Do your M&A integration strategies need a new boost?
Are your M&A integration strategies in need of a boost?
With unprecedented business model disruption across the majority of industries, integrating acquisitions has never been more complicated. But those who prioritize and resource their efforts appropriately are likely to seize a measurable competitive advantage.
Geopolitical issues may dominate the headlines, but corporate boards and senior management are laser focused on countermeasures against technological disruption and seizing new routes to growth. Those countermeasures will often involve M&A as a faster route to innovation and expansion.
Our recent Capital Confidence Barometer, which surveys almost 3,000 C-suite executives from around the world, showed that 56% of companies globally plan to make acquisitions in the next 12 months and technology and digital disruption are two major drivers of the current market.
Ultimately, for an acquisition or merger to create value, the combination must become more than the sum of the parts. Realizing that potential relies on best-in-class integration strategies that quickly address risks and seize opportunities and synergies.
Understanding this, many companies have developed leading-practice M&A playbooks and dedicated M&A teams within functions. But, with deal premiums high and no evidence to suggest that will change, and as the pace of technological change accelerates, these approaches will need updating.
In our work with clients, we recognize the importance of integration strategies that address this new environment – to master it can mean gaining a competitive advantage over less digitally advanced peers, to fail to can mean unfulfilled potential and exposure to new kinds of risk.
We asked Harvard Business Review Analytic Services to explore five areas we believe companies need to focus on when assessing potential transactions and in the crucial first year. With the right strategy, we believe companies can rise to the challenge and reap the rewards of effectively and efficiently integrating organizations in the digital age.
Click on the headings to read more.
- Big data: use analytics to foster nimble and informed decisions
Wherever two integrating companies find overlap - supply chains, product mix, channels or operations - decisions must be made about what to retain, what to jettison and what to combine.
With the advent of big data and data analytics, companies can harness information technology to allow executives to make faster, more fact-based decisions about what the customer of tomorrow is going to want, how the newly enlarged and integrated enterprise can meet those wants, and how to allocate capital and resources accordingly.
Consider, for example, a bank that decides to buy a competitor and wants to minimize the loss of customers from the acquired entity. By looking at which services individual customers use, their history with the bank and other key metrics, the acquirer can predict which customers are most likely to consider leaving the combined enterprise and implement programs designed to keep their business. Similar analyses could be undertaken to figure out where the best opportunities are to cross-sell customers of the two institutions.
The opportunities don’t stop there. Companies can also use data analytics to tailor their approach to supply chain integration, or assess contractual relationships of the new combined entity. All of these processes can use public and private information to identify synergies and even business opportunities.
In a recent health care services merger, for example, the acquirer was able to have a proprietary data set developed to evaluate the customer opportunity available from the target company. They used this to establish a clear picture of the total market accessible to the combined entity. The analysis involved combining and querying multiple data sets enabling the acquirer to identify synergy opportunities and potential risks, both by service line and by market.
- The customer experience: create an integrated omni-channel experience
Marketing is no longer a one-lane or even three-lane highway. Companies don’t just market to customers via advertising, or direct mail or in-store promotions. And it doesn’t stop there. The whole customer experience must embody a seamless, omni-channel approach to engaging customers and providing them with the service they’ve come to expect in a digitally connected world.
Companies can’t afford to duct-tape themselves together when addressing the customer’s mobile experiences, transactions, purchase history or follow-up care. They must identify the issues that matter to their customers and focus on creating an integrated experience and value proposition. And, they must keep customers honestly informed about the process along the way.
“Don’t sugarcoat things and say it’s going to be seamless,” warns Mitchell Lee Marks, professor of leadership at San Francisco State University and author of “Joining Forces: Making One Plus One Equal Three in Mergers, Acquisitions and Alliances.” “Under promise and over deliver. Instead of saying things like ‘It’s going to be business as usual,’ you can say things like, ‘We’re going to try to minimize the hardship’ and ‘We are committed to keeping this as painless as possible.’”
Used correctly, social media can be a powerful tool and offer organizations a vast trove of useful information. Smart acquirers will pay attention to what customers, vendors, analysts and other stakeholders are saying about a potential target, and then what they are thinking and saying about the combined enterprise and the integration process. Social media can also provide an early warning if the process begins to veer off track.
- Cloud computing: a shortcut to synergies?
Any M&A integration is an opportunity for a company to evaluate how it’s been doing things and whether change is appropriate - whether it can learn from the acquired company’s business processes, for example, or if it can impart some of its own competitive advantages to the acquired organization.
Today, part of that opportunity is the chance to evaluate the speed and cost benefits of cloud computing. Especially for highly acquisitive companies, moving enterprise resource planning and other computer systems to the cloud can make future acquisitions easier to integrate, and non-core assets easier to separate.
The use of this technology can save time and money compared to integrating traditional on-premises applications and allow you to optimize the way systems work together early on in the life cycle of the new combined entity. Marks says exploring opportunities like this is part of what makes a merger or acquisition an “unfreezing” opportunity.
