Why Integrating a bolt-on acquisition needs a different approach

Integrating a bolt-on acquisition

Integrating a bolt-on acquisition is critical. In this blog, we will see how the integration strategy will vary depending on the deal specifics.
The integration playbook employed when integrating a larger acquisition cannot be used for smaller deals.
The operating model and degree of integration will change depending on the value driver of the deal and how the acquirer wish to maximize the value of the target assets.
In case of Integration of small companies, Change management and communication plan is critical to ensure cultural alignment and preservation of target value.

Integration Strategy for a scale acquisition

  1. In case of large acquisitions where value is realized based on achieving cost savings, the cost synergies becomes more important.
  2. Since the operating model of a buyer organization would be same as that of target, it would be easier to assimilate the target company into acquirer organization.
  3. Post the acquisition, duplicate costs and functions between entities can be eliminated to reduce the bloated cost structure of the combined entity.The sales force is then combined so that all are aligned on a similar GTM strategy.
  4. In the case of consolidations, the synergies targets are identified during the pre-deal stage and the integration team starts to implement the synergies targets right after the deal closing.Most of the synergies targets would revolve around Cost synergies.These targets are then tracked weekly to ensure that the goals are achieved.
  5. In the consolidation, both the acquirer and target employees would be affected and would be anxious about their future in the organization.The communication plan should take this into account and integration plan needs to be shared with employees of both entities before execution.

Strategy for integrating a bolt-on acquisition

  1. Companies look for smaller acquisitions to either gain access to technology, broaden its service offering, strengthen its existing capabilities, entry to new markets or add new customers.These acquisitions are mostly bolt-on acquisitions.
  2. The smaller firms also agree to be acquired as they require access to capital to further grow and can leverage the acquirer brand, service offerings and customer base to further fuel its expansion.Many of these founders continue to operate their companies post acquisition.
  3. The rationale for these acquisitions is not on Cost synergies but on revenue synergies.The focus is to retain the talented employees of the target companies to ensure intended value of the target firm is preserved.
  4. The operating model of the acquirer will be different from the target.Hence the acquirer needs to design a target operating model which would take advantage of the strength of the combined acquirer and target company.
  5. Based on the deal objectives, the operating model of the combined entity can be as follows:

Target company operating standalone

  • Target company can continue to operate standalone post acquisition.This happens when the target company possess capabilities that are niche and not available with competitors.
  • In this case, the target company will leverage the acquirer customer base and reputation to grow its business.

Assimilation of Target business into acquirer portfolio

  • Target portfolio is assimilated to acquirer portfolio business.In these acquisitions, the target company is broken and its portfolio business are integrated with the acquirer portfolio business with technology and resources moving to respective portfolio business.
  • In this case, the combined entity will have a joint leadership from both entities and would be given combined targets to achieve.

Reverse merger with target entity

  • In this case, the acquirer business is merged with the target business.The target entity is retained and would operate the combined business.
  • The target founder would be given responsibility to operate the combined entity and would be assigned financials targets for the combined entity.
  • This happens when the target company has higher reputation in the market and has more capabilities and skillsets to operate the business.

Integrate the target technology with acquirer to build an end to end platform

  • In these deals, the target technology platform is integrated with acquirer technology to come up with a end to end platform that can be provided as a service offering to customers.
  • In this case, the acquirer will lead the combined entity and target can leverage the acquirer enterprise capabilities and customer base to expand its business.

Synergies and Degree of Integration when integrating a bolt-on acquisition

  1. The degree of integration would depend on the value driver of the deal and depending on the deal objectives, respective functions of target and acquirer business is integrated.
  2. The synergies targets for scope deals would be measured on the addition of new customers and new revenues added by the cross selling of each other services.
  3. The approach for synergy tracking should be different and focus more on Communication strategy and cultural integration.
  4. In the case of small acquisitions, the anxiety would be more for the target employees compared to acquirer employees.Hence the integration plan needs to be shared with target employees before execution.

Critical success factors for Integrating a bolt-on acquisition

  1. The integration strategy should be aligned to the deal rationale so that the value can be captured and measured to ascertain the success of the deal.
  2. The integration should happen at faster pace.Speed is very critical to the success of the integration.Any delay will affect the synergy realization and can also give rise to resistance to change from the target employees
  3. Alignment at the executive level is important but compatibility among the working teams of both the entities is very critical.For this to happen, the integration team should have a sound change management plan in place.
  4. Focus on high value areas to have maximum impact.Focusing on activities that generate highest value immediately post acquisition would increase the deal success.

Conclusion

  1. Integrating a bolt-on acquisition requires a different approach. The Integration strategy and operating model cannot be formulaic and needs to be tailored based on the deal specifics.
  2. In case of acquisition of smaller companies, Communication and Change management is very critical in order to design a target operating model for the combined entity that is aligned with the deal objectives.
  3. The M&A integration playbook used for scale acquisitions cannot be applied to the scope deals.Hence having different playbooks for large and small deals is crucial for the deal success.


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