Mergers and Acquisitions
In the nine year period spanning June 2001 to June 2010, International Business Machines Corporation (IBM) acquired 92 companies for in excess of $25 billion dollars. If you are lucky enough to work for a juggernaut that averages ten acquisitions per year, then you can probably skip this chapter. However, the rest of us are unlikely to have a finely tuned merger machine humming away at corporate headquarters. Instead, acquisition due diligence and post-merger integration will likely be tackled by a cross-functional team of smart, well intentioned people who at least want to look like they know what they are doing.
The statistics on merger success rates are sobering. This has been true for decades, as evidenced by everything from Harvard professor Michael Porter’s 1987 assertion that fifty to sixty percent of acquisitions result in failure to McKinsey & Company’s 2004 calculation that only twenty-three percent of acquisitions have a positive return on investment. If you define success by a lower standard, that acquired companies continue to operate within the acquired company or as a divestiture, then the prognosis does improve a little. Unfortunately, that yardstick measures mere Pyrrhic victories.
If you are thrown into the M&A battlefield, there are a few vital recommendations that will improve your odds of survival and give you a fighting chance at success.
Choose acquisition targets that extend your core value proposition
Integration challenges grow exponentially with deal size and business focus relative to your existing organization. Consequently, you are likely to realize the best results by acquiring smaller firms that reinforce or extend your existing strategy. This means that you must identify the concrete, incremental value proposition the target company brings.
Logically, the most fruitful acquisitions involve purchases that increase production or sales capacity. A close second are deals to acquire a new product that you can sell to your existing customers. Be very honest with yourself about the capacity of your existing sales force to absorb the new offering.
Things get significantly harder when the value proposition involves buying into a new channel to sell your product. After all, if those prospective customers had found your product valuable, you probably would have built a way to access them a long time ago. Finally, you should avoid pure diversification plays, unless you work for a holding company with financial engineering expertise and low-cost access to capital. Offering a new product to a new set of customers amounts to nothing more than gambling with your investors’ money.
The concrete value proposition for the acquisition should be translated into rigorously quantified drivers of value creation. These drivers will typically include a schedule for cost reduction, financial engineering including tax benefits, and revenue projections.
Anticipate and manage acquisition risks
All acquisitions carry risk. However, risk alone should not be a deterrent. Rather, you have an opportunity and an obligation to identify key risk factors and develop plans to mitigate them. During the acquisition process, most people take a functional approach, an excellent start. Specifically, you may create teams to explore issues around merging information technology, production, sales, human resources, legal requirements, and so on. Unfortunately, too many buyers ignore the softer risk factors that fall between functional gaps. Crucially, really get to know the cultures of both companies and what is likely to happen when they intermix. This will enable you to proactively address issues that arise. For example, your company might be dominated by a fact-based decision making culture. If you acquire a people-focused culture, then do not expect your new colleagues to be swayed by purely rational arguments. They will need time to build trust and are likely to drag their feet in sharing developing problems; so, motivate, inspire, and prove yourself trustworthy.
In addition to the softer side of internal issues, you should similarly plan for external reactions to the acquisition. How will your customers react? How will their customers react? What is your brand strategy?
Engineer your post-merger integration strategy
If there is one recurring theme in engineering successful acquisitions, it is planning, planning, planning. As articulated earlier, proper planning includes integration milestones and goals that span functional and ‘softer’ cultural and customer issues. Since you cannot anticipate every eventuality, establish a clear escalation process for unforeseen problems. For that to be effective, you will need to reserve financial and intellectual capacity for frequent problem solving and future investments.
During acquisitions, it is vital to provide clear and unambiguous leadership by selecting the new management team early on. The team should include a passionate, execution driven integration leader with past merger experience, strong incentives, and comprehensive decision making authority. Even if you do not have a leader with past merger experience, all hope is not lost. In that instance, you should pony up the extra money to bring in outside consultants to help engineer the details.
In all service-based businesses, and even most manufacturing businesses, the key asset that you are purchasing is people and their associated intellectual capital. Since acquisitions are a time of turmoil for the acquirer and the target, one of your most important early responsibilities is to give everyone affected clarity on their new roles, responsibilities, and reporting structure. You want people to spend as little time as possible worrying about their job security and their sense of purpose in the combined enterprise. Though the leadership team may feel it has a respectable idea of what is going on, everyone else has the impression, rightly or wrongly, that they do not have enough information. Hence, plan to repeatedly communicate the post merger strategic vision to employees.
Though words are by far the most important, money also matters. Remember to provide incentives to retain key employees across all important functions in the target. A useful best practice is to define a three tier structure. The first tier includes the ten to fifteen percent of star talent who should have the strongest courtship and retention incentives. Bear in mind that not all management is star talent. Moreover, many major contributors work in individual contributor roles. The second tier includes the dedicated bunch who are collectively, but not individually, key to the ultimate success of the merger. Finally, the third tier includes people that you expect to part ways within a well specified amount of time in order to realize cost savings.
This degree of over-communication should extend beyond employees to your customers. Customers on both sides of the aisle will grapple with uncertainty. Competitors will take advantage of this ambiguity and your higher than normal level of distraction by intensifying their marketing activities. Anticipating this, develop a clear strategy to retain existing customers. Also, be realistic that customer attrition rates – especially at the target company – are likely to degrade.
During the due diligence phase, you established a measurable set of value drivers. Those defined what great looks like for the purchase. As the integration proceeds, institute formal tracking of the acquisition’s performance against those goals. In most instances, a monthly review with the company operating committee and quarterly review with the board of directors is sufficient. Beyond keeping everyone honest, these reviews keep people focused on what needs to be accomplished.
Here are the concepts you can immediately apply to become great at acquisition due diligence and post-merger integration:
- Choose acquisition targets that extend your core value proposition
- Anticipate and manage acquisition risks
- Engineer your post-merger integration strategy