Importance of customizing M&A Integration strategy to deal rationale

Tailoring M&A integration strategy

In this blog, we shall discuss on the importance of tailoring M&A integration strategy according to each deal.Every merger or acquisition is different, yet we see many acquirers sticking to the same integration playbook.
With advent of more scope deals with acquirers buying targets for access to capabilities and expanding to new markets, integration strategy needs to be aligned to the deal rationale.
Many acquirers would have been successful with bolt-on acquisitions and roll up strategy, hence would want to replicate the same integration strategy for transformational deal.This will backfire as a transformational deal would involve a different approach because such deals transform both the acquirer and target existing business operations.

Importance of tailoring an M&A integration strategy

• Integrating targets successfully requires a combination of skills and practice.Having years of experience in integrating companies can increase the success rates of delivering synergies targets.
• Companies that are new acquirers can learn a lot from serial acquirers whose deal teams have built capabilities and employ standardized integration playbooks to kickstart their integration.
• These experienced acquirers also stumble in their approach because of their over reliance on sticking to a standard playbook. Their approach of ‘One size fit all’ for integration will not work because every deal is unique and complex. Not every deal is looking at cost synergies and savings. Many acquisitions are done to acquire skilled talent, access capabilities and customers.

When to customize M&A integration approach

• Most of the successful acquirers tailor their integration approach to deal rationale and sources of value.
• Successful acquirers do different types of deals.Their integration approaches will differ based on the sources of value to be captured in these deals.
• For instance, acquirers would look for a consolidation in mature markets, look for acquisitions to expand geographically and acquire companies to make strategic bets on the emerging technology.
• As the deal rationale is different for the above deals, the integration approach and requirements will also change based on the deal rationale.

Three factors that signal the change to an integration approach are:

• The culture of the target and acquirer are different.Their operating models, how they handle their daily operations and even their core business values might be different.
• The acquirer and target core business models are not similar or even closely related to each other.
• The target company might be very small or in some case even large in size in relative to the acquirer.

These factors reflect the complexity in the integration phases due to the differences in size, culture and business models .Hence acquirers should emphasize the importance of Change management while doing integration.

M&A integration process to be customized

Successful acquirers tailor their integration approach to five critical dimensions of integration.

• Governance – Who leads and how the governance model works
• Integration Management Office Architecture – Who coordinates the integration effort and through what organization
• Scope – What process and functions needs to be integrated and to what extent
• Speed – What should be the optimum speed of integration which add value and at the same time do not disrupt the existing target business
• Culture – How to handle talent and preserve the target unique innovation approach and DNA.

M&A integration dimension 1 – Governance

• Successful acquirers allocate the decision making power and authority equally among the target and acquirer management.The integration team would be structured in a manner in which there is an equal representation of target and acquirer resources.
• In a large deal which requires the acquirer to create a new culture and operating model, the integration team would have leadership representation from both acquirer and target firm, hence the decision making authority is spread equally between the target and acquirer.The benefits of this approach is that synergies can be realized faster than expected and the target employees can be retained even after the integration is over.
• At the same time, in case of a deal, where target firm would replicate the acquirer operating model, the integration team and the decision making authority would be assigned to the acquirer leadership team.

M&A integration dimension 2 – IMO Architecture

The IMO team can be tailored to the deal specifics in three different ways:

1. Size of the IMO – No of resources and the funding required for IMO
2. Involving dedicated and specialized teams for Value capture, Clean teams, Change Management, Culture and Communications
3. Structuring the Integration team – By Geo, Business Unit, Function or using an hybrid approach

