A second reason: Many companies are getting better at M&A.
At the beginning of the period from 1995 to 2005, about 50 percent
of mergers in the US underperformed their industry index. By the
end of the period, only about 30 percent were underperforming. One
explanation, based on our experience, is that some companies have
learned to pursue deals closer to their core business, which
increases the odds of success. They more frequently pay cash rather
than stock, which encourages better due diligence and
more-realistic prices. The long-term trend of more-frequent
acquisitions has also pushed companies to develop repeatable models
for successful integration and managers with professional
integration-management skills. Despite these successes, many
acquirers-perhaps most-leave huge amounts of value on the table in
every deal. Companies continue to stumble in three broad areas of
post-merger integration:
- Missed targets. Companies fail to define clearly and succinctly
the deal's primary sources of value and its key risks, so they
don't set clear priorities for integration. Some acquirers seem to
expect the target company's people to integrate themselves. Others
do have an integration program office, but they don't get it up and
running until the deal closes. Still others mismanage the
transition to line management when the integration is supposedly
complete, or fail to embed the synergy targets in the business
unit's budget. All these difficulties are likely to lead to missed
targets-or an inability to determine whether the targets have been
hit or not.
- Loss of key people. Many companies wait too long to put new
organizational structures and leadership in place; in the meantime,
talented executives leave for greener pastures. Companies also may
fail to address cultural matters-the "soft" issues that often
determine how people feel about the new environment. Again,
talented people drift away.
- Poor performance in the base business. In some cases,
integration soaks up too much energy and attention or simply drags
on too long, distracting managers from the core business. In
others, uncoordinated actions or poorly managed systems migrations
lead to active interference with the base business-for example,
multiple (and contradictory) communications with customers.
Competitors take advantage of such confusion.
Successful integration-the key to avoiding the risks of a merger
or acquisition and to realizing its potential value-is always a
challenge. And it is complicated by the simple fact that no two
deals should be integrated in the same way, with the same
priorities, or under exactly the same timetable. But 10 essential
guidelines can make the task far more manageable and lead to the
right outcome:
1. Follow the money
Every merger or acquisition needs a well-thought-out deal
thesis-an objective explanation of how the deal enhances the
company's core strategy. "This deal will give us privileged access
to attractive new customers and channels." "This deal will take us
to clear leadership positions in our 10 priority markets." A clear
deal thesis shows where the money is to be made and where the risks
are. It clarifies the five to 10 most important sources of
value-and danger-and it points you in the direction of the actions
you must take to be successful. It should be the focus of both the
due diligence on the deal and the subsequent integration. It is the
essential difference between a disciplined and an undisciplined
acquirer.
The integration taskforces are then structured around the key
sources of value. It is also necessary to translate the deal thesis
into tangible nonfinancial results that everyone in the
organization can understand and rally around-for example, one
salesforce or one order-to-cash process. The teams naturally need
to understand the value for which they are accountable, and should
be challenged to produce their own bottom-up estimates of value
right from the start. That will allow you to update your deal
thesis continuously as you work toward close and cutover-the
handoff from the integration team to frontline managers.
2. Tailor your actions to the nature of the
deal
Anyone undertaking a merger or acquisition must be certain
whether it is a scale deal-an expansion in the same or highly
overlapping business-or a scope deal-an expansion into a new
market, product or channel (some deals, of course, are a mix of the
two types). The answer to the scale-or-scope question affects a
host of subsequent decisions, including what you choose to
integrate and what you will keep separate; what the organizational
structure will be; which people you retain; and how you manage the
cultural integration process. Scale deals are typically designed to
achieve cost savings and will usually generate relatively rapid
economic benefits. Scope deals are typically designed to produce
additional revenue. They may take longer to realize their
objectives, because cross-selling and other paths to revenue growth
are often more challenging and time-consuming than cost reduction.
There are valid reasons for doing both types of transactions-though
success rates in scope deals tend to be lower-but it is critical to
design the integration program to the deal, not vice versa.
Consider the recent spate of announcements about computer
hardware companies buying services businesses. In 2008, it was
Hewlett-Packard buying EDS. More recently, Dell announced the
acquisition of Perot Systems, and Xerox made a bold move for ACS
that will more than double the size of its workforce. These are
clearly scope deals, as these companies search for ways to move up
the value chain into more profitable lines of business. And they
require a new type of integration effort for these hardware
companies. If HP, for example, applied the same principles and
processes that it used in integrating Compaq, it would greatly
complicate the EDS acquisition.
