Insights

Acquisition Integration

Last month, we discussed how acquirers can select and work most productively with an M&A advisor. Here we conclude this buy-side article series with a look at acquisition integration. Though we typically end our formal engagement at deal closing, we always emphasize acquisition integration for two reasons:

1. Regardless of how rigorous your selection, due diligence and pricing have been, meeting your strategic and financial targets depends on what you actually do with the acquired company.

2. Much can be accomplished before a deal closes to set up for a successful integration.

According to McKinsey, companies that integrate their acquisitions well generate total returns to shareholders 6-12% higher than those that do not. The firm’s research finds that “grounding an integration in the objectives of the deal, bringing together disparate cultures, setting the right performance goals, and attracting the best talent are frequently among the top challenges that bedevil even experienced active acquirers. They’re also the ones that, according to our experience and survey research, differentiate strong performers from weaker ones.”[1]

General Best Practices

There are any number of good articles sharing integration best practices. We’ll list a few here for your reference, then focus on the key things you should be doing pre-close.

  • Making the Deal Real: How GE Capital Integrates Acquisitions (R. Ashkenas, L. DeMonaco, and S. Francis) – This Harvard Business Review article was the first widely recognized treatment of acquisition integration as a replicable process, and its key insights have informed how most leading acquirers and consulting firms today approach integration.
  • Special Leaders for Special Times (R. Ashkenas and S. Francis) – Following from Making the Deal Real, this piece drills down on the critically important Integration Manager role.
  • How the Best Acquirers Excel at Integration (R. Doherty, O. Engert and A. West) – This current article focuses on the most common recurring integration challenges and is grounded in extensive McKinsey experience and research.
  • The 10 steps to successful M&A integration (T. Rouse and T. Frame) – Based on Bain & Company research and experience, this piece provides a comprehensive set of guidelines for successful integration. It aligns with our own focus on the original strategic purpose of the deal.

Pre-Close Integration Work

Perhaps the most important lesson from Making the Deal Real is that “acquisition integration is not a discrete phase of a deal and does not begin when the documents are signed. Rather, it is a process that begins with due diligence and runs through the ongoing management of the new enterprise.”[2] With that in mind, here are four key things we encourage clients to do as we work together to identify and negotiate an acquisition.

    1. Use your acquisition strategy and purpose to determine overall integration approach and priorities.

As Clayton Christensen et al, writing in Harvard Business Review, say “your approach to integration should be determined almost entirely by the type of acquisition you’ve made. If you buy another company for the purpose of improving your current business model’s effectiveness, you should generally dissolve the acquired model as its resources are folded into your operations. …. But if you buy a company for its business model, it’s important to keep the model intact, most commonly by running it separately.”[3]

    2. Conduct due diligence with integration in mind.

This has two dimensions. The first is linking due diligence findings to their integration implications in a timely and disciplined way. Companies often do this through formal end-of-day check in calls or regular work sessions for due diligence team leaders. The second is ensuring the transfer of deep target company knowledge from due diligence to integration work. In addition to keeping good documentation, this means assigning key people who will serve on both functional due diligence and integration teams. It also means ensuring that the integration manager has good visibility into the due diligence process and findings, preferably through a role on the team.

    3. Begin formal integration planning pre-close.

The integration governance structure and team membership should be determined before a deal closes, along with key integration priorities and performance metrics. If the target company is willing, you can also kick off the high-level integration team, typically consisting of functional leads from both companies. This group can continue the work of identifying integration priorities, begin to determine functional staffing models, and develop high-level timelines. Post-close, integration planning can expand to include a wider group of people from the acquirer and target companies.

    4. Plan for Day 1.

The day a deal closes, and the week following, are be busy for the acquiring company, and it is important to have solid plans in place. Typically, these will involve multi-level employee communications and external announcements, as well as any high-priority changes in legal and financial arrangements, IT, security, supply contracts, and signage / branding.

We hope you have enjoyed the series of articles we have presented over the past 12 months, stepping through the acquisition process from an acquirer’s perspective. Coming up we shall dig into key sell-side issues, as well as go deeper into some of the technical analysis.

[1] R. Doherty, O. Engert and A. West, “How the Best Acquirers Excel at Integration”, McKinsey.com, January 2016.

[2] R. Ashkenas, L. DeMonaco, and S. Francis, “Making the Deal Real: How GE Capital Integrates Acquisitions”, Harvard Business Review, January-February 1998.

[3] C. Christensen, R. Alton, C. Rising and A. Waldeck, “The Big Idea: The New M&A Playbook”, hbr.org, January 2016.

 

 

For more information, contact:

Douglas Nix, CPA, CA

Chairman

E/ dnix@stillwatercapital.ca

T/ 905-845-4340 x.211

Stillwater Capital Corporation

2010 Winston Park Dr, suite 401, Oakville, ON L6H 5R7