“Running a business and integrating two companies is like having two different jobs and both are equally important.” – Chris Barbin, CEO, Founder, Entrepreneur
Only one-third of mergers and acquisitions successfully create shareholder value. More often than not, this is down to failures during the post-merger integration (PMI) process. Cari Windt, who specializes in organizational design and change management, pins this on a lack of planning; CEO Christ Barbin claims it’s a lack of execution.
These two problems, however, are not mutually exclusive. Executing a poor plan can be more harmful than not executing a plan at all.
Being aware of the challenges of post-merger integrations and developing a thorough PMI process can both go a long way to ensuring yours runs smoothly. But how do you determine if total integration is right for your organization?
This Process Street post will look at the 4 main post-merger strategies and when you should use them:
- The shape of post-merger integration
- Consolidation post-merger strategy: Gain scale and cost synergy
- Transformation post-merger strategy: Reposition your identity
- Tuck-in post-merger strategy: Tech and talent acquisitions
- Bolt-on post-merger strategy: Increase your portfolio
The shape of post-merger integration
“Every day, the wrong companies are purchased for the wrong purpose, the wrong measures of value are applied in pricing the deals, and the wrong elements are integrated into the wrong business models.” – The New M&A Playbook
There is no doubt that a successful merger is only possible with a successful post-merger integration. Even if you do the most thorough PMI prep, if you don’t have a clear vision of what sort of company you’re trying to build, your integration will fall through.
From the very beginning, you need to determine what M&A framework you want to use. Do you plan to fully absorb the target company? How aligned are your business models? What is the primary draw of the target – its products or its people?
The benefit of maturity models in your post-merger planning
It’s also worth applying a maturity model at this stage to determine how possible integration actually is, given your systems and structures. Typically, maturity models are used to assess the capability of an organization for continuous improvement, but they can be helpful when it comes to acquisitions as well. After all, if you’re systems aren’t built for routine self-improvement, you’re going to have big problems when it comes to integrating with a wholly separate set of systems.
Once you have the answers to those questions, there are four primary integration strategies that will determine how your organization moves forward in terms of designing your new operating framework post-merger.
Consolidation post-merger strategy: Gain scale and cost synergy
This scenario works best when both the target and buyer companies have a similar size and business model. Consolidation can happen either horizontally or vertically, but is generally pursued with the hope of achieving economies of scale.
The focus of a consolidation integration strategy is combining most or all of the processes, policies, and procedures of both companies into the new, single entity. Technically, after this type of integration, neither of the original companies will exist, although it’s not uncommon for the new entity to retain the buyer’s name and branding.
Transformation post-merger strategy: Reposition your identity
Like the consolidation strategy, transformation can occur either horizontally or vertically. The primary difference between consolidation and transformation is that, in the latter, buyer and target companies will have different business models.
While some operations will be integrated, a transformation strategy is more concerned with repositioning the new entity within the current environment, or optimizing it for a future business ecosystem predicted by market trends.
Due to the difference in business models, both buyer and target will have to undergo substantial changes to integrate into a single organization. As a result, transformational integrations are the most difficult to carry out. That said, like many ventures with high risk, transformation also offers the most value – if done properly. If you have the courage to embrace transforming your company, it opens up a number of opportunities for expansion in terms of both product and geography.
Tuck-in post-merger strategy: Tech and talent acquisitions
Tuck-in acquisitions are quite common in the tech sector. This is the scenario of a very large corporation engulfing a much smaller start-up before it becomes a competitor further down the road. Essentially, with a tuck-in integration, a small company with similar products or services is acquired and then “shut down.”
Apple utilizes this strategy so much there’s an entire Wikipedia page for their acquisitions. While you may have heard of a few of these companies, most are completely unknown and – surprise – no longer exist (in a sense). If you look at the table of Apple’s acquisitions, you can clearly see which Apple products have been derived from their various acquisitions.
In these instances, it’s not so much that the target company was shut down as its technology, products, and services were absorbed into the buyer – Apple, in this case.
Tuck-in integrations aren’t only beneficial for acquiring new tech or a particularly innovative product; they’re also instrumental in acqui-hiring. Given the highly competitive tech industry, courting individual engineers can be costly, time-consuming, and may not even result in recruitment.
Acqui-hiring, however, allows a company to “recruit” an entire team of bright, young engineers in one fell swoop. Tuck-in integrations are a pretty effective way to do this.
Bolt-on post-merger strategy: Increase your portfolio
While there are a number of similarities between tuck-in and bolt-on integrations, the process – and motivation behind – bolt-on integration is a bit different.
A bolt-on integration is generally applied when there’s a large disparity in both the size and business model of the target and buyer companies. As a result, while some of the companies’ functions will be integrated, most of them will remain separate. The target will then continue to operate as an autonomous subsidiary of the buyer company, often retaining its own name and branding.
Facebook’s acquisition of Instagram is a good example of a bolt-on integration. While Instagram is part of Facebook, Inc’s portfolio, it still maintains its own identity among the rather large array of social apps Facebook has acquired over the years.
Choosing the right post-merger integration strategy
No two mergers are ever the same, and no two integrations will be the same either. It’s important, before starting the acquisition process, to have a firm idea of exactly what you want to gain from the acquisition and the best method to reach your goals.
In deciding on an integration strategy, motivation is just as important as any other factor you might consider. Both the consolidation and transformation strategies are best suited for larger acquisitions, while tuck-in and bolt-on acquisitions tend to be much smaller and therefore less risky.
Key factors to consider for post-merger integration
For a successful integration – and you must have a successful integration to have a successful acquisition – there are a few key points that can’t be ignored. When determining what your post-merger strategy will be, remember to consider the following:
- Readiness: Are you truly prepared for all aspects of the acquisition?
- Timeline: Is your timeline realistic? Acquisitions are a lengthy process that you won’t realize true benefit from potentially for a year or more after the deal closes. Can you commit to that?
- Leadership & organization: Who is responsible for what, and whom do they report to? Draft an organizational chart of what the integrated company will look like so you have something to aim for.
- Culture: What will your post-merger values be? How well do the values of both companies align? Will there be friction between the two workforces (plan for “yes”)?
- Human capital: You will lose personnel. It’s inevitable. Decide early on who you plan to keep on, and how you plan to keep them. Be humane when it comes to redundancies. Not only will you likely have to work with these people in some context in the future, how you handle redundancies will greatly influence your employees’ view of your company and values.
- Communication: Employees, vendors, and clients all need to know exactly how the acquisition will affect them, and be assured that you can handle any complications that come up.
- Motivation: Why are you pursuing an acquisition in the first place? What do you want to get out of it? Keep that goal in mind and use it to prioritize tasks and resources.
Whichever strategy you choose, however, make sure you proceed using a realistic assessment of the situation. Even if your aim is to conduct a simple acqui-hire, your company will be changed through the process. You will have new talent, new ideas, and new experiences shaping the way your company moves forward.
Change on that level can be intimidating, but when it comes to mergers and acquisitions, it’s also very necessary. To have a truly successful post-merger integration, you need to be able to identify the strengths and weaknesses of both companies and use that knowledge as the foundation for your combined operating model.
Have you been acquired? Are you an acquirer? Tell us how it went in the comments!