Long before the ink dries on the legal agreement to acquire a company or to merge two entities, the integration strategy should be clear, but in the heat of finalizing the deal, integration is often left until the last minute or ignored completely. Rather than roll the dice, consider the following framework, the Five Essential Elements of Successful Mergers and Acquisitions.
The success of the integration process depends largely on senior leaders taking a holistic look at both companies-a process that should circle back to strategic questions that will illuminate cultural differences, clarify which parts of the companies that should be integrated and which parts should remain separate. Not all acquisitions require integration; sometimes the acquiring company will decide to run the newly acquired company as a separate entity. Much will depend on the two business models.
Some authors refer to “incompatible business models” undermining a deal, but what does that really suggest? It means that when companies make money in vastly different ways, doing extremely different things, and no one recognizes it, joining them is challenging, costly, and probably ill advised. If you don’t understand how the other company makes money, it is impossible to assess the pragmatics of their growth plans. Over-confidence in creating projected future value creates its own set of problems-ones that can increase in complexity if no one challenges assumptions, especially in operations.
While acquirers should consider the mission, vision, and values of a target company, they must also understand their target’s market, which begins by asking, “Who are their best customers?” For obvious reasons, an existing customer base makes a company attractive from a strategic standpoint, but from an integration viewpoint, acquirers need to look beyond the customer base to understand how the target company interacts with them.
Acquirers will then want to know, “What value does the target provide customers?” As you examine your target company’s brand and repute, what do you find? You’ll want to see evidence that they respond well to competitors and changes in the industry, and their customers would miss them if they went away. A solid track record for taking appropriate risks, continuous learning, growth, and agility will offer further evidence that they understand what they must continue to do to provide their best customers the best value. More than any other single factor, their ability to adapt will contribute to efforts to integrate operations and maintain sales after the close.
One of the biggest impediments to integration involves operational changes-the changes themselves, the fear they bring, and the speed with which they happen. During the integration stage, indecision and secrecy will be your enemies. Companies that weather all the stages of the deal and emerge successful do so because they keep their eyes on both their external and internal customers.
Most acquirers conscientiously work on integration of business systems, but few pay attention to an equally important part of the transaction-the assimilation of people. Acquiring companies tend to keep their senior leaders in place, but decision-makers on both sides should challenge this assumption too. Often the target company will offer exceptional talent in key areas.
Although commonality exists regarding best practices for making the integration of talent go smoothly, no formula or checklist exists to adequately address every situations. However, when making talent decisions, look beyond the obvious success indicators like performance reviews and experience to determine which person will make the best decisions for the newly minted organization.
Culture involves the pattern of shared assumptions that a company has adopted and adapted over a period of time as they solved their problems and adjusted to the world around them. During a merger, the goal is to join two companies that might have adopted and adapted to the world in very different ways-often when the assumptions of each will be only partially visible. Although all aspects of culture play a role in any major transaction, the cultural differences that derail M & A deals have more to do with beliefs about the ways the companies make money and less to do with customs and interactions.
To determine how well you’re doing in the integration process, evaluate the Five Essentials Elements for Successful Mergers and Acquisitions:
Score this deal from 1 to 4 for each of the statements below. After completing the survey simply press the Results button to find your total score and the implications for your organization.
Rank each on a scale of 1 to 4
1=Totally Disagree, 2=Disagree, 3=Agree, 4= Totally Agree
An interactive version of this survey is available here…
- We have a clear strategic objective for doing this
- Our desire to grow goes beyond cost-savings and defensive moves.
- We clearly understand what is achievable in light of market and industry trends.
- We have widespread agreement about our goals.
- We have tied our short-term goals to our long-term vision.
- We know how they make money.
- We know how our investors will measure success of this deal.
- We have a plan to make money quickly after the deal.
- We have a clear picture of their financial situation.
- We have a plan for integrating our financial systems.
- We know what we have to do to retain their key customers.
- Our business models are compatible.
- We understand their competitive advantage and driving forces.
- We agree about how to integrate products and services.
- We understand what our key customers will want from this deal.
- We have set criteria for choosing which people will be chosen for the new organization.
- We have a commitment from key players that they will stay.
- We agree about how the new company will be run and by whom.
- We have clear lines of accountability for each function.
- We have developed a succession plan for key positions.
- We agree about how each step of the deal will be communicated to employees and stakeholders.
- We have decided how fast things will happen.
- We have made a strong commitment to change.
- We have seen evidence that we have compatible risk tolerance.
- We see evidence that key decision-makers share core values.
90-100 Escape Velocity
Congratulations! You have a clear mission, a vision for the future, and a rational plan.
80-89 Thrilling Ride
You have a number of things in place, but you may be tempted to let the thrill of the ride override your good judgment. You are far better off challenging yourself now than wishing you had done so later.
70-79 Unclear Direction
You need to devise a plan and implement it immediately. Otherwise, your well-laid plans during the due diligence will quickly turn to disaster. The energy and focus that you will need to keep this on course is minimal compared to the losses that will accumulate if things go badly.
Below 70 Implosion
Only direct and immediate action will avert the disaster. Whether you’re about to do a deal or have just closed on one, you are in imminent and certain danger of taking this deal to the wrong side of zero.
Don’t assume that bringing together companies is an entirely rational process. Consider emotion too-yours, your employees’, and your customers’. Too often the acquiring company insists on improving things, replacing things, and renaming things that didn’t need to change in the first place. If you find a company worth buying, it’s probably worth trusting, funding, and encouraging it to thrive by being strategic about integration.