The 10 steps to successful M&A integration

The 10 steps to successful M&A integration

By Ted Rouse and Tory Frame

Tailor integration to identifyvalue, keep the right people and focus on critical decisions

Copyright © 2009 Bain & Company, Inc. All rights reserved.Content: Editorial teamLayout: Global Design

Ted Rouse is a partner with Bain & Company in Chicago and co-leader of Bain’sGlobal M&A practice. Tory Frame is a partner in London and leader of London’sPost-Merger Integration and Consumer Products practices.

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Tailor integration toidentify value, keep theright people and focuson critical decisions

Mergers and acquisitions—well conceived andproperly executed—can deliver greater valuethan ever right now. And savvy acquirers aretaking action, as deal activity acceleratesamid signs of recovery.

One reason is the effect that a downturn hason asset values: Other things being equal, it’sa good time to buy. Bain analysis of more than24,000 transactions between 1996 and 2006shows that acquisitions completed during orjust after the 2001–2002 recession generatedalmost triple the excess returns of acquisitionsmade during the preceding boom years. (“Excessreturns” refers to shareholder returns fromfour weeks before to four weeks after the deal,compared with peers.) This finding held trueregardless of industry or the size of the deal.Given today’s relatively low equity values,acquirers with cash to invest are likely to finddeals that produce similar returns.

A second reason: Many companies are gettingbetter at M&A. At the beginning of the periodfrom 1995 to 2005, about 50 percent of mergersin the US underperformed their industry index.By the end of the period, only about 30 percentwere underperforming. One explanation, basedon our experience, is that some companieshave learned to pursue deals closer to theircore business, which increases the odds ofsuccess. They more frequently pay cash ratherthan stock, which encourages better due dili-gence and more-realistic prices. The long-termtrend of more-frequent acquisitions has alsopushed companies to develop repeatable modelsfor successful integration and managers withprofessional integration-management skills.

Despite these successes, many acquirers—perhaps most—leave huge amounts of valueon the table in every deal. Companies con-tinue to stumble in three broad areas of post-merger integration:

• Missed targets. Companies fail to defineclearly and succinctly the deal’s primarysources of value and its key risks, so theydon’t set clear priorities for integration.Some acquirers seem to expect the targetcompany’s people to integrate themselves.Others do have an integration programoffice, but they don’t get it up and runninguntil the deal closes. Still others mismanagethe transition to line management whenthe integration is supposedly complete,or fail to embed the synergy targets in thebusiness unit’s budget. All these diffi-culties are likely to lead to missed targets—or an inability to determine whetherthe targets have been hit or not.

• Loss of key people. Many companies waittoo long to put new organizational struc-tures and leadership in place; in themeantime, talented executives leave forgreener pastures. Companies also mayfail to address cultural matters—the “soft”issues that often determine how peoplefeel about the new environment. Again,talented people drift away.

• Poor performance in the base business. Insome cases, integration soaks up too muchenergy and attention or simply drags ontoo long, distracting managers from thecore business. In others, uncoordinatedactions or poorly managed systems migra-tions lead to active interference with thebase business—for example, multiple(and contradictory) communications withcustomers. Competitors take advantageof such confusion.

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Successful integration—the key to avoidingthe risks of a merger or acquisition and torealizing its potential value—is always a chal-lenge. And it is complicated by the simple factthat no two deals should be integrated in thesame way, with the same priorities, or underexactly the same timetable. But 10 essentialguidelines can make the task far more man-ageable and lead to the right outcome:

1. Follow the money

Every merger or acquisition needs a well-thought-out deal thesis—an objective explana-tion of how the deal enhances the company’score strategy. “This deal will give us privilegedaccess to attractive new customers and chan-nels.” “This deal will take us to clear leadershippositions in our 10 priority markets.” A cleardeal thesis shows where the money is to bemade and where the risks are. It clarifies thefive to 10 most important sources of value—

and danger—and it points you in the directionof the actions you must take to be successful.It should be the focus of both the due diligenceon the deal and the subsequent integration. Itis the essential difference between a disciplinedand an undisciplined acquirer.

