Successfully Managing the Integration of Mergers and Acquisitions

8/9/2019 Successfully Managing the Integration of Mergers and Acquisitions

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Successfully Managing

the Integration ofMergers and Acquisitions

E. Craig McGee, Ph.D.

Abstract

Despite their prevalence, few mergers actually achieved the expected results. This paperdescribes the critical factors for successful mergers. Some of the factors include:

Conduct a thorough assessment prior to the merger

Create an integration task force

aintain visibility of leaders from both organi!ations

"nderstand the business metrics of both companies

# checklist of critical tasks to complete is provided.

During the $%&'(s and $%%'(s the numbers of mergers and ac)uisitions dramaticallyincreased. #s organi!ations were forced to restructure and develop new strategiesto maintain competitiveness, mergers, strategic alliances, and other integrativeorgani!ational strategies became more prevalent. *ut a study by +ohrer, ibler,and +eplogle -a management consulting firm found that /01 of a sample ofmerged companies called the outcome disappointing or a total failure. The )uestionto be answered in order to increase the success of mergers or other partnerships is2ow do we successfully integrate with another company whose values, culture,management approaches, and operating practices are different from ours34 *eloware listed some of the factors that are associated with successful integration.

Identify and support the core competencies andcompetitive levers of the partner company.

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5xecutives of both companies should ask 26hat is it about the other company that led us to thisarrangement34 7ften the answer to this )uestion is a core competency or body of technology thatneeds to be protected. The other )uestion they should ask is 26hat is it about the other company

that represents a competitive advantage34 7nce these areas are identified, conscious decisionscan be made to ensure that they are not minimi!ed during the integration process.

Conduct a thorough organizational assessment prior tonegotiating and closing the partnership agreement.

ost companies carefully inspect the financial performance and product suite of the partnercompany. They want to ensure that the partner company is financially viable and has a product setthat is compatible with theirs. owever, less attention is given to other aspects of the partnercompany such as:

technical competence of the workforce management styles and values organi!ation culture and values information systems

metrics used to guide the business interpersonal styles

These are critical sub8ective areas that often make or break successful integration. Consider theclash in cultures between 9eneral otors and 5lectronic Data Systems. t took over ten years forthose organi!ations to integrate. Some people would argue that they never truly integrated and thatis what led to the spinoff of 5DS off from 9.

Develop a high-level integration plan during thenegotiations of the partnership agreement.

*ased on the organi!ation assessment, due diligence and other assessment work that occurs priorto the formal closing of the partnership agreement, executives of both companies should be able todevelop a high level plan for how the two companies will operate after the merger;partnering

agreement.

After the announcement of the partnership agreement, quicly

communicate to people !hat !ill change and !hat !ill stay thesame.

5mployees of both companies will naturally have a number of )uestions about new organi!ationstructures, new reporting relationships, geographic locations of new;merged units, etc. The plandeveloped during the negotiations can be an invaluable tool for allaying fears and concerns ofpeople. *e frank, candid and understanding. 6ithout a clear understanding of what the directionand plan is, people will create their own reality. They will spend more time creating that reality intheir own mind than performing constructive work. n the absence of clear information, rumors will

develop and spread. 5xecutives and managers of both companies will spend more time controllingrumors than attending to the true needs of the business.

Create an integration tas force.

5ven with a high


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protect existing turf. The integration task force is one means for building the same cooperativeworking relationships throughout the two companies. #dditional task groups can be formed toresolve the myriad of integration issues that arise and provide a mechanism for building these

relationships among other people in the two companies. The task groups should be chartered bythe integration task force and report to them during the integration process.

Arocess mapping is an effective tool for helping managers from the two different companiesunderstand the operating practices in the other company. t identifies the points in the process

where integration must occur. t identifies redundancies and opportunities for streamlining existingprocesses. t identifies information system re)uirements. Arocess mapping will typically surfaceconflicts in roles and responsibilities among the managers and work groups in the two companies.The )uicker these role conflicts are identified and clarified the )uicker the integration proceeds.

