Turns out you can get too much of a good thing, especially in the tricky world of merger integration. Multiple studies show that the most treacherous time in the failure-strewn business of mergers comes after two companies tie the knot, when they attempt to combine operations. But here's the surprise: too often they destroy value through zeal, not inattention.

That's because recognizing the dangers posed by merger integration, acquirers often attempt to immunize themselves by painstakingly mapping out comprehensive, detailed plans for blending every aspect of operations. What they don't realize is that their careful, well-intentioned efforts could actually be digging their deals into the grave. The reality is, overintegrating an acquisition can block companies from realizing the benefits of a merger just as easily as underintegrating can. And, in some cases, overintegrating can actually do far more damage.

Consider Novell's $1.4 billion acquisition of WordPerfect Corporation in 1990s. The marriage between the leader in the corporate networking market and one of the historic front-runners in word-processing applications was intended to create a formidable competitor to Microsoft. Once the deal was signed, Novell launched a broad and extensive integration program. "The devil is in the details," one Novell senior vice-president told SoftLetter, the trade publication of the software industry. As SoftLetter reported, "success [for Novell] depends on thousands of nit-picking decisions that can tie up senior management for a good 16 to 18 months."

Pursuing that strategy of thoroughness, Novell's management team sought to fully mesh the two companies, targeting higher synergies and increased efficiency by assimilating WordPerfect's different product and service lines, sales groups, culture, and business model into its own. But Novell's comprehensive efforts to assert control and impose the Novell personality on WordPerfect's operations sparked intense culture clashes that sidetracked the company. While Novell was preoccupied with trying to keep integration on track, key product launches fell behind schedule, including those of WordPerfect's office suite and Windows products. That presented Microsoft with the opportunity to muscle in on Novell's turf and steal market share, which it did not only in WordPerfect's word-processing software but in Novell's own core networking products. Novell's performance dropped sharply, and its stock price followed suit. WordPerfect's sales sank 17 percent in 1994, the year of the merger.

In January 1996, less than two years after the acquisition, Novell unwound the deal, selling WordPerfect to Corel for about one-tenth the purchase price. By then Novell's stock price had been cut almost in half, falling from $23.75 a share the day before the merger announcement to $13.75 two business days before the announcement of the sale to Corel. As Novell's experience illustrates, in fast-moving, intensely competitive markets, companies that get bogged down in merger integration can pay a heavy price.

How much integration is enough

It's not as if companies are blind to strategic and tactical thickets that clot the path to successful integration. When we recently surveyed 250 global executives involved in M&A about why deals broke down, respondents said two out of the three top causes related to integration. "Ignoring integration challenges," cited by 67 percent of respondents as a major factor in disappointing deal outcomes, topped the list; while "problems integrating management teams and/or retaining key managers," cited by 61 percent, came in third. Most executives also saw the run to daylight: 80 percent of respondents asserted that integration efforts must be "highly focused on where the value is in the merger."

Yet too many companies trip while trying to turn such insight into action. The key to merger success lies not in integrating everywhere; the trick is zeroing in-rapidly-on areas where integration will achieve the largest business impact.

Where that value is—and the lengths an acquirer must go to capture it—varies from deal to deal. To determine those things, acquirers should turn to the underlying deal rationale—what the M&A industry calls an "investment thesis" of how the merger will enhance the business—as a guide. Generally, a deal either enhances the acquirer's core business in some way or represents a completely new and separate platform for active investment. If a deal enhances the core, it either grows the scale of a company's operations (by adding similar products or customers with the intent of lowering costs and growing market power) or expands a company's scope of operations (by combining companies that offer each other one or several new products, customer segments, channels, or markets and a chance to grow revenues).

These three types of investment theses-active investing, growing scope, or growing scale-form a spectrum, with "active investing" on one end and "growing scale" on the other. As you move along the spectrum or blend theses, the required integration effort increases. If an acquired company is the first plank of a new platform, it will probably require the bare minimum of integration. Private equity firms, which acquire companies specifically to improve their value and exit at a profit through resale or public offerings, are quintessential active acquirers. They typically will limit integrating a diverse portfolio of companies to inserting some management talent in each and extending financial-reporting requirements.

Moving along the spectrum, deals that enhance scope need to be integrated only in discrete areas. An acquisition that expands a company's product scope, for example, may require extensive integration in distribution and customer service, but not necessarily in manufacturing and R&D. The best approach may be to keep lines of business or cultures separate or to impose a new corporate culture only on those operations that directly overlap.

At the other end of the spectrum, scale deals require extensive integration, not only of overhead functions but also in operations. Success here requires full integration of all activities to capture the value that inspired the deal. That value may come from reloading plants, lowering administrative costs per employee, or consolidating vendors to lower purchasing costs.

