Integration Pacing in Mergers and Acquisitions: Rip the M&A Band-Aid off Fast
Acquisition integrations are just like major surgery. Precise execution and quick completion are best. Learn key approaches and leading practices.
Imagine your cardiologist informing you that your heart/lung transplant was so challenging they were going to do the surgery very slowly and carefully. They would do a little bit each day, double checking their work. The surgeons would rest at night, performing the next part of the surgery each day over the following two weeks.
CRAZY, you’d say. What about the risk of infection? How would you stay alive for two weeks without a heart or lungs in place? What about the pain?
Despite the fact that surgery is challenging and high risk, everyone knows getting the job done quickly is best, followed by sealing the wound and letting the body heal itself. Modern technology allows us to complete surgeries that used to take 12 hours in just 30 minutes — and success rates have skyrocketed accordingly.
The Problem with Slow Integrations
The moment news of an impending acquisition hits, employees, customers, vendors and competitors are aware the playing field has shifted. Employees wonder what will happen to them now: their boss might change, their facility might shut down, downsizings may occur, the very mission of the company could shift radically. General concern is felt by both buyer and seller teams in big acquisitions. For smaller deals, most of the concern is felt by the selling team.
In such a state of uncertainty, productivity plummets. All the water cooler talk revolves around the acquisition. Progress on new initiatives slows down — maybe the new buyer won’t want them. Hard hitting performers aren’t sure who will be judging their work or whether the rewards they’re accustomed to will remain.Time is spent polishing resumes and updating LinkedIn. A slow integration prolongs this state of limbo for months. During that time,the best employees may leave, lured away by competitors who prey on their uncertainty. Those who stay are plagued by doubts, so the atmosphere in the office quickly turns negative. After all, if you’ve not been told you’re a “keeper”, then they must intend to dismiss you.
In some cases, the acquirer assures the selling team that no rash changes are planned, that they’ll take time to analyze the situation before changes are made down the road. After a few months, people start to believe that things won’t change, re-establishing a sense of entitlement to their job — to the new status quo. If the company then decides to make changes months after the deal closes, it has the same effect as a reduction in force, often taken as an admission that the acquisition is failing.
Slow integration also means deferring the benefits of the acquisition. There should always be a strategic rationale for acquiring any company. Perhaps the acquired engineering expertise will benefit your core business. Integrating the engineering teams rapidly means the expertise will be put to work more quickly. If the deal brings new products to the parent company, rapid integration means selling more goods on schedule. Conversely, slow integration means that planned cost savings from the acquisition will take longer to realize.
The longer the integration takes, the more likely you are to lose focus on achieving the acquisition thesis. Change is distracting and unsettling. It takes effort to get teams to change behaviors and processes. With each passing month in which employees and management focus on the elements of integration, they do not focus on taking the business forward: growing revenues, increasing efficiencies and innovating new products.
Here’s one perfect example of a slow integration that ultimately failed. Three capital equipment distributors merged their businesses to create a national leader with nearly $1 billion in annual revenues. Despite careful integration planning, the task proved overwhelming and the companies lost commitment — especially in the face of a major industry downturn which reduced their size by 50%. After three years, they gave up the integration effort and completely unwound the merger two years after that. All three companies suffered enormous losses.
Rip the Band-Aid off Quickly
Integrations are difficult and uncomfortable. Doing them quickly gets the team past the pain faster, making them productive sooner. Rip the Band-Aid off quickly.
In nearly all middle market cases, acquirers should move quickly to integrate acquisitions. Although there are often reasons for variation, here’s what an ideal integration schedule looks like:
Comprehensive communications plan launched to customers, employees, vendors and the marketplace.
First two weeks
Most management changes complete. Detailed integration plans approved.
All integration plans in process and on track.
Most departments/functions integrated.Small acquisition integrations complete.
All but the largest, most complex functions/processes fully integrated.
Complete — even the largest acquisitions.
Within the first few weeks post close, assemble a cross-functional team to establish objectives and tasks. They can take the higher level goals (for example reducing costs by X%, bringing over Y% of revenues, retaining N% of acquired employees) and, by function, break those goals down into 30, 60 and 90 day benchmarks. Although much of the planning work has been done before the close, it can be adjusted based on early input from the selling team, and often taken a level or two deeper. Be careful to record and track these commitments.
