| For over 20 years Focus Enterprises
has maintained that strategy should drive M&A activity,
not the reverse. In the article below, Mitchell Lee Marks
focuses on the characteristics of successful integration and
persuasively argues integration aspects of the same case.
Reprinted with the permission of the author, this article
also appeared in The Deal on January 17, 2003.
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Keep
Strategy Front and Center in Merger and Acquisition Integration
By Mitchell Lee Marks
It has become common knowledge that the majority
of mergers and acquisitions fail to achieve their financial
objectives. What is less well known is the why there is such
a dismal track record in post-merger success. Over the past
twenty years, my colleague Philip Mirvis and I have consulted
to or researched over 100 combinations. We find that the failure
to keep strategic intent front and center during the integration
is a key problem that afflicts most combinations.
In typical combinations, much of the emphasis
as the deal is being conceived and executed is on the financial
implications. Buyers concentrated on the "numbers":
what the target is worth, what price premium, if any, to pay,
what the tax implications are, and how to structure the transaction.
The decision to do a deal typically is thus framed in terms
of the combined balance sheet of the companies, projected
cash flows, and hoped for return on investment.
Two interrelated human factors added to this
financial bias. First, members of the "buy team"
in most instances come from financial positions or backgrounds.
They bring a financial mindset to their study of a partner
and, as a result, their judgments about synergies are mostly
informed by financial models and ratios. They often do not
know very much about, say, engineering, manufacturing, or
marketing nor do they bring an experienced eye to assessments
of a partner's capabilities in these regards. Second, there
is a tendency for "hard" criteria to drive out "soft"
matters in these cases. If the numbers look good, any doubts
about, say, organizational or cultural differences tend to
be scoffed at and dismissed.
In the successful cases, by contrast, buyers
bring a strategic mindset to the deal. But there is more to
it than an overarching aim and intent. Successful buyers also
have a clear definition of specific synergies they seek in
a combination and concentrate on testing them well before
momentum builds and any negotiations commence. Sensible buyers
consider carefully the risks and problems that might turn
a strategically sound deal sour. This does not mean that the
financial analyses are neglected or that they are any less
important to success. To the contrary, what puts combinations
on the road toward success is both an in depth financial understanding
of a proposed combination as well as a serious examination
of what it will take to produce desired financial results.
A few years ago, I received a call from the
CEO of a high technology firm who recently announced his company's
first major acquisition. The company, a computer hardware
maker, was strong in the middle- and upper-segments of its
product offering. Margins were high in these segments, yet
most of the industry-wide growth was occurring in the lower-end
of the product offering. Working with external advisors, the
CEO came to the conclusion that he had to acquire a firm with
expertise in the lower-end segment in order to achieve his
company's expectations for revenue growth. There simply was
not enough time in the "internet age" to meet revenue
expectations through internal growth.
After negotiating the deal amidst great secrecy,
the CEO announced the acquisition. On their own initiative,
several senior executives from the acquiring company holed
themselves away in a conference room where they hammered out
what they called the "Integration Plan." When the
CEO read the plan he found that, among other things, it called
for the elimination of the to-be-acquired firm's R&D function.
That's when he gave me a call. "Think about it,"
the CEO challenged me, "eliminating their R&D function
would defeat the very purpose for doing the deal - it would
eliminate all the engineers with expertise in the low end
of the product line."
We set upon a two-pronged intervention to guide
the integration program. First was a series of one-on-one
interviews with members of both companies' leadership teams.
These interviews assessed the extent to which key players
were or were not on the "same page" regarding the
purpose of and expectations for the acquisition. They also
provided insight into key areas of agreement and disagreement
within and between the leadership teams and the dynamics that
need to be addressed to make this integration succeed.
Among other findings from the interviews, it
was clear that even within the lead company there was not
a consistent view of why the acquisition was occurring or
what would be required to make it achieve its strategy. This
insight influenced the design of the second part of the intervention.
Rather than bring executives from the partners together, I
argued that executives from the buying company needed to go
away by themselves to build understanding of and support for
the acquisition strategy. This suggestion runs counter to
the advice of most integration advisors, who push to bring
the partners together as soon as possible to create the impression
of a "one-team" mindset. If the lead team does not
have a shared perspective on why the deal is occurring and
what is required to make it succeed, however, then bringing
the two sides together prematurely detracts from-rather than
contributes to-good cross-company relations.
A one-day offsite meeting was scheduled in which
the CEO walked his management team through the rationale for
the deal. I then fed back findings from my interviews to alert
executives to the potential hindrances to achieving the integration
strategy. The discussion put several previously "unspoken"
issues in play and generated an earnest discussion of what
the lead company needed to do to prepare for a successful
combination. The meeting culminated with the articulation
of "critical success factors" for the integration
process. These became the decision-making criteria that were
used to assess recommendations for integration. One critical
success factor, for example, was "penetrate the low-end
of the product offering." Thus, later, when integration
planning teams (comprised of executives from both partner
companies) were convened, they were given not just financial
targets (e.g., cut X number of dollars out of the combined
R&D budget) but were also given strategic decision-making
criteria that literally kept the rationale for the deal front
and center during integration planning and implementation.
Having a well-understood strategy enhances integration
decision making and detracts from the "us versus them"
battles and political gambits that otherwise prevail. It also
contributes to positive "buzz" about the combination,
as employees gain confidence in their leadership knowing that
strategy-and not power politics-is guiding integration and
that organizational enhancements are likely to result from
the combination.
Mitchell Lee Marks, Ph.D. is an independent
management consultant specializing in helping firms plan and
implement mergers, restructurings and other transitions. His
most recent book is Charging Back Up the Hill: Workplace
Recovery After Mergers, Acquisitions and Downsizings, published
in January 2003 by John Wiley & Sons. In 1998, with Philip
H. Mirvis, he published Joining Forces: Making One Plus
One Equal Three in Mergers, Acquisitions, And Alliances
(Jossey-Bass), and in 1994 published From Turmoil to Triumph:
New Life After Mergers, Acquisitions, and Downsizing (Jossey-Bass).
He leads www.JoiningForces.org
in San Francisco and can be reached at 415-436-9066. His books
can be purchased at www.amazon.com.
About
FOCUS Enterprises, Inc.
For 21 years, Focus has successfully assisted clients with
corporate development consulting assignments; merger, acquisition,
and divestiture engagements plus capital raising and capital
formation assignments. In a mixture of services uniquely beneficial
to clients, FOCUS integrates consulting and transactional
expertise with superb research capabilities and precise, proven
methodologies.
Unlike larger investment banks, FOCUS processes
are optimized and proven effective in our target marketplace
-- private companies or operating units with revenues in the
$5 million to $100 million range.
Six full-time FOCUS Partners provide over a
century of C-level operating experience in a variety of industries.
Operating nationally and internationally, Focus works with
buy- and sell-side corporate clients, private equity groups,
holding companies and early stage venture capital firms in
the following areas:
- Technology (hardware, software and services)
- Media and Communications
- Telecommunications
- Government Contracting
- Aerospace
- Manufacturing and Distribution
- Retail
- Healthcare
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