Selective integration

Scope acquirers that integrate selectively earn returns above their industry average, our research shows. In a recent study, we looked at the scope acquirers whose stock had outperformed that of their industry peers one year after the deal's announcement. We found that all the high performers had blended organizations partially or minimally. But when we looked at the scope acquirers whose stock had underperformed that of their industry peers, we found that only a third of them had integrated partially or minimally; the rest had blended companies significantly.

Illinois Tool Works, Inc., a frequent acquirer of industrial businesses, provides an excellent example of how less can beget more in scope deals. ITW's main aim is to squeeze value out of complementary assets, rather than to generate synergies by combining operations. W. James Farrell, who became CEO of ITW in 1995, spent over $6 billion to buy more than 200 mostly small, mostly private companies over six years. Today, the Glenview, Illinois-based company manufactures everything from plastic soda bottle carriers to paint sprayers, operating in 44 countries and employing 48,700 people.

ITW keeps its acquisitions almost entirely independent. It focuses on a simple model for boosting the stand-alone efficiency of its acquisitions; it calls the core of this approach its "80-20 process." The idea is that companies obtain 80 percent of their revenue from the top 20 percent of the products they sell to a small number of key customers. Accordingly, at ITW's 600-odd small, highly specialized businesses, local managers have broad authority to manage their units with little assistance from headquarters—provided, of course, that they live by the "80-20" rule, focusing primarily on top customers and products.

ITW integrates control functions, rather than operations. Headquarters handles taxes, auditing, investor relations, R&D support, and some centralized HR functions. Otherwise, the businesses are self-supporting, with headquarters helping to point them in the right direction. Is selective integration working? Indisputably. From the time Farrell took the helm in 1995, the deals he has struck have helped ITW to more than double revenues to $10 billion in 2003. In that same period, the company's stock price increased fivefold.

Integrating less, not more, also proved to be a winning strategy for department store Sears, Roebuck when it acquired catalog retailer Lands' End in the spring of 2002. At first, analysts reacted skeptically to the deal. Though the strategy seemed sound-Sears's apparel lines desperately needed the lift that Lands' End, with its tasteful, outdoorsy brand, could provide—many saw the two companies headed for a crippling culture clash. They wondered how slower-paced Sears could maintain Lands' End's famed customer service and nimble supply chain.

The answer? Sears left Lands' End largely untouched, integrating only a few back-office functions, like purchasing. "This is not about cost cutting," Sears CEO Alan Lacey wrote to employees. "Sears wants Lands' End to retain its character and momentum." Understanding that many of Lands' End loyal, affluent customers were uncomfortable with the connection to the low-priced mega-retailer, Sears kept the Lands' End customer interface separate, allowing it to retain its distinctive service style. Instead, Sears focused mainly on selling Lands' End apparel in its stores and sharing information about the combined customer base. By the final quarter of the year, the introduction of Lands' End clothing had helped boost Sears's retail operating profits by 10%, while Lands' End catalog sales remained as strong as ever. [CHK]

Fully merging market share 

 In contrast, in scale deals, where a company attempts to grow market share through acquisitions, integration matters in more places and calls for far more extensive effort. In our study, we found that the best scale acquirers tended to cover the waterfront. When we looked at the scale acquirers whose stock had outperformed that of their peers one year after the deal announcement, we found that all the high performers had integrated fully. But less than half of the scale acquirers whose stock had underperformed their peers' had integrated comprehensively; the rest had blended companies only partially or not at all.

One well-known, albeit extreme, instance of a comprehensive scale integration is British Petroleum's acquisition of Amoco in December 1998. BP's CEO, John Browne, had observed the mistakes made by other companies that had taken a hands-off approach to integrating their scale investments. He realized that, to capture all the benefits in such mergers, "you have to create a single organization-with common processes and standards, common values and a way of working, which everyone can recognize."

Browne moved swiftly to achieve that goal. Within 100 days of closing the Amoco deal, he had filled all the top management jobs and completed most of the staff reductions—including 10,000 layoffs—and imposed BP's structure and management style on the new company. BP's assimilation of Amoco was so thoroughgoing that it inspired an insider's joke: How do you pronounce BP-Amoco? Answer: BP. The Amoco is silent. Some senior executives at Amoco quit in frustration. Even so, BP achieved its projected $2 billion in cost savings within the first year—that is, 12 months ahead of schedule. Its stock emerged as a top performer, rising nearly 11 percent during the first 100 days, and outperforming the oil-and-gas stock index by 17 percent one year after the deal was announced.

In this integration process, John Browne may have ruffled some feathers, but he certainly pleased shareholders. And without a doubt, he mastered the complexity of assimilating his combined company to capture the full benefits of scale.

