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A Marriage of Two Companies

Poor integration is increasingly cited as the leading cause of failed mergers and acquisitions. Indeed, measured by the present value of discounted cash flows, more than 50% of acquisitions reduce shareholder value.There are three classic approaches to integration:

  1. Assimilation. Industry consolidation, acquisition of a direct competitor and turnarounds usually require assimilation of the acquired business. That means closing plants, offices and functional departments, changing systems and terminating employees. The goal: Add sales from the acquired company, and eliminate as many costs as possible.
  2. Conservation. The acquired company remains “as is” because of buyer reverence or because it allows the buyer to enter a new market. Most private-equity “platform” acquisitions, where the management team of the acquired company drives the equity group’s activity in their respective sector, are treated this way because buyers are not in the business of operating their platform companies.
  3. Cooperation. “They’ll make us better at this; we’ll make them better at that.” Generally, this idea is most salable to boards and shareholders. Yet cooperation requires mutual respect and an open environment between buyers and sellers, which can be difficult to create and sustain.The best approach varies by acquisition. Consider:
    • The strategic purpose of your merger or acquisition.
    • Size and quality differences between your firm and the acquisition candidate.
    • The opportunity to transfer brands, trade secrets, capacity, channel power, technology and economies of scale.
    • Financial expectations.

Making it work

Although there are no steadfast rules to successful M&A integration, here are eight guidelines:

  1. Plan the integration. Ideally, a buyer and seller should map out all the details of integration — what, how and when — before the closing. Be sure to budget sufficient dollars and people to achieve the desired results.Laser Excel Inc., a Green Lake, Wis.-based laser cutter with 95 employees, wanted to acquire a California company, but its owner turned them down. Within months, Laser Excel had the chance to buy the company via a 363 bankruptcy (asset sale or auction). This, however, required the cooperation of the candidate company’s employees — from machine operators to the administrative staff. With that in mind, Laser Excel executives met with the candidate company prior to the purchase and held detailed discussions about the post-close relationship, including how to address cultural and geographic differences between California and Wisconsin.
  2. Execute swiftly. If integration is slow, enthusiasm and momentum will be lost, which can result in excess costs from overstaffing, overcapacity and duplicated corporate expenses. Also, the longer integration takes, the longer management is distracted from core operating duties, which can hurt financial performance.Move quickly but realistically. It’s not easy to execute attrition, plant closures and improvements to systems and logistics. The difficulties and costs of integration should be thoroughly considered in your valuation of synergies.
  3. Be flexible. When circumstances change, accept the new realities and readjust your expectations. If planned synergies become implausible, move on and find new ones.
  4. Align executive compensation. Performance incentives need to be realigned to support integration. People must be held accountable and rewarded for reaching projections that are used to justify a deal.”We bit off a lot when we closed two acquisitions simultaneously and doubled our revenues overnight,” says Fred McCoy, CEO of Total Automated Solutions Inc., a producer of automated test, measurement and assembly systems in Cleves, Ohio, with $40 million in annual revenues. “But none of us anticipated the harsh economy of 2001. Aligning the goals of management and elevating our vision, strategies and tactics to those of the newly combined company allowed us to apply resources where needed and draw strength as a team.”
  5. Pursue synergies. While basking in the afterglow of a closing, it’s tempting — and common — for executives to move on to the next hunt. CEOs need to stay involved in the integration progress. The “heavy lifting” of integration doesn’t build careers, but missed projections and losses can break them.
  6. Pay attention to cultural issues. Cultures should come together naturally, with the best attributes of each company intact. To achieve this:
    • Listen and encourage feedback. Ask employees to identify concerns.
    • Be visible and accessible. Communicate with both executives and employees clearly and consistently. Explain the objective of the combined business so employees can work in a common direction. Otherwise, you’ll have an information vacuum filled with rumors.
    • Don’t allow fiefdoms and pre-deal organization charts to cloud improved leadership ranks.
    • Look after the best employees from both companies. If your employees leave, value will be destroyed.

    “Balancing the two cultures is a critical issue in integration,” says William Warner, president of Clickguard Corp., a printer maintenance and repair company with 100 employees in Redwood City, Calif. “We’re careful not to break the spirit of what we’re acquiring. We’re up front with our plans for the combined business so people understand how they fit in. And when it is necessary to reduce staff, we provide generous notice and parting compensation to encourage a smooth transition.”

    Tip: Be particularly sensitive to deals among longtime, fierce rivals. It takes time, money and energy to redirect their weapons outward. The acquisition of a similarly sized company also can be prickly, as buyers and sellers may be unwilling to surrender components of their respective corporate cultures.

  7. Manage customer perceptions. You may want to notify customers about your acquisition and integration plans to avoid surprises or rumors. Alternatively, buyers and sellers may agree to defer announcements to demonstrate to customers that their relationships remain positive after the deal. Whatever you decide, do not allow rumors to fester. Never leave customers to wonder what the combined company will be called, who will handle their account, which office to call and, especially, whether the business combination will adversely affect them.Tell customers how the deal will better your relationship:
    • Improved vendor financial stability.
    • Lower costs or better pricing.
    • Improved service.
    • Improved product quality.
    • Greater innovation.
    • Broader product lines.
    • Stronger category management.

    If the deal is significant, determine how to notify your customers. Acquisitions may threaten some customers if the resulting business shifts the balance of power between vendor and customer — or if customers perceive that it has shifted. Key accounts should not receive the news through a form letter; they deserve a personal call or visit from one of your top executives.

    Be prepared for some customer attrition. You may want to factor in some account attrition when valuing the acquisition.

  8. Improve the integration processes. The better you integrate the acquisition company, the greater your ability to execute and benefit from subsequent deals. With experience, your integration approach should become more effective and less taxing on company resources. You should also become more comfortable with the pacing of deals and their limitations, which will help you determine how much synergy you can realistically capture — and how much to pay for those synergies in your valuations.

Writer: Alexander G. Watson is president of Level Next Inc., a Petoskey, Mich.-based business-development adviser and acquisition intermediary. awatson@levelnextinc.com