Tailoring integration
strategies to secure deal value
By ERIKA SCHRANER AND
STEVEN SELLIN, Ernst & Young LLP
May 10, 2012
A key component of transaction success is developing the appropriate,
comprehensive integration strategy focused on delivering key value
drivers corresponding to the deal type. Companies winning at acquisition
integration systematically focus on their strategy before signing a
definitive agreement or do so as soon as possible thereafter. The
integration strategy framework can help to guide this process and get
companies ahead of the curve.
Most of the value in a M&A deal is captured during integration, yet
most transactions fail to create value because companies apply the wrong
integration strategy and approach. Less than half of the corporate
development officers (CDOs) who responded in a recent Ernst & Young
CDO study said they were satisfied with M&A integrations.
Less than half of corporate development officers are satisfied with M&A integrations
Overall transaction satisfaction: 1-5 scale
Source: Ernst & Young CDO Study, April 2011
Framework for combining the right integration strategy for the right type of deal
While
each deal has its own opportunities and challenges, we have found
pivotal similarities among winning integration strategies for the four
most common deal types: consolidation, transformation-, tuck-in and
strategic growth. We’ve encapsulated our findings and experience in an
integration strategy framework. For each deal type, we outline key
elements of winning integration strategies in terms of operational model
adoption, and the degree and speed of the integration.
Consolidators generally purchase competitors to
achieve synergies and economies of scale. As such, a winning strategy
typically revolves around fully integrating business models as quickly
as possible. We recommend that the acquirer takes the following
approach.
- Quickly arrive at a combined organization structure that eliminates redundancies. Postponing organization changes only prolongs fear and leads to productivity losses. Pulling the proverbial Band-Aid off quickly has proven to be a winning approach.
- Adopt either the acquirer’s or the acquired company’s business model and fully integrate. Trying to invent an entirely new business can quickly become disruptive and impact the speed of the integration. Look at qualitative measures including employee and customer satisfaction information. Quantitative measures may include customer satisfaction, revenue per employee, cost of goods sold per employee, downtime and employee turnover.
- Use standardized systems to enforce standardized processes and capture efficiencies. Focus on the “quick wins” in the back office and on shared services structures. The cost amortization of sophisticated IT systems and infrastructure over increased volume is often, in and of itself, a key value driver for consolidation deals Clearly and consistently communicate the strategic goals of the combined company. Communication plays a pivotal role as headcount reduction and facility consolidation may result in employee disengagement and undesired employee turnover. The acquirer should develop a communication plan including who will be communicated with, what will be communicated, when it will be communicated, how it will be communicated and who will be responsible for delivering the messages.
Transformational deals are the
most complex to integrate because the acquiring company typically has
little to no experience in the target company’s business model, market,
products or services. These deals tend to focus on revenue synergies to
be gained by creating new business models and a new value proposition.
When done right, they accelerate changes in both the target and the
acquirer.
Value is often driven by growth in the new business –new
revenue, new customers, as well as new technology solutions. While
maintaining consistent performance in the legacy businesses, a winning
integration strategy typically requires a phased integration with the
acquired company operating standalone on go-to-market, products and
services for a transition period. It usually takes at least year or two
to allow time to understand the acquired business and implement a
combined operating model. During this time, while there is usually a
degree of back-office integration, the focus is on capturing immediate
cross-selling opportunities, product roadmap integration and enabling a
full-fledged go-to-market strategy:
- Design the new go-to-market model of the combined company to capture the revenue synergies. Strategic planning should focus on creating a new or differentiated value proposition. Consider specific tactics that will be required to integrate the acquisition and the legacy business into the new model.
- Develop interim financial and operating reporting structures that can be used while planning and designing the longer-term structure.
- Blend the quantitative and analytic tasks of integration with the inspirational and creative tasks of creating a new vision. For example, focusing purely on the revenue synergies as the measurement of the acquisition without understanding and addressing differences in cultures can be a recipe for disaster.
- Retain the acquired key business leadership team to enable transformation and knowledge transfer.
Tuck-in deals are often found in emerging industries
like biotechnology, software, computer networking and others where
intellectual capital is essential to stay competitive. The value usually
comes from rapidly integrating people and technology into the acquiring
company. We suggest the following approach to these deal types.
- Focus on key employee retention — incentivize those helpful to enabling the integration. Meet with human resource professionals and key functional areas to identify star performers and those whose experience is required for a successful integration. Collaborate with HR and the functional executive to design bonus awards for specific integration milestones and metrics achieved. Develop individual “retention” plans for key employees that include more than money, as most acquired employees leave due to uncertainty of their role in the new organization versus pure economics.
- As back-office integration is often a component of deal value, planning should start as early as possible in order to have the back office fully integrated on Day One, as it offers “quick hit” cost savings and an avenue for cultural integration.
Strategic growth deals are focused on expanding
market offerings and/or geographic reach by leveraging the target’s
market presence. These deals therefore seek to transfer skills into a
new and/or non-core business. As knowledge held by the target company
is critically important to business continuity, it is important to
retain and leverage relationships with key employees, customers and
suppliers:
- Exploit the longer-term gains from expanding offerings and geographic reach. Implement a hybrid integration model involving skill transfer, back-office integration, and pace the front-office integration to the acquirer to fully understand the target’s business model.
- Develop interim financial and operating reporting structures that can be utilized while planning and designing the longer-term structure.
- Because this type of deal involves buying outside of the core, pay particular attention to aligning the cultures between the organizations. Identify synergy opportunities with significant participation by the relevant business unit and the target; otherwise management might risk engendering resentment and creating unattainable and possibly detrimental synergy targets.
Erika Schraner and Steven Sellin are members of the
Transaction Advisory Services practice of Ernst & Young LLP. Harish
Sachidanandan, Denise Lysle and Carin Bowman at Ernst & Young also
contributed to this article.
The views expressed herein are those of the authors and do not necessarily reflect the views of Ernst & Young LLP.
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You can find out herewith the second annual
review of trends affecting tax aspects of corporate M&A that Ernst
& Young has released. The report, Global M&A tax surveyand trends: the growing role of the tax director, is based on responses
from tax directors at 150 of the world's largest companies across 14 major
markets. Their message is clear: the harder that company boards press for
deals to deliver the value they promise, the more that tax directors play
a critical role in identifying and delivering that value.
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Collected by Nguyễn Hữu Thức (May 2012), Email: thuc.huu.nguyen@gmail.com.