The integration taskforces are then structuredaround the key sources of value. It is alsonecessary to translate the deal thesis into tan-gible nonfinancial results that everyone in theorganization can understand and rally around—for example, one salesforce or one order-to-cash process. The teams naturally need tounderstand the value for which they are account-able, and should be challenged to producetheir own bottom-up estimates of value rightfrom the start. That will allow you to updateyour deal thesis continuously as you worktoward close and cutover—the handoff fromthe integration team to frontline managers.

�1

0

1

2

3

4%

Number of acquisitions (1987–2006)

Annual excess return(1987–2006)

Inactive

Note: Annual excess return is defined as a company’s annualized total shareholder return less its cost of equity (calculated using CAPM)

�0.2

1–9 10–24

0.7

25–39

1.0

40–99

1.5

100+

3.0

0.7

Frequent acquirers outperform in the long term

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2. Tailor your actions to thenature of the deal

Anyone undertaking a merger or acquisition

must be certain whether it is a scale deal—an

expansion in the same or highly overlapping

business—or a scope deal—an expansion into

a new market, product or channel (some deals,

of course, are a mix of the two types). The

answer to the scale-or-scope question affects a

host of subsequent decisions, including what

you choose to integrate and what you will keep

separate; what the organizational structure will

be; which people you retain; and how you man-

age the cultural integration process. Scale deals

are typically designed to achieve cost savings

and will usually generate relatively rapid

economic benefits. Scope deals are typically

designed to produce additional revenue. They

may take longer to realize their objectives,

because cross-selling and other paths to revenue

growth are often more challenging and time-

consuming than cost reduction. There are valid

reasons for doing both types of transactions—

though success rates in scope deals tend to be

lower—but it is critical to design the integration

program to the deal, not vice versa.

Consider the recent spate of announcements

about computer hardware companies buying

services businesses. In 2008, it was Hewlett-

Packard buying EDS. More recently, Dell

announced the acquisition of Perot Systems,

and Xerox made a bold move for ACS that will

more than double the size of its workforce.

These are clearly scope deals, as these com-

panies search for ways to move up the value

chain into more profitable lines of business.

And they require a new type of integration

effort for these hardware companies. If HP,

for example, applied the same principles and

processes that it used in integrating Compaq,

it would greatly complicate the EDS acquisition.

3. Resolve the power and people issues quickly

The new organization should be designedaround the deal thesis and the new vision forthe combined company. You’ll want to selectpeople from both organizations who are enthu-siastic about this vision and can contribute themost to it. Set yourself an ambitious deadlinefor filling the top levels and stick to it—toughpeople decisions only get harder with time.Moreover, until you announce the appoint-ments, your best customers and your bestemployees will be actively poached by yourcompetitors when you are most vulnerable toattack. The sooner you select the new leaders,the quicker you can fill in the levels below them,and the faster you can fight the flight of talentand customers and the faster you can get onwith the integration. Delay only leads to end-less corridor debate about who is going to stayor go and spending time responding to head-hunter calls. You want all this energy focusedon getting the greatest possible value out ofthe deal.

The fallout from delays in crucial personneldecisions is all too familiar. When GE Capitalagreed to buy Heller Financial in 2001, payinga nearly 50 percent premium over Heller’s shareprice at the time, GE Capital indicated that itwould need to reduce Heller’s workforce byroughly 35 percent to make the deal viable. Butit didn’t move quickly to say who would remain.Key players departed before waiting to findout, and several helped Merrill Lynch create arival middle-market unit the following year.

4. Start integration when youannounce the deal

Ideally, the acquiring company should beginplanning the integration process even beforethe deal is announced. Once it is announced,

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there are several priorities that must be imme-diately addressed. Identify everything that mustbe done prior to close. Make as many of themajor decisions as you can, so that you canmove quickly once close day arrives. Get thetop-level organization and people in place fast,as we noted—but don’t do it so fast that youlose objectivity or that you shortcut thenecessary processes.

One useful tool is a clean team—a group ofindividuals operating under confidentialityagreements and other legal protocols who canreview competitive data that would otherwisebe off limits to the acquirer’s employees. Theirwork can help get things up to speed fasteronce the deal closes. In late 2006, for example,Travelport—owner of the Galileo global distri-bution system (GDS) for airline tickets—announced that it intended to acquire Worldspan,a rival GDS. The two companies used a cleanteam to work through many critical peopleand technology issues while they awaitedfinal regulatory approval from the EuropeanCommission. When regulators gave the greenlight, the company was able to begin integra-tion immediately rather than spending weekswaiting to gather the necessary data and makingcritical decisions in a rush.