3. Resolve the power and people issues
quickly
The new organization should be designed around the deal thesis
and the new vision for the combined company. You'll want to select
people from both organizations who are enthusiastic about this
vision and can contribute the most to it. Set yourself an ambitious
deadline for filling the top levels and stick to it-tough people
decisions only get harder with time. Moreover, until you announce
the appointments, your best customers and your best employees will
be actively poached by your competitors when you are most
vulnerable to attack. The sooner you select the new leaders, the
quicker you can fill in the levels below them, and the faster you
can fight the flight of talent and customers and the faster you can
get on with the integration. Delay only leads to endless corridor
debate about who is going to stay or go and spending time
responding to headhunter calls. You want all this energy focused on
getting the greatest possible value out of the deal.
The fallout from delays in crucial personnel decisions is all
too familiar. When GE Capital agreed to buy Heller Financial in
2001, paying a nearly 50 percent premium over Heller's share price
at the time, GE Capital indicated that it would need to reduce
Heller's workforce by roughly 35 percent to make the deal viable.
But it didn't move quickly to say who would remain. Key players
departed before waiting to find out, and several helped Merrill
Lynch create a rival middle-market unit the following year.
4. Start integration when you announce the
deal
Ideally, the acquiring company should begin planning the
integration process even before the deal is announced. Once it is
announced, there are several priorities that must be immediately
addressed. Identify everything that must be done prior to close.
Make as many of the major decisions as you can, so that you can
move quickly once close day arrives. Get the top-level organization
and people in place fast, as we noted-but don't do it so fast that
you lose objectivity or that you shortcut the necessary
processes.
One useful tool is a clean team-a group of individuals operating
under confidentiality agreements and other legal protocols who can
review competitive data that would otherwise be off limits to the
acquirer's employees. Their work can help get things up to speed
faster once the deal closes. In late 2006, for example,
Travelport-owner of the Galileo global distribution system (GDS)
for airline tickets-announced that it intended to acquire
Worldspan, a rival GDS. The two companies used a clean team to work
through many critical people and technology issues while they
awaited final regulatory approval from the European Commission.
When regulators gave the green light, the company was able to begin
integration immediately rather than spending weeks waiting to
gather the necessary data and making critical decisions in a
rush.
5. Manage the integration through a "Decision
Drumbeat"
Companies can create endless templates and processes to manage
an integration. But too much program office bureaucracy and
paperwork distract from the critical issues, suck the energy out of
the integration and demoralize all concerned. The most effective
integrations instead employ a Decision Management Office (DMO); and
integration leaders, by contrast, focus the steering group and
taskforces on the critical decisions that drive value. They lay out
a decision roadmap and manage the organization to a Decision
Drumbeat to ensure that each decision is made by the right people
at the right time with the best available information.
To get started, ask the integration taskforce leaders to play
back the financial and nonfinancial results they are accountable
for, and in what timeframe. That will help identify the key
decisions they must make to achieve these results, by when and in
what order. Using this method, one global consumer products company
recently was able to exceed its synergy targets by 40
percent-faster than originally planned-while retaining 75 percent
of the top talent identified. (For a primer on how companies can
create an effective decision timeline, see "Making it happen: The
Decision Drumbeat in practice," on page 7.)
6. Handpick the leaders of the integration
team
An acquisition or merger needs a strong leader for the Decision
Management Office. He or she must have the authority to make triage
decisions, coordinate taskforces and set the pace. The individual
chosen should be strong on strategy and content, as well as
process-in other words, one of your rising stars. Ideally, this
individual and other taskforce leaders will spend about 90 percent
of their time on the integration. Given the importance of
maintaining the base business's performance while you're pursuing
integration, one solution is to put the No. 2 person in a country
or function in charge of the integration taskforce. The chief can
take over the No. 2's responsibilities for the duration.
7. Commit to one culture
Every organization has its own culture-the set of norms, values
and assumptions that govern how people act and interact every day.
It's "the way we do things around here." One of the biggest
challenges of nearly every acquisition or merger is determining
what to do about culture. Usually the acquirer wants to maintain
its own culture. Occasionally, it makes the acquisition in hopes of
infusing the target company's culture into its own. Whatever the
situation, commit to the culture you want to see emerge from the
integration, talk about it and put it into practice. A diagnostic
can help reveal the gaps between the two, provided acquirers are
appropriately skeptical about people's descriptions of their
organization's culture and provided they recognize their own
potential biases.
Whatever you decide on, executives from the CEO on down then
need to manage the culture actively. Design compensation and
benefits systems to reward the behaviors you are trying to
encourage. Create an organizational structure and decision-making
principles that are consistent with the desired culture. The
company's leaders should take every opportunity to role-model the
desired behaviors. And they should consider carefully the fit with
the new culture in making decisions about which people to keep.
