Successful mergers and acquisitions are major deals requiring skilled negotiations and expert business knowledge. Applying those same integration skills after the deal is closed determines the long-term success of the M&A.
— By Royston Arch
The number of mergers and acquisitions (M&A) is increasing once again, but this time around the focus is on transformational integration. In prior cycles, the focus was mostly on horizontal acquisitions – firms operating in the same space – to access new markets for existing products and services, access state-of-the-art technologies and reduce competition. The new wave of M&As are more vertical in that acquisitions are companies that do not compete with each other but are in the same supply chain. Vertical M&As have the power to transform the buying business.
The M&A as a transformative strategic action is expected to drive business growth but in a different way compared to the past. Instead of consolidating markets or other business activities, it is used to adopt complementary products rather than more of the same, upgrade one or more capabilities at a more rapid rate to provide new customer services, add online marketing channels to a brick-and-mortar business, and across sectors. A recent example is the CVS Health acquisition of Aetna insurance company.
Business leaders need a different set of integration skills in the new world of M&As because merging unlike businesses is not as easy as merging two companies that are at least similar.
Once an M&A is completed, the hard work begins. Integration skills can close the deal, but then it is time to do new deals to make the M&A viable.
One of the most difficult challenges of the M&A is the fear it creates in the workforce.
Functions are integrated, staffing is evaluated, new technologies are implemented, and marketing is revamped. It is the next stage of “deal making” because merging companies in any form creates a sense of insecurity in the workforce, influences the organization's culture, and leaves customers wondering how it will impact their needs. A new deal is needed, so to speak, but this deal is creating a cohesive company with a new strategic direction that continues to succeed long into the future.
A transformational deal is one that changes the operations or nature of a company. It enables a company to consider factors beyond its core competency, whether it is changing the existing business model or scaling the business to better meet market needs. The results are most influenced by what management does once the merger or acquisition process is completed.
The M&A is usually initiated with a specific end goal in mind, such as responding to market or industry changes that present a risk to the current way of doing business. Technology in particular is driving significant changes in the way goods and services are delivered, products are designed, materials are sourced, and customer services are delivered. An example is Salesforce, which decided to diversify beyond its CRM platform and acquired Tableau Software, a data visualization company.
Leading the Business Into a Good Fit
It is easier to absorb small competitors than to transform key business functions. It is simpler to buy up and bolt-on companies producing and selling similar or highly compatible products than to acquire a company that does something entirely different. The approach needs to be tailored on a deal-by-deal basis, and the integration expertise applied during and after the process.
Tailoring the approach means addressing specifics. How will governance need to change? How will employees be impacted, and how will the change be communicated? How will the organization's culture be impacted? What functions will be integrated or left as-is? How fast will the integration take place? How will the market be informed of the strategic plan? Imagine the integration needed for the proposed Walmart acquisition of Humana (should the deal be concluded) – a retail store enters the health insurance industry.
One of the most difficult challenges of the M&A is the fear it creates in the workforce. Without careful planning and transparent communication, there could be a large exodus of employees, including some at the top, who have critical skills. The reality is that many M&As lead to layoffs as the new company realigns its functions and workforce. Uncertainty reigns, impacting productivity internally and stakeholder perceptions externally.
Integration expertise includes the ability to understand the true potential value of the M&A, and how to ensure that value is generated while minimizing disruption.
Research has shown that transformational integration deals often underperform, failing to achieve the synergies, growth opportunities, economies of scale, and/or financial success that is possible. There are numerous reasons, but in general the business failed to accurately assess the impact on the business in terms of people, technology, operations, or financial resources. This reflects the higher risks associated with transformational deals.
Plan of Integration Action
PricewaterhouseCoopers conducted a 2017 M&A integration survey and found that many companies failed to achieve their market goals, which could include growth in market share, access to new markets, access to new brands or products, access to new technologies, or access to new distribution channels.
Driving performance requires a dedicated group of integration leaders who are prepared to address the core tenets of a successful integration. They are accelerating the transition as quickly as possible, defining the integration strategy, focusing on priority initiatives, preparing for day one, communicating with all stakeholders (employees, customers, suppliers, investors, and general public), establishing committed leadership at every organizational level, and managing the integration as a business process.
Integration expertise can drive a successful M&A that achieves goals. When the legal work is completed, who will take charge of the process? Lawyers and bankers do not have operational or technical skills for follow through, and many executives lack experience with large M&As and project management.
A company that decides to pursue a transformational integration deal needs to access the right expertise to maximize value. Being honest about internal leadership capabilities is critical to success, but for some companies it also proves to be the hardest step.