less important to success. To the contrary, what puts combinations on the road toward success is both an in depth financial understanding of a proposed combination as well as a serious examination of what it will take to produce desired financial results.

A few years ago, I received a call from the CEO of a high technology firm who recently announced his company's first major acquisition. The company, a computer hardware maker, was strong in the middle- and upper-segments of its product offering. Margins were high in these segments, yet most of the industry-wide growth was occurring in the lower-end of the product offering. Working with external advisors, the CEO came to the conclusion that he had to acquire a firm with expertise in the lower-end segment in order to achieve his company's expectations for revenue growth. There simply was not enough time in the "internet age" to meet revenue expectations through internal growth.

After negotiating the deal amidst great secrecy, the CEO announced the acquisition. On their own initiative, several senior executives from the acquiring company holed themselves away in a conference room where they hammered out what they called the "Integration Plan." When the CEO read the plan he found that, among other things, it called for the elimination of the to-be-acquired firm's R&D function. That's when he gave me a call. "Think about it," the CEO challenged me, "eliminating their R&D function would defeat the very purpose for doing the deal - it would eliminate all the engineers with expertise in the low end of the product line."

We set upon a two-pronged intervention to guide the integration program. First was a series of one-on-one interviews with members of both companies' leadership teams. These interviews assessed the extent to which key players were or were not on the "same page" regarding the purpose of and expectations for the acquisition. They also provided insight into key areas of agreement and disagreement within and between the leadership teams and the dynamics that need to be addressed to make this integration succeed.

Among other findings from the interviews, it was clear that even within the lead company there was not a consistent view of why the acquisition was occurring or what would be required to make it achieve its strategy. This insight influenced the design of the second part of the intervention. Rather than bring executives from the partners together, I argued that executives from the buying company needed to go away by themselves to build understanding of and support for the acquisition strategy. This suggestion runs counter to the advice of most integration advisors, who push to bring the partners together as soon as possible to create the impression of a "one-team" mindset. If the lead team does not have a shared perspective on why the deal is occurring and what is required to make it succeed, however, then bringing the two sides together prematurely detracts from-rather than contributes to-good cross-company relations.

A one-day offsite meeting was scheduled in which the CEO walked his management team through the rationale for the deal. I then fed back findings from my interviews to alert executives to the potential hindrances to achieving the integration strategy. The discussion put several previously "unspoken" issues in play and generated an earnest discussion of what the lead company needed to do to prepare for a successful combination. The meeting culminated with the articulation of "critical success factors" for the integration process. These became the decision-making criteria that were used to assess recommendations for integration. One critical success factor, for example, was "penetrate the low-end of the product offering." Thus, later, when integration planning teams (comprised of executives from both partner companies) were convened, they were given not just financial targets (e.g., cut X number of dollars out of the combined R&D budget) but were also given strategic decision-making criteria that literally kept the rationale for the deal front and center during integration planning and implementation.

Having a well-understood strategy enhances integration decision making and detracts from the "us versus them" battles and political gambits that otherwise prevail. It also contributes to positive "buzz" about the combination, as employees gain confidence in their leadership knowing that strategy-and not power politics-is guiding integration and that organizational enhancements are likely to result from the combination.


 

Mitchell Lee Marks, Ph.D. is an independent management consultant specializing in helping firms plan and implement mergers, restructurings and other transitions. His most recent book is Charging Back Up the Hill: Workplace Recovery After Mergers, Acquisitions and Downsizings, published in January 2003 by John Wiley & Sons. In 1998, with Philip H. Mirvis, he published Joining Forces: Making One Plus One Equal Three in Mergers, Acquisitions, And Alliances (Jossey-Bass), and in 1994 published From Turmoil to Triumph: New Life After Mergers, Acquisitions, and Downsizing (Jossey-Bass). He leads www.JoiningForces.org in San Francisco and can be reached at 415-436-9066. His books can be purchased at www.amazon.com.