By Thomas Schinkel
June 2011
Buy-side or sell-side, in the M&A world, much of the energy is focused on “getting the deal done.” How much is the business worth? What valuation methods are used? The lawyers will fight fiercely with one another over issues of reps and warranties. But as soon as the dealmakers have cleared the scene to make room for the folks charged with the task of integrating the acquired company into a larger whole, the real challenge begins. Successful post-merger integration is the key to generating sustainable added value for the acquiring company.
This is such a truism, and yet, over 65 percent of all acquisitions, including cross-border deals, fail to live up to their expectations. Why is this, and how can you increase your odds for success if you are involved in an acquisition?
Post-acquisition integration is a catchphrase for a very complex issue that affects different companies in different markets in different ways. Too often, integration is limited to managing the teams of the two companies that are coming together, trying to find common ground and determining overlap. One of the most critical issues that gets overlooked is the new combined team’s connection to a rapidly changing market.
Most of my clients are privately held firms that have grown to a size where internationalization becomes a big issue. Some are driven to internationalization by their customers, big-box retailers and mass merchandisers. In my experience, sometimes such firms make acquisitions as a way of coping with changing markets, but then when the deal is done, they focus all their efforts on internal processes and team issues, without regard for the larger picture, namely the changing requirements of global customers. It takes a long time for the teams in the two companies to understand each other; while they’re trying to come to grips with the new situation, their competitors are walking away with the business.
I try to get my clients to focus on cultural issues (relating both to geography and internal company culture). Most importantly, I also try to have my clients map out the restructuring costs they may need to incur to make the acquisition successful. Only when such costs are added to the purchase price will it become clear what the payback of an acquisition will be.
I have found that each case of post-acquisition integration is different. Integration into a clearly defined business model that has proven acceptance in one culture is one thing. Engaging in a cross-border acquisition and then addressing post-acquisition integration issues in that case is very different.
The key challenges are strategic and cultural. Many markets are moving targets today and post-acquisition integration needs to be done quickly to allow the organization to stay focused on changing market conditions. All in all, I opt to err on the side of caution and try to map out worst-case scenarios before an acquisition deal is signed.
In the cross-border environment, I believe that more companies are becoming aware of the unique post-acquisition needs, not only on the acquiring company’s side but also on the side of the acquired company.
Mapping out the talents and skills available in the acquired company and then cultivating relationships in a manner that lets all players feel they are making a valuable contribution is as important as, if not more so than, all the financial analysis that is customarily invested in an M&A project. Suppose that during the pre-acquisition evaluation process, it becomes apparent that the firm to be acquired has an IT systems infrastructure superior to what the acquirer has. This valuable additional asset needs to be handled with extreme care so the acquiring company integrates this new system to its advantage without allowing other processes to push aside the benefits of the newly acquired knowledge.
Or suppose you are a manufacturer whose customers demand you go global with them. You need to be keenly aware of where the international markets are moving. Not infrequently, it is towards lower costs, lower margins, fewer SKUs, and consolidation among vendors and resellers. In such an environment, it behooves the acquiring company to move with the tide and not against it.
Overall, post-acquisition integration remains a matter of managing uncertainty and providing clarity early on about the way forward. If that means job realignment, or acknowledging redundancies, address these issues early on and take action, based on the needs of the market. I have found that traditional incentive programs for senior executives are inherently inadequate to deal with post-acquisition integration issues. More often than not, these incentives stand in the way of the creative use of talent brought in via an acquisition.
In this article I have touched very briefly on a few key aspects of what is really a very complex issue. In closing, allow me to leave you with some questions to ponder:
o What is your experience with post-acquisition integration issues?
o If you are contemplating an acquisition, do you feel that you have a 360-degree view of the issues?
o Are there cost categories that have been underestimated?
o Do you have a sense that the cultural issues have been taken into consideration in a meaningful way?
o Is everyone on both sides of the acquisition focused on the market going forward?
These issues regarding post-acquisition integration may affect you in many ways. It is better to prepare and explore in advance.
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Thomas Schinkel is a boston-based expert in the area of assisting American and European clients in cross-border mergers and acquisitions. He can be reached at 617-241-9073 or www.thomasschinkel.com.
The Successful Transition Planning Institute of Cambridge, MA teaches Baby Boomers and their advisors how to avoid boring, meaningless retirements. STPI's books, tools, training and seminars empower Baby Boomers to "Think", "Live" and "Decide" what to do with their companies and careers. By doing so, Baby Boomers create plans for dynamic new lives, full of meaning and purpose. (see video).
5 Reasons to Know the Value of Your Business, before a Transition, by Risa Baker, Managing Director Partners 31
In today's economy, no one wants to waste time or money on something they don't need.
So why do you need an estimate of your company's value when you don't expect to leave for several years?
To be smart about creating greater business value in the least amount of time.
1) An estimate of value establishes your starting line and distance to the finish. Your job, whether your company is worth $500,000 or $50M, is to fill the gap between today's value (the starting line) and the value you need when you exit (the finish line). Once you know how far you need to travel, you can begin to create timelines and implement actions to foster growth.
2) An estimate of value tests your exit objectives. Let's assume that you decide that your finish line (financial objective) is to receive $7,000,000 (after taxes) from the transfer of your business interest. You also want to complete your race in three years (timing objective). An estimate of value will tell you if the distance between today's value and the finish line is too great to reach in three years.
3) An estimate of value provides important tax information. Taxes can take a significant chunk out of a business sale price so the value of your company (what a buyer pays for it) must usually exceed the amount of money you need. The size of that excess depends on how you design your exit. Exit design begins with knowing starting value and the distance to your finish line.
4) An estimate of value gives owners a litmus test. When owners know how much value they need to meet their objectives, it helps them determine where they need to concentrate their time and effort.
5) An estimate of value provides an objective basis for incentive plans. As you design incentive plans for key employees to motivate them to help you increase value, you must base these plans on an objective estimate of value. You and your employees need a starting line that you all can confidently rely on.
On some level, we all recognize that we will leave our businesses some day. The exit from your company is likely to be the largest financial transaction of your life. Does it make sense to go into that transaction without an objective understanding of your company's value?
An estimate of value can save precious time as you build value and achieve the exit of your dreams!
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Risa Baker is Managing Director of Partners 31, an M&A Advisory firm that guides business owners in planning their exit strategies, executing these plans, and succeeding in achieving their sale and succession goals. risa@partners31.com www.partners31.com
The Successful Transition Planning Institute of Cambridge, MA teaches Baby Boomers and their advisors how to avoid boring, meaningless retirements. STPI's books, tools, training and seminars empower Baby Boomers to "Think", "Live" and "Decide" what to do with their companies and careers. By doing so, Baby Boomers create plans for dynamic new lives, full of meaning and purpose. (see video).