5. Manage the integrationthrough a “Decision Drumbeat”

Companies can create endless templates andprocesses to manage an integration. But toomuch program office bureaucracy and paper-work distract from the critical issues, suck theenergy out of the integration and demoralizeall concerned. The most effective integrationsinstead employ a Decision Management Office(DMO); and integration leaders, by contrast,focus the steering group and taskforces on thecritical decisions that drive value. They lay outa decision roadmap and manage the organ-ization to a Decision Drumbeat to ensure that

each decision is made by the right people at theright time with the best available information.

To get started, ask the integration taskforceleaders to play back the financial and non-financial results they are accountable for, andin what timeframe. That will help identify thekey decisions they must make to achieve theseresults, by when and in what order. Using thismethod, one global consumer products com-pany recently was able to exceed its synergytargets by 40 percent—faster than originallyplanned—while retaining 75 percent of the toptalent identified. (For a primer on how compa-nies can create an effective decision timeline,see “Making it happen: The Decision Drumbeatin practice,” on page 7.)

6. Handpick the leaders of theintegration team

An acquisition or merger needs a strong leaderfor the Decision Management Office. He orshe must have the authority to make triagedecisions, coordinate taskforces and set thepace. The individual chosen should be strongon strategy and content, as well as process—in other words, one of your rising stars. Ideally,this individual and other taskforce leaders willspend about 90 percent of their time on theintegration. Given the importance of main-taining the base business’s performance whileyou’re pursuing integration, one solution is toput the No. 2 person in a country or functionin charge of the integration taskforce. Thechief can take over the No. 2’s responsibilitiesfor the duration.

7. Commit to one culture

Every organization has its own culture—the setof norms, values and assumptions that governhow people act and interact every day. It’s “theway we do things around here.” One of thebiggest challenges of nearly every acquisition

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or merger is determining what to do aboutculture. Usually the acquirer wants to maintainits own culture. Occasionally, it makes theacquisition in hopes of infusing the targetcompany’s culture into its own. Whatever thesituation, commit to the culture you want tosee emerge from the integration, talk about itand put it into practice. A diagnostic can helpreveal the gaps between the two, providedacquirers are appropriately skeptical aboutpeople’s descriptions of their organization’sculture and provided they recognize their ownpotential biases.

Whatever you decide on, executives from theCEO on down then need to manage the cultureactively. Design compensation and benefitssystems to reward the behaviors you are tryingto encourage. Create an organizational structureand decision-making principles that are con-sistent with the desired culture. The company’sleaders should take every opportunity to role-

model the desired behaviors. And they shouldconsider carefully the fit with the new culturein making decisions about which people tokeep. Will they support and reflect the newculture—or not?

When Cargill Crop Nutrition acquired IMCGlobal to form the Mosaic Company, a globalleader in the fertilizer business, the new CEO,who came from Cargill, knew from the outsetthat retaining IMC employees and creating oneculture would be important to the success ofthe fledgling company. One-on-one meetingswith the top 20 executives and surveys of thetop teams from both companies revealed dif-ferences between Cargill’s consensus-drivendecision-making process—which would be theculture of the new company—and IMC’s more-streamlined approach, which emphasizedspeed. Armed with an early understanding ofthe differences in approach, the CEO was ableto select leaders who reinforced the new culture.

Acquisitionfrequency

Average acquisition size

“Inactives”�0.17%

Note: Undisclosed deals assumed at 3% (based on median of disclosed deals)Source: Bain U.S. long�term acquirer performance study (2007)

Frequent(More than orequal to 0.5

deals per year)

Small(Less than 9% of buyer’s market cap)

Large(More than or equal to 9% of buyer’s market cap)

“String of pearls”1.87%

“Mountain climbers”2.69%

“Small bets”1.46%

“Roll the dice”�0.93%

Infrequent(Fewer than 0.5deals per year)

Annual excess returns (1987–2006)

The penalties are greatest for one-shot mega-deals or sitting on the sidelines

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Cargill managers also made time to explainthe benefits of their decision-making systemto their new colleagues, rather than simplymandating it. Result: The synergies estimated(and owned) by jointly staffed integration teamsturned out to be double what due diligencehad estimated.