Blending rationales

Some deals blend objectives. For example, an active investor may invoke the benefits of scale to roll up companies in an undervalued industry before exiting. Meanwhile, rationales for corporate deals may incorporate elements of scale and scope. When blending objectives, it's especially important to clearly prioritize for employees, customers and shareholders just where and when you need to integrate to achieve the gains predicted by your investment thesis and grow profitably. The experience of Philips Medical Systems, the medical-device unit of Koninklijke Philips Electronics N.V. of the Netherlands, shows how.

Philips Medical makes imaging products, such as X-ray equipment and MRIs, and competes fiercely with Siemens Medical and GE Medical Systems. Between 1998 and 2001, Philips Medical acquired four small companies in rapid succession. Its rationale? With hospitals forming buying groups to cut costs, Philips needed a broader product line and greater market share to stay competitive. The acquisitions moved Philips from a distant third-place position to parity with Siemens, the No. 2 player, and filled critical gaps in its product line.

Capturing the true benefits of this roll-up required a major integration effort. In October 2001, with the last of the deals completed, Philips deployed 17 "synergy search-and-rescue" teams over an intense six-month period. Their mandate was to identify the greatest potential for both cost savings and revenue increases.

From an initial list of about 500 initiatives, the teams first pursued the highest-payback tasks, such as integrating individual product lines. They delayed the longer-payback ones, such as redesigning the imaging-technologies supply chain or integrating the sales force for products that required different selling skills. Throughout the process, William Curran, former CEO of Philips Electronics North America, which oversaw Philips Medical Systems, kept his colleagues focused on the biggest prizes. "I admit that we paid less attention to the teams where the cost synergies were small," says Curran. "We were off doing the job where the money was."

After five and a half months, teams had identified three times the synergies originally quantified. The largest synergies and savings came from IT integration; the next largest from combining the sales and service staffs for CT scanners, X-ray machines, and MRIs. The upshot? Philips Medical surpassed its announced goal of achieving $230 million synergies by 2004, announcing the realization of $342 million in synergies in February 2004.

The flip side of focus

Integrating only where it matters has a valuable flip side. By focusing your integration efforts, you not only reap the benefits of the merger sooner but also counteract a force that often derails deals: employee distraction. As the experience of demonstrates, the gravitational pull of integration activities can draw attention away from the base business—just when companies are most exposed to competitor attacks. Limiting your efforts will help your frontline employees to keep their firepower focused—a practice that our experience shows is critical to merger success. Indeed, the most successful integrations allocate no more than about 10 percent of managerial talent to the integration effort. They wholly dedicate just a handful of leaders, and keep other managers abreast by involving them in monthly steering committees, where they can give input and receive information.

Those are principles the top brass at Singapore-based Keppel Offshore & Marine (KOM) clearly understood when that company was formed through a merger of two businesses in 2002. The two outfits, Keppel FELS, which builds and repairs offshore rigs, and Keppel Hitachi Zosen, which repairs ships and converts container ships into oil storage vessels, were both majority owned by the Keppel Group and had partly overlapping businesses, which occasionally even competed against each other. Because 2002 was a boom year for the industry, KOM's CEO, Choo Chiau Beng, realized he could not afford to let integration efforts distract the staff from landing contracts and completing projects on time and at cost.

How did Choo keep employees focused? He named its new leaders early, tackled integrating only a few, high-return functions and made strategic use of incentives. In the combined company's first year, he handed out 10 percent of all integration-related savings—which totaled close to 20 million Singaporean dollars—not only to members of the small integration team, but also to others who kept the base business humming.

"We did not try to integrate everything," he says, "only a few areas like finance, HR, and good procurement. We tackled the big areas that needed to be integrated."

Choo's advice to other acquirers: "Do not integrate things that may destroy value. For example, the sales team, the two marketing teams we did not integrate, because it would have affected our ability to get business and the savings were not large enough to justify it. We did not integrate operations managers because the yards are highly decentralized."

 Keppel's efforts paid off when newly combined company won an order during the integration process itself—one that the firm's leaders felt they clearly would not have won, pre-merger. And despite the incremental costs that are associated with any merger, Keppel went on to achieve record results in 2002, with combined revenues up 35 percent and profits up 169 percent over 2001. Further, Keppel exceeded its synergy targets by 100 percent within six months of the deal close.

In the end, acquirers like Keppel, BP, Philips, ITW, and Sears know from experience what many deal makers have suspected all along: that successful merger integration can make or break a deal's trajectory. But they also know something that only a much smaller group of companies understand: By integrating only where it matters most to sales and profits, based on their investment thesis, they can get just enough of a good thing—and vastly improve their odds of merger success.