Teambuilding among the new groups can also be helpful. 5fforts should be made to create oridentify tasks around which to structure group activities. Successful accomplishment of meaningfultasks builds effective work teams. 5xamples of tasks include:

merging the information systems of the two companies evaluating the benefit plans of the two companies and integrating them if necessary integrating the product plans of the two companies clarifying the structure of the sales force and technical support

A group should also "e chartered to listen for rumors andrespond to them quicly.

This is often the responsibility of one of the subgroups of the integration task force. This group iscomprised of employees who are well respected and have good working relationships with theirpeers. They will be able to hear rumors during their early stages and prevent the spread ofinaccurate rumors.

(he attitude of managers and e$ecutives of "oth partiesshould re)ect one of pro"lem-solving, cooperation andequality rather than condescendence, superiority ordefensiveness.

Senior managers of both companies will need to closely monitor the activities at lower levels of theorgani!ation to ensure that the proper tone and attitude is being promoted. #gain, issues of turfprotection and coloni!ation can be very prevalent and must be carefully guarded against.

S!eat the "ig stu'.

Do not allow managers and executives to compromise those core competencies or operating

practices that have made each of the companies successful in their own respect. Senior managersshould be prepared to strongly resist changes they believe will weaken the core competencies ortechnologies.

Similarly, help people turn loose of the minor issues. @ong standing practices may no longer besupported by business rationale. Bew practices may produce economies of scale and greatersynergism. 5ffective communications will help people understand the differences between oldpractices for old practices sake and new practices for greater synergism.


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Allo! for di'erences.

There are already significant differences in management style, levels and roles of management and

implementation of policy among different departments in the same company. Diversity amongpractices and policies may actually be the engine for organi!ational innovation. "nless thesedifferences produce glaring violation of corporate policies and operating inefficiencies, they shouldbe considered.

%nderstand the "usiness metrics used "y "oth companies.

The metrics used for evaluating business unit performance have profound effects on theorgani!ation. They affect staffing, product planning, marketing program development, etc. Thebusiness metrics used by one company may directly conflict with the metrics of the other company.mplementing the metrics of one company in the other may severely compromise the coretechnology or undermine the core competencies of the organi!ation.

or example, consider an ac)uired company with a core competency of technical expertise and theability to develop products with cutting edge technology. Supporting this core competency re)uiresextensive training and development costs, attendance at professional meetings and networks,support for university research, etc. f the parent company uses metrics that emphasi!e costcontrol, it is likely that these expenses will be reduced, thereby diminishing the core competencyover time.

&ncourage and promote cross-company transfers.

t is very common for the parent company to transfer new managers and executives into theac)uired company. This helps diffuse the values and operating practices of the parent companyinto the ac)uired company. owever, less common is the transfer of managers and executives fromthe ac)uired company to the parent company. Successful integration re)uires advocates for the

ac)uired company who are embedded in the parent company(s management system.

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Successfully Managing the Integration ofMergers and Acquisitions

Merger and Acquisition Integration +rocess


estructuringsestructurings # eorganizations# eorganizations Cross


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Creating High Performan

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Merger and Acquisition Checlist

I) Concept *hase

#. 6hat is it that this company can contribute to our company3

Distribution channel anufacturing capability +esearch and development Customers;accounts Aroduct line arket segment -geography, industry, price point, etc. Speciali!ed technology uman capital +evenue stream inancial assets

*. what would be the costs to develop this capability on our own3

C. ow long would it take to develop this capability on our own3

D. 6hat is the synergism of the merger3 ow does this company complement ours3

5. 6hat are the options for obtaining the capabilities this company has3

erger;ac)uisition Foint venture Foint marketing;distribution agreement Strategic alliance agreement @icensing Commission;royalty agreement Consulting services Aatent;technology option nternal development

