Managing merger integration for maximum value
Speed is essential to successful integration. But speed isnÆt everything. Only 25 to 50% of deals create shareholder value, often because those managing the integration process donÆt know how to make trade-offs between speed and careful planning. To keep the value of a merger from evaporating, leaders need to manage the integration process actively, and steer a course that leads the new organisation to its stated strategic goals as swiftly as possible.

When Internet equipment maker Cisco Systems completes an acquisition, it aims to assimilate the technical know-how of the new company under its corporate umbrella within a hundred days. Cisco aggressively seeks to keep the highly skilled people that made the target attractive and to incorporate new products into CiscoÆs development pipeline. With that strategic end, Cisco has developed a comprehensive approach to integration that works. And although the companyÆs market value has shrunk in the 2001 technology downturn, its track record for merger integration stands strong. Cisco integrated more than 60 acquisitions from 1996 to 2000. During this period CiscoÆs stock price rose by an average of more than 50% per year.

Customize the plan
For every merger integration the companies involved must pass three basic milestones, marking three phases that require active management. These phases include: establishing the vision, planning the integration, and executing the plan. But before integration begins, leaders need to consider the strategic rationale behind the deal and tailor their plans to address the particular challenges associated with achieving their stated goals.

If youÆre merging to capture benefits of scale, ôyou must act fast,ö says Tony Johnston, Regional Director of British American Tobacco (BAT) Asia-Pacific. Johnston led the regional team in the integration of Rothmans with BATÆs Asia-Pacific operations. ôThe longer you take to make decisions, the more risk you take.ö He would know. The BAT-Rothmans total effort spanned more than 70 countries and involved numerous plant closures, three major antitrust queries, and the melding of two head offices. He completed most of this mammoth task in a year.

According to Johnston, success depends on identifying very early the key people to lead the organization, and removing the people likely to block the process. During the early stage, says Johnston, a sense of urgency is essential. ôDonÆt allow endless debate; an 80 % right solution is almost always better than delay.ö In tandem, merging companies need frequent, two-way communication with employees and affected communities to air concerns and alleviate anxiety.

Acquisitions intended to achieve scale or operating improvements are the simplest to plan. Since (by definition) a high overlap exists between the two businesses, there is often a common technical understanding between the management teams. This understanding makes it possible to map out essential actions in advance and delegate tasks to transition teams. But senior executives need to remain engaged to arbitrate on delegated issues that have become difficult to resolve. Johnston recalls, ôThere were times when too much was at stake, and it was impossible for the country guys to be neutral. I had to intervene more than I would have likedàto break logjams.ö

Mutual understanding makes scale-based integrations simpler to manage, but that doesnÆt make it easier. If the benefits of merging are easy to spot, the acquisition price usually reflects the value of these benefits. As a result, managers, under pressure, make deeper cuts and drive further performance improvements than the market expects. In these cases speed becomes most critical.

Broadening scope
In a merger aimed at expanding into adjacent markets, customers or product segments, the big prize comes from growing revenue. This often comes atop opportunities to benefit from economies of scale. To win the revenue prize, a good part of the integration effort needs to focus on defining the new entityÆs value proposition to customers and determining how to bring it to market. Teams from both sides must work together to develop a new marketing plan for the combined company.

Witness baby equipment makers Graco and CenturyÆs integration approach: Part of the integration team tackled opportunities to increase scale and reduce costùin this case, administrative headcount cuts and consolidated sourcing in Mexico. The rest of the team focused on the revenue opportunity, wrestling with such issues as: Would customers accept a Graco-branded car seatùone of CenturyÆs core productsùdespite the Graco brandÆs strong association with strollers and baby carriages? Would trade customers value the combined product offering enough to maintain or expand shelf space? Was there a customer-driven reason to keep two like products, or should the company reduce the number of different models it sold?

After hammering out answers based on each sideÆs customer knowledge, the combined company expanded product lines under one anotherÆs distinctly positioned brand names. Together they now serve a broader range of customers and command expanded shelf space. Graco and Century tempered their urge for speed with careful consideration of critical strategic issues.

Redefining the business
Executives who use mergers to take a business in a fundamentally new direction face further integration challenges. Typically, opportunities exist post deal closure to both reduce costs and expand into highly related market segments. Executives must divide their energy between these and the more elusive sources of value. To create something entirely new from the two companies, leaders need to communicate the new companyÆs vision, and motivate people to channel their energies in the direction desired.

Retaining then redirecting talent towards new goals beyond the immediate horizon requires high-level leadershipùsomething not easily delegated. John Roth, president and chief executive of Northern Telecom, created guiding principles to help his employees make a ôRight-Angle Turnö towards the Internet in 1997. He encouraged his people to focus on leading-edge customers, to make decisions quickly, and to look for ways to lead change in the marketplace. By doing this, he provided a framework to help people judge when to make a decision quickly, and when to take time to get things absolutely right.

Re-inventing an industry
Bold transactions that endeavor to change an industryÆs rules of competition present the greatest risk, and the greatest difficulties for integration. Industries are never redefined in a 100-day period, and rarely even in two years. The success of these deals depends on influencing the customer and competitive landscapeùa landscape undefined at the dealÆs close. So, where should a company start?

Ask AOL and Time Warner, as they journey on perhaps the most ambitious merger in history. Vice Chairman Kenneth Novack describes the blended companiesÆ goal: to ôcombine our unique mix of creative, editorial and distribution assets to connect, inform and entertain people everywhere, transforming the ways in which they communicate and receive information.ö Achieving this will not be easy.

In this environment, leaders need to communicate forcefully a clear vision. The challenge lies in quantifying and understanding this type of deal. Therefore, the companiesÆ leadership must make the case for the merged entity that maintains its market value and retains skeptical employees. Leaders must likewise continue to steward and promote the value of their individual businessesùitÆs hard to recoup a drop in standalone performance, particularly if the value of putting the two companies together takes time to emerge.

Manage the three phases
Once executives have considered the particular challenges posed by the strategic rationale behind the merger or acquisition, they can move ahead with active management of the three phases of integration. Phase 1 sets the stage by articulating the vision and naming key leaders. Phase 2 designs the new companyÆs organization and operating plans. Finally, phase 3 makes the integration happen by aggressively implementing plans that bring the vision to life.

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*Orit Gadiesh is chairman of Bain & Co. Charles Ormiston is a director in Bain's Singapore office and Sam Rovit is a director in London.

Source: Submitted by Bain & Co to the EIU ebusiness forum. Bain & Co is a sponsor of the EIU ebusiness forum.