8. Win hearts and minds

Mergers and acquisitions make people on bothsides of the transaction nervous. They’re uncer-tain what the deal will mean. They wonderwhether—and how—they will fit into thenew organization. All of this means that youhave to “sell” the deal internally, not just toshareholders and customers.

Consider the challenge faced by InBev, the globalbeverage company, in acquiring Anheuser-Busch,one of the most iconic American brands. Earlyin the integration process, the leadership teamfocused on the most effective way to introduceInBev’s long-term global strategy to Anheuser-Busch managers and employees. One power-ful tool was InBev’s “Dream-People-Culture”mission statement, which was tailored to theUS company and introduced into the Anheuser-Busch lexicon with strong messages empha-sizing the value of its customers and products,to excite the imagination of the AB organization.

It’s vital that your messages be consistent. Ifyou are acquiring a smaller company andthe deal is mostly about taking out costs, forinstance, don’t focus on a “Best of Both Organ-izations” in your first town-hall speech. Ingeneral, it’s wise to concentrate on what thedeal will mean in the future for your people,not on the synergies it will produce for theorganization. “Synergies,” after all, usuallymeans reducing payroll, among other things—and people know that.

9. Maintain momentum in the basebusiness of both companies—andmonitor their performance closely

It’s easy for people in an organization to getcaught up in the glamour of integrating twoorganizations. For the moment, that’s wherethe action is. The future shape of the company,including jobs and careers, appears to be inthe hands of the integration taskforces. But ifmanagement allows itself and the organizationto get distracted, the base business of bothcompanies will suffer. If everybody’s trying tomanage both the ongoing business and theintegration, nobody will do either job well.

The CEO must set the tone here. He or sheshould allocate the majority of time to the basebusiness and maintain a focus on existingcustomers. Below the CEO, at least 90 percentof the organization should be focused on thebase business, and these people should haveclear targets and incentives to keep those busi-nesses humming. By having No. 2s runningthe integration, their bosses should be able tomake sure the base business maintains momen-tum. Take particular care to make customerneeds a priority and to bundle customer andstakeholder communications, especially whensystems change and customers may be confusedabout who to deal with. Meanwhile, establishan aggressive integration timeline with a count-down to cutover—the day when the primaryobjectives of integration are completed andthe two businesses begin operating as one.

To make sure things stay on track, monitorthe base business closely throughout theintegration process. Emphasize leading indica-tors like sales pipeline, employee retentionand call-center volume.

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Olam International, a global leader in theagri-commodity supply chain business with$6 billion in annual revenues, has managedto maintain its base business while incorpo-rating a stream of acquisitions. In 2007, forinstance, Olam purchased Queensland Cotton,with trading, warehousing and ginning oper-ations in the US, Australia and Brazil. Olamensured that a core part of the QueenslandCotton team remained focused on the basebusiness, while putting together a separateteam made up of Queensland Cotton and Olamemployees to manage the integration. Thathelped the company navigate difficult condi-tions due to drought in Australia, while alsogrowing their Brazil and US businesses wellabove the market. Olam’s acquisitions con-tributed 16 percent to its total sales volumesin fiscal year 2009 and 23 percent to its earn-ings, which have grown at an overall rate of45 percent CAGR since 1990.

10. Invest to build a repeatableintegration model

Once you have achieved integration, take thetime to review the process. Evaluate how wellit worked and what you would do differentlynext time. Get the playbook and the names ofyour integration experts down on paper, so thatnext time you will be able to do it better andfaster—and you will be able to realize thatmuch more value from a merger or acquisition.

Bain has done extensive research on whatdrives success in acquisitions, including twoLearning Curve studies completed in 2004and again in 2007. The data is compelling.Frequent acquirers consistently outperforminfrequent acquirers as well as companies thatdo no deals at all. If you had invested $1 in eachgroup, the returns from the frequent-acquirergroup would be 25 percent greater than theinfrequent group over a 20-year period. Overthe last 15 years, a number of companies,

including Cisco Systems, Danaher, CardinalHealth, Olam International and ITW, haveshown that you can substantially beat the oddsif you get the integration process right andmake it a core competency.

