Mergers and Acquisitions Integration Overview

Mergers and Acquisitions Integration

Mergers and acquisitions integration approaches determine the success of a M&A deal. Companies need to grow and deliver shareholder value.At the current environment, growth through internal business development had saturated in most industries as they have become matured.Hence M&A has become an important growth strategy for the company to increase growth.
This has made companies invest time, resources to build capabilities in setting up internal M&A teams to focus on inorganic activities.Inspite of the statistics indicating that M&A deals have increased failure rates, companies are still looking to pursue M&A as their growth strategy as this seems to the best bet to achieve growth in current market conditions.
Although each phase of the M&A process is critical and is crucial to achieve value, two most overlooked activities that are crucial for delivering value is Acquisition Strategy and Integration Strategy.
Acquisition strategy is derived from the corporate strategy and basically summarizes how an acquisition would help in achieving the growth objectives.The target screening phase should shortlist target companies whose value drivers are aligned to the enterprise strategy in order to achieve growth objectives.This value can be realized only when the integration strategy is aligned to achieving the value drivers and the objectives of the proposed acquisition.

Mergers and Acquisitions Integration Approaches

  1. The integration strategy needs to be aligned to the deal rationale.Hence depending on the deal objectives, integration approaches needs to change.
  2. There are only few reasons that companies look for in acquisitions.These are:

Access to New Markets or New Products:

  • In these acquisitions, acquirers look to leverage the target business model to either expand their presence in a new market or add target products to sell it with its existing service offerings.

Integration Strategy for these deals

  • The integration approach in order to capture the desired value would be to combine the target under the acquirer business
  • Assess the current business processes of target and acquirer to transform the operating model by leveraging the best practices of either entity or come up with best practices from each business.

Improve Cash Flows and Eliminate competition

  • In these acquisitions, the acquirer improves the target business operations by either increasing revenues or reducing costs in order to generate additional cashflows.In these acquisitions, synergy targets are identified during the due diligence process and integration teams are required to be laser focused in achieving the synergy targets.

Integration approach

  • In these deals, target is completely integrated into the acquirer business and target follows the acquirer business systems and end processes post integration.The procurement and supply chain functions are consolidated and the backoffice functions are transitioned to acquirer shared services functions in order to derive additional cost savings.

Strategic bets

  • In these acquisitions, the target business model is divergent from acquirer.The reason for the acquirer to invest is to leverage early stage capability of target firm which has a huge upside potential in future that the acquirer can exploit to edge out competition.

Integration Approach

  • These deals would require the target to function independently from acquirer.The target should have it’s own management team and can leverage the acquirer for additional investments as well as its network to access to new clients and markets.

Holding Company vs Fully Integrated Approach – An example

  1. Each integration approach adds value to the acquirer, provided these approaches are aligned to the acquisition strategy.When the right integration approach is selected, then this should be supported by the leadership team and high management expertise in order to derive the deal synergies.
  2. Let us take a look at two contrasting integration strategies followed, both of which generate value for the acquirer.
  3. Irrespective of the integration approach followed, leadership support and management capability are necessary in order to achieve synergies targets.

Holding Companies – Merger and Acquisitions Integration Model

  1. Holding companies are basically conglomerates who acquire businesses which are not related to each others.
  2. The acquisition strategy is to identify companies that have a great brand in market and apply management practices in order to improve revenues and margins.Successful companies like Berkshire Hathaway allow the target management to function independently and retain their identity.The target companies are given sufficient autonomy but are also given objectives to achieve the key financial and operating targets.Based on the targets met, incentive based rewards are provided.
  3. Financial metrics includes Revenues growth, Margins increase, Improvement in Working capital and Return on Invested capital.
  4. Operating Metrics include the high quality in product delivery, retention rate of the target employees and customer satisfaction rating

Fully Mergers and Acquisitions Integration Model

  1. This approach falls at the other end of the spectrum where the target company is fully integrated to the acquirer business operations.The target company do no longer exist to function.
  2. The acquirer has an internal integration team which will integrate the target business processes and systems with the acquirer. Successful acquirers have an Integration playbook already built with well documented practices which guides the teams to identify synergy targets and build suitable integration plans to achieve the required synergies.
  3. Integration teams are laser focused on achieving Costs synergies by consolidating the backend systems and processes, Revenue synergies by cross-selling each other services offerings and Working capital synergies by renegotiating the supplier and customer credit/payments terms and conditions to achieve higher cash flows.

Conclusion

  1. Mergers and acquisitions integration strategy are critical to the success of a M&A deal.Selecting a target based on a sound acquisition strategy which is aligned to the overall objectives of enterprise strategy is crucial to achieve success.
  2. The integration approach needs to be based on realizing and expanding the value drivers of the target company acquired which inturn would be aligned to the corporate strategy.
  3. Successful acquirers have built internal M&A capabilities by investing in resources, budget and time to leverage acquisitions for growth.Integration playbooks are documented with best management practices which guides the integration team to build and execute integration plans in order to realize the synergies targets identified during the due diligence.


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