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The Art of Integration: Nothing thwarts a merger faster than poor blending of firms. The acquirer must apply integration the same as its business plan: methodically, purposefully and diligently—and then execute.
Leader's Edge, March 2007
Fast Focus
- Pay attention to integration for a successful merger.
- Thoroughly planning the integration is tough, but critical.
- Take high-priority actions in the first 100 days.
Whenever a new gunslinger comes to town, his biggest challenge is not
getting rid of the bad guys, but getting the townspeople to stand behind
him and stand up for themselves. Clint's glinting eyes and flinty
expression can do a lot to build confidence in his abilities, but one
man does not a town make. No matter how fast you can shoot, you're going
to need those people to make the changes that will keep their town safe.
So it is in the Wild West of mergers and acquisitions. You may be able
to conduct a takeover and make the changes you believe are needed to
build your new town, but in order to make those changes effective, there
must be involvement and buy-in from the townspeople of that firm, from
the mayor down to the street sweeper. In other words, you'll need to
practice the art of integration.
There are hundreds of books on valuation, due diligence and other
aspects of managing a successful merger or acquisition. But very few of
these devote substantial time or effort to describing how the
integration process should work. Further, you will find very few devoted
solely to integration issues. This points out a grave weakness in M&A
thinking because we all know that integration is the key to a successful
transaction.
Most have heard the horror stories of transactions that failed because
of poorly planned and executed integration. This is not exclusive to
insurance. It's evident in M&As happening from Main Street to Wall
Street. Even Fortune 500 companies have failed, despite years of
practice through many acquisitions. On the other hand, many of the
large, public brokers have developed and implemented successful
acquisition strategies through a combination of learning from failures
and understanding the true challenges to integration.
Companies that are successful at integration understand that they're
dealing with two distinct companies and cultures.
We Are Not Borg
Consider why the process sometimes fails. History has shown the chances
of a successful merger are low unless there is effective integration.
Whether the acquiring company paid too much or overestimated potential
synergies is not as important as integration. Perhaps in "Star Trek's"
final frontier it will become easier, but in today's Earth atmosphere,
it's not enough to simply march in and assimilate by saying, "We are
Borg."
Some agencies focus on only part of the equation, such as combining back
office operations like human resources and accounting. Others dig more
deeply but fail to account for the human component. Some address the
process haphazardly or allow it to continue for too long.
While there are many actions that can, especially in hindsight, be
blamed for a merger's failure, there is no one right or wrong way to
handle integration. You may focus on synergies, technologies,
efficiencies or best practices to make your merger work. Whatever the
strategy, there is one threshold issue that must be addressed. Before
completing your next transaction, ask yourself this primary question: Do
you have a defined plan and timetable for integration?
In many surveys of failed acquisitions, the lack of a plan for
integration or the pace of integration has been cited as a key culprit.
If you asked a hundred experts why integration fails, you'd get multiple
responses like this:
- The company did not fully understand cultural differences.
- There was a loss of key employees and customers.
- Leadership was unable to create a single, consistent management
style.
- False promises were made, or there were misunderstandings.
- The acquiring company failed to implement change quickly and
effectively.
- There was an inability to create synergies and efficiencies.
- The process lacked flexibility and the ability to shift gears when
necessary.
To get beyond the excuses and reasons for failure, a company must work
at the integration the way it works at its overall business plan:
methodically, purposefully and diligently. It must execute four primary
phases of integration.
Four Phases for Success
Integration is an effort that takes place at every stage of the
acquisition. Pre-acquisition planning is followed by communication to
all parties during the process. Integration kicks in after the
acquisition and is followed by evaluation.
By far the most common struggle is the planning. How will the
integration occur? What is likely to happen, and how do we address the
issues? I counsel client firms to fundamentally analyze the following
questions:
- What is changing?
- What are the opportunities?
- What are the cultural challenges?
- Where do we cut costs?
- Where are operating differences?
- Where do we gain real synergies?
- What are the real growth opportunities?
- Do we expect employee turnover?
While I could write a whole book on just the pre-acquisition planning, I
cannot stress enough the importance of answering the above questions in
the pre-acquisition phase of integration.