Making it happen: The DecisionDrumbeat in practice

A Decision Drumbeat is the way to focus yoursenior management and integration taskforcesquickly on the critical decisions necessary fora merger integration to succeed. Here’s howone global consumer products company appliedthis approach to sucessfully integrate a majorcompetitor in record time:

Focus on the fundamentals. The first rule is toclearly articulate the financial and non-financialresults you expect, and by when. Parcel outthese results to each of the integration task-forces, and have them work out the decisionsnecessary to get there. Pare these decisionsdown to the bare essentials—just what’s nec-essary to deliver one integrated company onschedule. It’s important to distinguish betweenintegration and optimization decisions. Thelatter should be put off until the integrationis complete.

For the consumer products company, it wasimperative to quickly equip the salesforce withan integrated portfolio of brands for the busytrading period, despite the fact that some of thebrands were aimed at the same consumers andwere positioned in similar ways. The answerin this case was to quickly decide how to targetthe brands at different outlets, and to leavedecisions about fundamental brand reposi-tioning for later, after cutover to a singlecombined company.

Coordinate decisions. Any integration involvesa large number of decisions in a short timeframe, and many of those decisions are highlyinterdependent. So the timing of decisions

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needs to be closely coordinated, and everyoneneeds to understand the impact their actionshave on others. For instance, most marketingteams would prefer to wait until the end of theintegration process to recommend the finalproduct portfolio. Recognizing this tendency,the consumer products company quickly madea decision on the brand portfolio. That set upa series of cascading decisions: Within fourweeks, the company had created new SKUlists, order forms and sales scripts, and hadtrained the salesforce so that they were ableto sell each brand when they hit the streetsrepresenting the combined company. TheDecision Management Office plays an importantcoordinating role: first, by helping the taskforceswork out which decisions must be made todeliver their results; second, by ensuring thatthe decisions are made and executed in theright order to support the decision deadlines ofother taskforces. No one else has the integratedview of the timing and the value at stake.

Assign decision rights and roles. The DecisionManagement Office should then map out who isresponsible for each decision and communicatethat to all involved. One of the most effectiveways to clarify decision roles, in our experience,is a system we call RAPID—a loose acronym forRecommend (which usually involves 80 percentof the work); offer Input; Agree or sign off on(limited to rare circumstances, for example,when fiduciary responsibilities are involved);Decide, with one person assigned the “D”; andPerform, or execute the decision. The resultingdecision roadmap shows who is accountablefor each major decision and when that decisionneeds to be taken.

At the consumer products company, the steeringgroup focused on the 20 percent of decisionsthat were most critical to integration success,leaving the remainder of the decisions to theintegration taskforces. That meant the integrationwas able to move at maximum speed and, by

empowering the taskforce leaders, many gainedpriceless management experience that led toeventual promotions.

Stick to the timetable. Actively ensure that every-one is on track to make their decisions. TheDecision Management Office ensures that eachtaskforce has what it needs from other task-forces or from the steering group to make theirdecisions on time through the weekly drum-beat of meetings with each of the taskforces.When necessary, bring in experts to speed upteam delivery; and bring teams together formajor decision points and cutover plans, whichrequire detailed and coordinated planning. Focusyour working sessions on critical trade-offs andthe additional work required to resolve them.

Here, again, the consumer products companykept to the deadline by providing extra help tothe taskforces when they risked missing deci-sion deadlines—to ensure union negotiatorshad what they needed to secure agreementfrom manufacturing employees, for instance,or to work around obstacles in the distributionsystem when containers from the two companiesdid not fit on the same trucks. As one seniorexecutive later said: “We focused on decisions,not on process for process’s sake. From day onewe had a focused plan that everyone understoodand believed in, and that really energized the team.”

As we emerge from the global recession, com-panies should prepare to take advantage ofattractive asset values and to capture the benefitsgarnered by frequent acquirers. But they mustact with judgment and finesse. Winners in thisgame will bring a tailored approach to inte-gration, adjusting their approach to the dealthesis with one eye constantly fixed on thecritical sources of value and risk. The mostexperienced acquirers not only understand these10 steps to a successful integration, they alsounderstand how to adjust their application tothe deal and the circumstances.


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The 10 steps to successful M&A integration