Like changing the shape of an ice cube by allowing it to melt, reshaping the mold and then refreezing it, he says, an M&A integration is a great opportunity to reshape the way the two parties involved go about their business. And it shouldn’t be postponed until things “settle down.”
“First of all, you often don’t come back to it,” he says. “Second, people are going to be shook up anyway during the integration. If you wait, you have to start all over again, just when people have begun to settle down.”
For this reason, among others, companies will also will want to pay attention to what has become, at many organizations, a self-service approach to human resources. This can add a lot of complexity to the IT integration, since so much of what employees need access to - salary information, vacation tracking, performance reviews and more - is now self-serviced. Migrating this activity to the cloud may be able to reduce complexity and provide a better experience for employees.
- Cybersecurity: due diligence essential for managing risk
For all that technology has to offer acquisitive companies, it’s also true that the convergence of the internet, mobile computing and social media have led to the emergence of cyber security as a great new business risk. Hackers can bring corporate operations to a standstill with a denial of service attack or severely damage a company’s reputation by causing sensitive customer data to fall into the wrong hands.
Companies merging with or acquiring another organization must quickly assess its new partner’s current cyber vulnerabilities and how seriously that partner took cyber-security. The acquirer also has to oversee the integration of the two firms’ information systems in ways that do not expose the combined entity to new risks.
This undertaking needs to begin early in the due diligence process and continue through the post-close integration and evaluation. This is fraught with pitfalls that many companies may not have considered just a few years ago and companies need to be aware of past breaches and any liabilities they may inherit, as well as preventing future risks to the business.
Michael Towers, vice president and chief information security officer for Allergan plc. says that “to expect that you’re going to be able to replace certain pieces of technology or certain security controls quickly is probably a nonstarter, so the key is to make sure you have a common aggregation point for cybersecurity analytics,” and that acquirers also need “a common set of incident response processes almost immediately.”
To make sure everything gets done, it is important for the head of cyber security at an acquiring company to work closely with the acquired organization’s chief information security officer and its head of human resources. If the target company doesn’t have a chief information security officer he’ll usually work with the company’s general counsel and head of compliance.
Working with the head of HR is important too because HR organizations typically own the identity and access management process at their companies.
- Culture integration: aligning the combined workforce and establishing the same common purpose
In industry after industry, traditional companies are making high-tech acquisitions to help them adapt to and compete in the digital age. For many traditional companies, buying a high-tech business raises a host of new issues and risks: how to value a tech company; how to retain its intellectual property, which may be in the form of human capital; and how to blend - and how tightly to blend - what often will be two very different corporate cultures.
In some cases, the acquirer may wish to “harvest the cultural DNA” of the acquired business without imposing itself so strongly on that business that it destroys its culture or DNA. But this is no easy task.
Where the acquirer operates in a heavily regulated industry, meanwhile - in financial services or healthcare, for example - the acquiring company also may have to help the acquired company learn to operate in a regulated environment.
To help mitigate culture clash, acquirers can make sure that a newly acquired management team has a seat at the table to identify early on which aspects of culture in the acquired company need to be preserved for employee retention and employee engagement what changes need to be made to culture, and to develop a timeline of rolling out changes on a gradual, manageable basis.
To help foster cultural integration, rotating talent from the acquired company into the acquirer’s organization to give them a better sense of how it does things - and vice versa is a highly effective method for aligning the combined workforce and reinforcing the same common purpose of the combined organization.
Marks warns, though, against pro forma efforts at collaboration. “I’ve seen situations where someone from the acquired organization was given a seat at the table, but they weren’t listened to,” he says. “It’s important to engage them in a meaningful way. That doesn’t mean you have to do things their way, but you can use their input to help in planning their movement from their way to your way.” Marks also urges companies not to pretend they’re engaged in a merger of equals if they really are making an acquisition rather than merging.
Communicate clearly to the acquired company what changes will be made, and why they need to be made to support the value to be achieved from the transaction. “If you’re going to dominate, just dominate. Don’t window dress. If you start setting expectations that we’re all in this together, one happy family building on the best of both, and then come in and dominate, you will lose credibility. It will be worse than having made no promises at all.”
Attempting a business integration today without using the latest technology tools is akin to driving across the country with a paper map rather than a GPS-based navigation system. You can do it, but you’re going to spend more time figuring out where to go and will be more likely to make a mistake due to human error or outdated information.
Ultimately the route may be longer and more painful, using more valuable resources in the process. Such inefficiencies may be fine if you’re taking a leisurely vacation, but in a competitive business environment they could be devastating.
Many companies are investing substantial portions of their capital budgets-and grounding their growth targets - in merger and acquisition activity. It is critical to both take advantage of digital technology and pro-actively address the challenges it brings ahead of and during the integration process if an inorganic growth strategy is to deliver on its promises.