Will they support and reflect the new culture-or not?
When Cargill Crop Nutrition acquired IMC Global to form the
Mosaic Company, a global leader in the fertilizer business, the new
CEO, who came from Cargill, knew from the outset that retaining IMC
employees and creating one culture would be important to the
success of the fledgling company. One-on-one meetings with the top
20 executives and surveys of the top teams from both companies
revealed differences between Cargill's consensus-driven
decision-making process-which would be the culture of the new
company-and IMC's more-streamlined approach, which emphasized
speed. Armed with an early understanding of the differences in
approach, the CEO was able to select leaders who reinforced the new
culture. Cargill managers also made time to explain the benefits of
their decision-making system to their new colleagues, rather than
simply mandating it. Result: The synergies estimated (and owned) by
jointly staffed integration teams turned out to be double what due
diligence had estimated.
8. Win hearts and minds
Mergers and acquisitions make people on both sides of the
transaction nervous. They're uncertain what the deal will mean.
They wonder whether-and how-they will fit into the new
organization. All of this means that you have to "sell" the deal
internally, not just to shareholders and customers.
Consider the challenge faced by InBev, the global beverage
company, in acquiring Anheuser-Busch, one of the most iconic
American brands. Early in the integration process, the leadership
team focused on the most effective way to introduce InBev's
long-term global strategy to Anheuser-Busch managers and employees.
One powerful tool was InBev's "Dream-People-Culture" mission
statement, which was tailored to the US company and introduced into
the Anheuser-Busch lexicon with strong messages emphasizing the
value of its customers and products, to excite the imagination of
the AB organization.
It's vital that your messages be consistent. If you are
acquiring a smaller company and the deal is mostly about taking out
costs, for instance, don't focus on a "Best of Both Organ-izations"
in your first town-hall speech. In general, it's wise to
concentrate on what the deal will mean in the future for your
people, not on the synergies it will produce for the organization.
"Synergies," after all, usually means reducing payroll, among other
things-and people know that.
9. Maintain momentum in the base business of both
companies-and monitor their performance closely
It's easy for people in an organization to get caught up in the
glamour of integrating two organizations. For the moment, that's
where the action is. The future shape of the company, including
jobs and careers, appears to be in the hands of the integration
taskforces. But if management allows itself and the organization to
get distracted, the base business of both companies will suffer. If
everybody's trying to manage both the ongoing business and the
integration, nobody will do either job well.
The CEO must set the tone here. He or she should allocate the
majority of time to the base business and maintain a focus on
existing customers. Below the CEO, at least 90 percent of the
organization should be focused on the base business, and these
people should have clear targets and incentives to keep those
businesses humming. By having No. 2s running the integration, their
bosses should be able to make sure the base business maintains
momentum. Take particular care to make customer needs a priority
and to bundle customer and stakeholder communications, especially
when systems change and customers may be confused about who to deal
with. Meanwhile, establish an aggressive integration timeline with
a countdown to cutover-the day when the primary objectives of
integration are completed and the two businesses begin operating as
one.
To make sure things stay on track, monitor the base business
closely throughout the integration process. Emphasize leading
indicators like sales pipeline, employee retention and call-center
volume.
Olam International, a global leader in the agri-commodity supply
chain business with $6 billion in annual revenues, has managed to
maintain its base business while incorporating a stream of
acquisitions. In 2007, for instance, Olam purchased Queensland
Cotton, with trading, warehousing and ginning operations in the US,
Australia and Brazil. Olam ensured that a core part of the
Queensland Cotton team remained focused on the base business, while
putting together a separate team made up of Queensland Cotton and
Olam employees to manage the integration. That helped the company
navigate difficult conditions due to drought in Australia, while
also growing their Brazil and US businesses well above the market.
Olam's acquisitions contributed 16 percent to its total sales
volumes in fiscal year 2009 and 23 percent to its earnings, which
have grown at an overall rate of 45 percent CAGR since 1990.
10. Invest to build a repeatable integration
model
Once you have achieved integration, take the time to review the
process. Evaluate how well it worked and what you would do
differently next time. Get the playbook and the names of your
integration experts down on paper, so that next time you will be
able to do it better and faster-and you will be able to realize
that much more value from a merger or acquisition.