In the case of an acquirer looking at buying a small target company, the acquirer would look at having a smaller IMO.The acquirer would assign the integration responsibility to relevant business leaders so that they can take control of the target as early as possible.
In case of a deal where the acquirer is buying an niche high growth company that has build a reputation for its key offerings and developed client relationships, the acquirer would have a large IMO.The primary objective is to ensure that there is no disruption to the target base business post acquisition.
The acquirer shall then assign a clean team prior to closing, to identify areas of synergies and key customer relationships that needs to be retained.After the report from the clean teams, the acquirer can structure the sales team to focus on key accounts, contract review and redeploying the sales people to the right accounts.
In the case of deals where both acquirers and target company are of same size but have different operating models, the integration approach needs to be tweaked.For instance if the acquirer is organized by geographically and the target firm has a business unit structure, then one can have a matrix model that takes the features of both entities.
This can be achieved by assigning a business partner for each integration team.The business partner would communicate the target operating model, finalize talent retention and the principles of new operating model.It is always good to impement and communicate these changes prior to deal closing.

M&A integration dimension 3 – Scope

• Scope plays an important role in deal specifics especially when integrating critical functions like Sales & Marketing, R&D and Product development.
• Deals that provide acquirer access to new technologies and product specific capabilities needs to have a specific integration approach. Important questions to be answered would be whether the target will operate as a stand alone entity after acquisition or if there would be selective integration of backoffice functions like HR and Accounting with core value functions still operating independently.
• Acquirer can also choose to integrate the target completely to bring the acquired products to new levels rapidly.This is done when the acquirer and target products are very similar to each other in scope.
• The choice of integration approach is taken to prevent attrition of key employees in target business, prevent disruption to target base business, its innovative culture and its key customer relationships.

M&A integration dimension 4 – Speed and Pace of Integration

• As the best of practices, integrating the target with acquirer quickly maximizes value.This need not be right in all the cases as being too much aggressive can disrupt the target business thus eroding the deal value.
• The decision on which systems, processes to use and which functions to be integrated is dependent on the deal specifics and value that can be added by integrating the relevant process.For instance in an acquisition involving a small niche next generation technology firm, costs synergies by integrating business functions will only destroy the target culture.
• To capture cost synergies, acquirers identify the talent to be retained and finalize the end vision of the combined operating entity before closing. Post closing, acquirer implements these plans at a faster space to deliver synergies and cost savings. This approach can backfire destroying key capabilities and slow business momentum if these are not aligned with the deal value drivers.
• Some acquirers delay initiatives to implement cost synergies to prevent reputational damage.Instead they look at opportunities to add revenues by introducing new alliances and customer loyalty programs.

M&A integration dimension 5 – Culture and Talent

• Aligning culture and retaining key employees of the target business post acquisition is critical to the integration strategy.
• In a Transformational deal, importance is given to employee retention programs and in preserving the target unique culture.
• In a deal to improve the target underperforming operations, the integration would focus on strengthening the target management and introducing superior processes.The integration strategy would focus on consolidating the target into acquirer structure and culture to deliver cost synergies.
• Even in the case of two similar companies of same size and culture merging with each other, the way the businesses are run can be different. One company might focus on growth where as other company is focused on cost management.In these situations, Integration approach giving more importance to change management, structuring the right incentive/compensation process and providing the right training programs is required to deliver value.
• In case of deals where acquirer is buying targets to expand geographically, importance is given to retain all the target employees.Hence cultural integration is done slowly and the target is allowed to operate autonomously.Over a period of time, the acquirer inducts its employees into the target leadership in order to start the transformation from the top.Then the target is gradually integrated with the acquirer successfully without causing any disruptions to the target business.

Conclusion

1. Every deal is different and every M&A integration comes with it’s own set of challenges. Hence the integration team needs to address these challenges with the required integration agility.
2. Few key questions that needs to be addressed before integrating any deal is:

• Deal rationale for acquiring the target company.
• Capability that an acquirer can add to target and vice versa
• How does the deal add value – Cost synergies, Revenue synergies etc
• Which BU will benefit the most with this deal and which function in target needs to be shielded to prevent disruption?
• Timing of integration – When to integrate each function, geography and department.