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Issue #187

Tuesday, October 8, 2013

In the last edition of our newsletter, we began a series of articles on Social Media. We will be alternating between this topic and another we are kicking off today. In this edition of our newsletter, we are pleased to introduce a series of articles authored by one of Customer Centricity's first clients, Paul Floyd, who has transitioned to the world of Business Strategy consulting including helping companies with Post-Merger Integrations. In this series, Paul will share insightful perspectives on M&A deals and what it takes to be successful at integrating new acquisitions. In our next edition, we will pick up with the second article on Social Media. Enjoy!

How to Improve the Odds of a Successful Post-Merger Integration
by Paul Floyd

With the improvement in the global economy, we are seeing an increase in the number of mergers and acquisitions. Some of these have been huge, as with the $60B Verizon acquisition of Vodafone’s 45% stake in Verizon Wireless. Most are much smaller, with the average global deal size being in the $300M range.

Did you know that between 70 – 90% of these mergers fail to live up to their expectations? These are not impressive odds - not odds that most people would wager money on. Why is this failure rate so high? Why do companies pursue mergers and acquisitions if the risk of failure is so high? Is there anything that can be done to improve the odds?

According to the Harvard Business Review March 2011 article “The Big Idea: The New M&A Playbook” by Clayton M. Christensen, Richard Alton, Curtis Rising, and Andrew Waldeck, mergers primarily fail for two reasons:

  • Executives overpay for acquisitions due to a misalignment in the price paid and the strategic purpose of the deal. In addition there is a strong tendency to overestimate the expected business improvements when pricing a deal.
  • Acquisitions are integrated in the wrong way and integrations are poorly executed.

Why do Executives Overpay for an Acquisition?

The HBR article defines two types of acquisitions. The most common type is one that strengthens a company’s core business by expanding market share and boosting current performance, either by reducing the cost of doing business or allowing the company to raise prices on existing products. Executives often overpay for these types of acquisitions since they are overly optimistic about the performance improvements that will be obtained. The desire to complete the deal leads to a tendency to assume best case scenarios including total success in integrating the acquired company.

The less common type of acquisition is the type that is done to dramatically change the direction of a company, expand into new markets, and bring in a whole new type of customer. These types of acquisitions are highly strategic and a big bet on the future of the company. If done well, these types of acquisitions can reinvent the company and have spectacular results; however, they are very risky, difficult to price, and can be more challenging to integrate. Sellers, recognizing their highly strategic value to the acquiring company, demand top dollar, which puts the acquiring company in a difficult position as the value is not readily determined by expected cost reductions, margin improvements, or market share expansion within an existing segment.

Why are Integrations Poorly Executed?

Once the deal is negotiated and completed, the challenging work of integration sets in. This work needs to be done while continuing to put attention on the normal operation of the business. Doing this requires a business either to dedicate new (or existing) resources to the integration effort or to prioritize the integration above the normal business operation. Companies often start the integration effort with high plans and lots of excitement, and then watch the integration sputter as normal business demands take over.

In both types of acquisitions previously described, planning and executing a successful post merger integration is critical to the overall success of the M&A deal. There are many factors that must be taken into account when doing an integration, and planning for an integration should start early in the deal cycle. A lot can be determined during the due diligence concerning the factors that will lead to a later integration success. It is important to decide prior to deal closure if the integration has a strong opportunity to be successful.

What can be done to improve the Odds of a Successful Integration?

The following key factors are important to a successful integration. These are based on the author’s experiences living through numerous corporate acquisitions, mergers, integrations, and divestitures:

  • People
    • Pay attention to People, Cultures, and Organizations
    • Use Skilled Resources; Don’t Reinvent the Wheel
    • Have Enough Resources; Bring in External Resources as Required
    • Communicate, Communicate, Communicate
  • Planning
    • Align the M&A Strategic Objectives with the Overall Integration Approach
    • Plan Thoroughly; Use Strong Program and Project Management Principles
    • Prioritize; Avoid Conflicting Processes and Divergent Initiatives
  • Execution
    • Avoid having too much Democracy; You will not be able to Please Everyone
    • Base Decisions on Facts
    • Agree on Integration Success Metrics, Track Them, and Regularly Report on the Results
    • Be Adaptable, Flexible and Open for Changes as there will be “Surprises” along the way

In future articles we will explore these success factors in more detail and discuss what it takes to be successful with Post-Merger integrations. In the meantime, if you are wrestling with an upcoming M&A deal, planning for an integration, or having current integration challenges, feel free to contact us. We are here to serve!


About Paul Floyd

Paul is an experienced technology operating executive with extensive international leadership experience and a track record for achieving rapid product and service growth on a global scale. Paul thrives on working with companies to build great products and services, and using technology to achieve breakthrough solutions for major business challenges. Paul’s experience includes large, medium, and start-up environments. Paul has led major corporate change including the evolving dynamics of a start-up and the many challenges presented by acquisitions, integrations and divestitures. He brings a strong combination of technology, business, operations, and people leadership skills to all of his engagements.






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Recommended Reading
                      

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