The second major step is communication. You generally get only one
chance to make a profound impact on the employees of an agency being
acquired. Their perception of the situation is key. Both buyers and
sellers implicitly recognize that many things will change
post-transaction. Therefore, it is extremely important to provide clear,
consistent messages about what will change, how it will be done and what
the expectations will be.
Once the deal is sealed, integration begins. Of course, making the
integration work is the hard part. Best practices have identified that
forming an "integration team" consisting of employees from both
companies is generally the most effective strategy. Not only does this
improve the communication process, but you are also gaining the
perspective of the seller as to critical matters and decisions that they
believe must be made. Key characteristics of a successful
implementation team are clarity in their role, responsibility and clear
expectations of the integration timetable.
Timing of integration actions is vital. All companies that are
successful in acquisitions have developed integration timelines. History
has proven that the time it takes to integrate is the best predictor of
a merger's success or failure. Therefore, the longer you are in
transition, the closer you are to living on the edge.
It's not uncommon for the acquiring firm to have a 100-day plan listing
all the integration actions to be done within the first 100 days after
acquisition. This does not imply that the entire integration must be
done within that time—indeed, some large firms have taken two or three
years to integrate a purchase. Rather this plan is for the things
necessary to keep the integration timeline on track.
Here are the key actions you should take during the first 100 days:
- Align the expectations of the acquired agency's management with
yours and stay on track.
- Effectively communicate to everyone your expectations, goals and
objectives.
- Do not allow "deal fatigue" to set in, whereby critical time slips
away without the enactment of any meaningful changes. Deal fatigue is
quite common in a protracted transaction process, and it can sap the
integration energy.
- Focus on the high-priority items critical to integration success and
save for later all the great ideas that came up in the transaction
process.
- Obtain buy-in to the top strategic items that must be accomplished
in the first 12 months and develop a timetable for these key strategic
areas.
How would you measure whether or not your first 100 days were
successful? Here are some benchmarks:
- Did you achieve open, regular communications among management
regarding integration issues?
- Have key procedures and processes been blended to create some
immediate synergies?
- Is performance tracking with projections?
- Have key metrics been developed to measure future success?
- Have both buyer and seller agreed on the key strategic initiatives
that will drive shareholder value?
- Are the mission and vision shared by all?
- Have the cultures begun to blend?
These questions are part of the final stage in the process: evaluation.
This, too, is often difficult. Benchmarks and metrics must be devised to
see if integration tracks with pre-acquisition planning. Has cross-sell
penetration been achieved? Are overhead costs being reduced as expected?
Are best practices in the areas of workflow, technology and deliverables
being utilized?
If the evaluation reveals that goals are not being reached and
integration is failing, make changes fast. Keep communication flowing
and stay intent on blending cultures that will support the synergies you
are expecting. It's not possible to over-communicate, nor is it
plausible to gloss over the impact of integrating different cultures.
While sales and profits are primary metrics used to measure financial
success, I submit that intangible items are often the link between a
successful integration process and a healthy bottom line. Defining the
intangible aspects of your integration is critical. They might include:
- Effective and timely communications
- Focus on the client
- Shared mission, values and vision
- Effective leadership
- Cultural compatibility
- Shared strategy, goals and objectives
- Cooperation and teamwork
- Willingness to change.
It is universally agreed that integration is the most difficult part of
any M&A transaction. Like those townspeople standing up for themselves,
it takes vision and intestinal fortitude to stand behind a new leader
and slog through the tough times of making a bigger, better village. The
challenging era may last quite a while, even taking years to resolve and
discover whether success or failure has been achieved.
What does it take to tame the Wild West? Here are main things needed in
your holster:
- Develop the plan
- Build the common vision
- Provide leadership
- Don't play politics
- Act with due speed—this is critical
- Make the tough decisions
- Set reasonable expectations
- Build cooperation among many
- Embrace change—it is not a bad word
- Communicate, communicate, communicate.
Stop and take a fresh look at your integration process before your next
transaction. Both sellers and buyers can use these guidelines as a
framework for successful mergers and acquisitions that result in the
tangible top-line and bottom-line growth that everyone expected.
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