Serial business acquirers are keenly aware that the most challenging work begins when the deal closes. However, waiting for the deal to close to start the planning and execution of the integration process most likely will result in a failed transaction. In fact, the success of the deal depends on the acquirer’s ability to execute in earnest three interdependent processes: stabilizing the acquired business, integrating key resources and capabilities and achieving the synergies sought by the deal.
One of the reasons why integrating acquisitions is so challenging is that it is always a race against time. Even before the deal closes, the combination of uncertainties about jobs, the second-guessing of important investment decisions, and ongoing project delays caused the demands of the due diligence process invariably take a toll on the target’s operations, and consequently, on its value.
Day One Readiness is Key. Day One readiness and execution is a key competence of organizations that successfully carry out business acquisitions. In essence, a Day One plan involves a tightly coordinated sequence of events during the first or second week post-closing involving the resolution of critical operational issues such as reporting and decision authority, financial controls, operational workflows, client/supplier management and internal/external communications to all stakeholders. Equally important is the ability to quickly identify the target’s best practices that can be incorporated into the acquirer that can constitute “quick wins.”
The execution of all these activities simply cannot be improvised — even in the simplest acquisitions — and requires careful advanced planning, often starting as soon as the Letter of Intent is signed. It is important to note that without a detailed plan that provides clear direction and communication, both organizations (acquirer and target) will likely freeze operationally leading to lost productivity, culture clashes and value erosion.
Although Day One readiness is highly dependent on the type and complexity of the companies involved in the transaction, the plan should cover essential activities involving three general areas:
1. People – employees, customers, vendors, regulators
2. Processes – governance, cash management, IT, key customers/suppliers, communications, compliance
3. Assets – cash, working capital, IP, contracts
In addition, the Day One plan should provide an effective transition to action for all company functions and clearly define the emergent organizational structure, board and executives’ roles as well as line management roles and responsibilities. This process is essential as it provides company stability and serves as the foundation for the integration process.
A Well-Defined Integration Strategy. The gold standard for acquisition integration was established by GE Capital in the late 1990’s. Based on its extensive experience in acquiring and integrating more than 100 businesses, it developed a replicable 100-day acquisition integration model which has been widely adopted by serial acquirers due to its effectiveness.
The 100-day timetable creates a most needed sense of urgency that minimizes value erosion and helps address other risk factors such as the company’s vulnerability to competition during integration, the escalation of operating costs inherent in maintaining duplicate systems and processes and the delays in pursuing the synergies sought in the transaction.
At a high level, the GE model consists of four stages: pre-acquisition, foundation building, rapid integration and assimilation. It is not a prescriptive formula, but a set of guidelines. Keep in mind that there are aspects unique to every transaction that will require both art and science to achieve a successful outcome. The art comes in the form of applying experience-based ingenuity and intuition to address the unique challenges and surprises that invariably will come up in the course of both the transaction and the integration process. The science comes from following a proven model that provides a framework for the implementation of best practices in a sequential and timely manner.
In addition to the process described above, there are two other important elements required for a well-defined integration strategy:
a) A clearly outlined rationale for the merger, the scope of the integration and a thorough understanding of what is being integrated or replaced.
b) The development of a strong integration team with functional expertise and decision responsibility to address emerging issues and ensure coordinated efforts.
These elements tilt the odds in favor of minimizing value erosion and successfully executing a complex integration thus providing a solid foundation for achieving the expected synergies.
Focus on Customers. The third critical component of successful integration efforts involves keeping customers front and center. The uncertainties created by the acquisition process, particularly when communication with external stakeholders is not timely and clear, almost always lead to customer defections and value erosion. Hence, having a clear plan to maintain customer focus during the integration process is critically important.
There are time-tested practices that should be part of any plan devised to maintain focus on customers at a time when they are most likely to join a competitor.
First, there should be clear points of contact to maintain the communication flow, address customer concerns and provide uninterrupted attention and support. It is particularly important to communicate to customers the rationale for the merger and the benefits that they will derive from the emergent organization.
Second, keep an eye on competitors’ moves. Customer attrition tends to increase when they receive compelling offers from other industry players who try to capitalize on the uncertainty. These threats can be mitigated with a proactive approach to communicate to customers the strengths and benefits of the merger along with a focus on providing an outstanding customer experience during the transition period. This, in turn, may require empowering employees to make on-the-spot decisions to respond quickly to clients with competitive offers.
Planning and Swift Implementation are the Essential Variables. Moving quickly with a well-defined integration plan increases the likelihood of a successful transaction and provides significant payoffs in terms of minimizing the value erosion that results from employee uncertainty, vulnerability to competitive threats and delays in achieving expected synergies.
However, this requires careful planning that starts in earnest and a dedicated cross-functional team with decision authority to move the process forward. All within three months of closing and competing internally with the daily pressures of running the business. It’s no wonder why integration planning is so critical and why so few companies are able to master this process.
About the Autor
Enrique C. Brito, MBA, CFA, CVA, CM&AA is a managing director of Kaizen Consulting Group, an M&A advisory firm headquartered in Richmond, VA providing merger and acquisition, capital formation and business strategy services. He has over 25 years of corporate finance and investment banking experience and lectures nationally on the subjects of M&A, business valuation and negotiation.
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