Bain has done extensive research on what drives success in
acquisitions, including two Learning Curve studies completed in
2004 and again in 2007. The data is compelling. Frequent acquirers
consistently outperform infrequent acquirers as well as companies
that do no deals at all. If you had invested $1 in each group, the
returns from the frequent-acquirer group would be 25 percent
greater than the infrequent group over a 20-year period. Over the
last 15 years, a number of companies, including Cisco Systems,
Danaher, Cardinal Health, Olam International and ITW, have shown
that you can substantially beat the odds if you get the integration
process right and make it a core competency.
Making it happen: The Decision Drumbeat in
practice
A Decision Drumbeat is the way to focus your senior management
and integration taskforces quickly on the critical decisions
necessary for a merger integration to succeed. Here's how one
global consumer products company applied this approach to
sucessfully integrate a major competitor in record time:
Focus on the fundamentals.
The first rule is to clearly articulate the financial and
non-financial results you expect, and by when. Parcel out these
results to each of the integration taskforces, and have them work
out the decisions necessary to get there. Pare these decisions down
to the bare essentials-just what's necessary to deliver one
integrated company on schedule. It's important to distinguish
between integration and optimization decisions. The latter should
be put off until the integration is complete.
For the consumer products company, it was imperative to quickly
equip the salesforce with an integrated portfolio of brands
for the busy trading period, despite the fact that some of the
brands were aimed at the same consumers and were positioned in
similar ways. The answer in this case was to quickly decide how to
target the brands at different outlets, and to leave decisions
about fundamental brand repositioning for later, after cutover to a
single combined company.
Coordinate decisions.
Any integration involves a large number of decisions in a short
time frame, and many of those decisions are highly interdependent.
So the timing of decisions needs to be closely coordinated, and
everyone needs to understand the impact their actions have on
others. For instance, most marketing teams would prefer to wait
until the end of the integration process to recommend the final
product portfolio. Recognizing this tendency, the consumer products
company quickly made a decision on the brand portfolio. That set up
a series of cascading decisions: Within four weeks, the company had
created new SKU lists, order forms and sales scripts, and had
trained the salesforce so that they were able to sell each brand
when they hit the streets representing the combined company. The
Decision Management Office plays an important coordinating role:
first, by helping the taskforces work out which decisions must be
made to deliver their results; second, by ensuring that the
decisions are made and executed in the right order to support the
decision deadlines of other taskforces. No one else has the
integrated view of the timing and the value at stake.
Assign decision rights and roles.
The Decision Management Office should then map out who is
responsible for each decision and communicate that to all involved.
One of the most effective ways to clarify decision roles, in our
experience, is a system we call RAPID-a loose acronym for Recommend
(which usually involves 80 percent of the work); offer Input; Agree
or sign off on (limited to rare circumstances, for example, when
fiduciary responsibilities are involved); Decide, with one person
assigned the "D"; and Perform, or execute the decision. The
resulting decision roadmap shows who is accountable for each major
decision and when that decision needs to be taken.
At the consumer products company, the steering group focused on
the 20 percent of decisions that were most critical to integration
success, leaving the remainder of the decisions to the integration
taskforces. That meant the integration was able to move at maximum
speed and, by empowering the taskforce leaders, many gained
priceless management experience that led to eventual
promotions.
Stick to the timetable.
Actively ensure that everyone is on track to make their
decisions. The Decision Management Office ensures that each
taskforce has what it needs from other taskforces or from the
steering group to make their decisions on time through the weekly
drumbeat of meetings with each of the taskforces. When necessary,
bring in experts to speed up team delivery; and bring teams
together for major decision points and cutover plans, which require
detailed and coordinated planning. Focus your working sessions on
critical trade-offs and the additional work required to resolve
them.
Here, again, the consumer products company kept to the deadline
by providing extra help to the taskforces when they risked missing
decision deadlines-to ensure union negotiators had what they needed
to secure agreement from manufacturing employees, for instance, or
to work around obstacles in the distribution system when containers
from the two companies did not fit on the same trucks. As one
senior executive later said: "We focused on decisions, not on
process for process's sake. From day one we had a focused plan that
everyone understood and believed in, and that really energized the
team."
As we emerge from the global recession, companies should prepare
to take advantage of attractive asset values and to capture the
benefits garnered by frequent acquirers. But they must act with
judgment and finesse. Winners in this game will bring a tailored
approach to integration, adjusting their approach to the deal
thesis with one eye constantly fixed on the critical sources of
value and risk. The most experienced acquirers not only understand
these 10 steps to a successful integration, they also understand
how to adjust their application to the deal and the
circumstances.
Ted Rouse is a partner with Bain & Company in Chicago
and co-leader of Bain's Global M&A practice. Tory Frame is a
partner in London and leader of London's Post-Merger Integration
and Consumer Products practices.