II) #xploration

#. inances

$. 6hat is the financial strength of this company3

#ssets @iabilities +evenue streams

Strength of balance sheetG. 6hat are the financial pro8ections for the next $


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G. 6hat is the pro8ected profit contribution for different product lines3

H. 6here are each of the products in their product life cycle3C. uture Aroducts

$. 6hat products are in the pipeline3

G. ow do they complement the existing products3

Aroduct line extension Bew product line Bew product family thin existing product line

H. 6hen will the products begin generating revenue3

=. 6hat are the pro8ections for re venue;profit contribution3

D. Customers;Suppliers

$. 6ho are the current customers3 ow is revenue;profit contribution distributedamong these customers3

G. #re there any long


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Aatterns of marketing, sales, general, and administrative expenses -S9?# "nexposed liabilities

Ialuation methods for assets Determination of goodwill unding of pension plans

G. 5xecutive compensation

*. @egal exposure

Aending, probable or possible litigation Trademark;patent protection;violation 5nvironmental exposure -real estate, chemicals;materials, compliance record Safety and health practices and exposure 557;## exposure S5C;shareholder rights exposure

+S;tax exposure

C. Iisual;7nsite nspections

D. Customer;Supplier Contracts

Detailed examination of contracts -terms, length, termination provisions, etc.

5. Current Aroduct

detailed examination of product lines breadth of product line functionality and capability of product line detailed examination of product components purchased;licensed technology

purchased;licensed subcomponents where is the greatest value added3 detailed examination of product life cycle -how mature is the existing product set market performance of current products market perception of product line and capability

5. uture Aroducts

$. 6hat are the future product plans

extension of current product line -enhancements new product line new product family within existing product line

G. 6hat resources have been allocated to future product development

capital -e)uipment, buildings, or ac)uisitions personnel -headcount technology

H. 6hat further resources will need to be allocated for future product developmentand commerciali!ation

9. Core Competencies


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$. 6hat are the core technologies of this company3

G. ow do they complement our core technologies3H. 6hat are the other core competencies of this company3

customer service distribution data management commerciali!ation of technology development of basic technology

. uman +esources #dministration:

$. 6hat is their compensation philosophy3

G. ow do their pay structures compare to ours3 6ill there be internal e)uity issuesthat we will have to address3

H. ow do their benefit plans compare to ours3

health and medical insurance education reimbursement vacation;holidays leave;time off policies pension stock purchase;options

=. 6ill we need to maintain separate benefits plans or can they be integrated withours3

0. s this company in compliance with ma8or state and federal regulations3

557;## #D# 7S# wage and labor standards

F. 6orkforce Competency:$. 6hat is the technical competence of the workforce3

G. 6here are the areas of technical competence and technical weakness3

H. 6hat is the educational level of the workforce3 #re there concentrations of welleducated or poorly educated3

=. 6hat are the social skills of the workforce3

0. 6hat is the managerial competence level of this organi!ation3

planning;budgeting leadership pro8ect management financial stewardship

/. 6ho are the key technical, managerial, and executive people3 6hy are theyconsidered key3 6hat would happen if one or more of them left3J. Culture

$. Decision


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how are failures;mistakes dealt with3

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merger;ac)uisition 8oint venture

8oint marketing;distribution agreement strategic alliance agreement exclusive partnering agreement licensing commission;royalty agreement consulting services patent;technology option internal development

D. 6hat are the costs associated with the different options:

purchase price buyout of current shareholders

severance costs relocation expenses licensing fees commissions;royalties

5. nformation Systems

$. 6hat is the basic architecture of the information system3 ow compatible is it withours3

G. 6hat are the basic data models used3 ow compatible are they with ours3

H. 6hat metrics do they use and how are they tracked3 ow compatible are theywith ours3

=. 6hat information systems;linkages will need to be established between the twocompanies3

+) Terms an' Con'itions ,egotiations

final agreement



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Successfully Managing the Integration of Mergers and Acquisitions