The need to integrate rapidly is no excuse to skip planning or to ignore risks. Getting change accomplished quickly requires a higher level of diligence and careful project management.
Firms with revenues of $200 million or more often have a project management office (PMO) which assists management at all levels. Specifically, they set up projects, identify the resources required, create schedules and budgets and then keep the acquisitions on track. Such firms must lean on their PMO for assistance, with one or more project managers devoted to the integration for as long as needed. Large acquisitions are poster children for the project management profession.
Lower middle market firms need project management skills and discipline during integration just as much as large ones. One such firm which bought a sizable competitor hired a project manager experienced in acquisitions for the year-long project. Other firms assign responsibility for managing the project to an executive.
Significant acquisitions will “move the needle”, either for good or bad. With this many risks and opportunities, the CEO’s personal attention, authority and hands-on management is critical. For most middle market companies making an acquisition 10% their size or larger, the CEO must be personally involved, monitoring the integration’s progress on a weekly basis for the first three months at least. An executive team with deep acquisitions experience might relieve the CEO of such direct involvement. On the other hand, a rookie M&A team would require their CEO’s oversight, even on a deal that is only 5% of the acquirer’s size.
Avoid Unnecessary Integration
Avoid integrating any aspect of the businesses that doesn’t advance the acquisition thesis — or that detracts from progress. Integration for the sake of conformity is foolish. For example, a billion-dollar revenue acquirer had a standard practice: they replaced every acquisition’s IT systems in the first week to conform to corporate standards. But then they bought a $80 million revenue technology firm which was on a tight deadline for developing a crucial new software release. The business unit leader (on the acquirer’s side) went to battle for the acquired company to delay the IT replacement, since it would have disrupted development. The release was completed on time, then the IT systems were changed.
Any integration stirs up messes and anxiety. It can disrupt progress on core business functions. Every function or process that might be integrated should be studied for costs and benefits. If the costs are high and the benefits are low, consider leaving it separate. But dragging out acquisition integration because it is uncomfortable or upsetting is a bad idea. It generally results in more overall disruption. There must be a clear time frame, with solid business reasons for any delays.
Involve Sells, and Be Honest
Because many acquisitions depend on the seller’s team staying aboard, it is crucial that they are involved as early as possible — ideally, before the deal closes — in setting the new strategy and planning the integration. Acquired teams who have input into their fate and willingly sign on are more likely to stay and deliver results.
This maxim is true even when the buyer only needs the seller’s team for a short time. For example, a German chemical company bought a U.S. distributor, and rather than pretending they wanted to hire the seller’s team, they were forthright, stating they would only need key management for three months. They were already doing business elsewhere in the country with many of the seller’s existing customers and, for the remainder, all they needed was a personal introduction. Together, the buying and selling teams created retention incentives, job descriptions and timelines. Being honest up front avoided the messy integration problem of people exiting who thought they would be staying.
Especially in cases where you’re counting on the seller’s team, your team should interact with them extensively well before closing. The mutual interaction will help you determine whether you like and trust them, and if they like and trust you. In addition, share your ideas about the future of the business and listen to their ideas. Before closing, share the final post-acquisition plan, and see if they truly buy into it. To be part of the integrated team going forward, they need to be eager to drive that plan.
Rambus (NASDAQ: RMBS), a $300 million technology development and licensing firm, diversified its business lines, adding two business units (lighting and security) to its core memory group. Altogether it made about 20 acquisitions in four years, five of them operating businesses as opposed to asset acquisitions. They learned early on that a critical success factor for the successful integration of a new business is alignment with the seller’s management team on the go-forward business plan. Rambus works with the seller’s management team before closing, developing an acquisition plan subject to board approval which can insure quick implementation and alignment from day one.
Integrating an acquisition must never be taken lightly. Poor execution can cause an acquisition to fail, distracting your company from executing on its key strategies for several years. Advance planning and rapid disciplined execution are mandatory.