The acquisition cycle is heating up. Companies are sitting on unprecedented cash reserves, organic growth is nearly flat for most industries, and P-E ratios are at their lowest in many years. Add to this brew the fact that management is under pressure to use the cash to benefit shareholders by paying dividends, reinvesting in the company, or making acquisitions. Among these choices it is clear that acquisitions, which can fuel immediate growth, will be a serious contender. Unfortunately, acquisitions do not have a great record overall for increasing shareholder value. Some studies have shown that more than half of all acquisitions don’t provide favorable returns for the acquiring companies. The reasons most commonly cited for these failures include underestimation of the cost and effort of operational integration, and poorly executed integration efforts.
When brought into the confidence of the deal team for a pending acquisition, operational managers are often challenged with how to develop reasonable benefit forecasts and integration plans when very little supporting information is available. Typically, interviews of the target’s operational managers are off limits, and little detailed planning has been conducted.
Despite these limitations, the integration effort is expected to start quickly after “Legal Day One,” and there is typically little time for operational due diligence before then. Success depends upon being able to quickly validate assumptions (and make necessary adjustments) between the time an acquisition announcement is made and the target company is legally acquired.
Three critical activities for building this agile foundation are:
1. Create an Acquisition Integration Team (AIT) – Due to confidentiality concerns, an initial deal team is usually composed only of the most senior management plus financial and legal advisors. Usually, operational managers are not brought in until a financial deal is close to being struck, but that doesn’t mean that operational managers must sit idle. If a company’s strategic plan includes acquisitions, it is only practical to assign a team to develop operational due diligence and integration frameworks. There may be many members on this team, as just about any acquisition will touch a wide cross-section of the acquiring company’s organization. When building the team, it is highly valuable to include staff members who have been through an acquisition—from either the acquiring or acquired perspective. Lessons learned and previous planning experience will translate to valuable insights for team members without that experience.
2. Create an “Acquisition Playbook” – When the AIT is brought into a deal, there are four major activities driven by two key dates. The dates are “Announcement Day” and “Legal Day One.” Two critical efforts must be executed swiftly between these two dates:
a. Conduct on-site operational due diligence of the target company to validate and/or adjust assumptions and forecasts regarding the integrated organization.
b. Finalize the details of what will take place on Legal Day One, when the acquiring company formally takes over the target company’s operations.
And, there are two major streams of work that must be executed starting on Legal Day One:
c. Continue regular day-to-day operations. This can be much more complex than expected. Many of the target company’s management staff will, out of necessity, refocus on integration activities as opposed to their normal operating duties. New priorities, reporting relationships, and approval processes will also be needed, adding to the workload as well.
d. Execute integration activities. Hundreds of new activities will be launched simultaneously on Legal Day One by both the target company and the acquiring company, most of which have to be finely coordinated. As part of a detailed action plan, establish appropriate and definitive authorities, develop a proactive and multifaceted communication plan, and define escalation procedures to address integration problems and unforeseen issues that will definitely arise.
When all these activities are taken together, the plans may encompass thousands of tasks. However, an integration team may be given a window of only four to eight weeks to develop them! Most acquisitions have similar core activities—as they say, the devil is in the details. By proactively establishing an AIT prior to an acquisition and developing an “acquisition playbook” with templates for the activities previously noted, the AIT will be ready to act quickly and eliminate the costly mistake of making it up as they go.
3. Define “Done” – With integrations there is a tendency to place certain activities into the integration plan when in fact they actually belong in the scope of daily operations. This creates a never-ending integration effort. The goal of the AIT is to phase out the integration efforts as quickly as possible. Significant management discipline is needed to ensure that only integration-related projects and activities remain on the integration plan and to reclassify tasks back to the day-to-day management environment as quickly as possible and without mercy.
Acquisition integration, much like consolidation, is among the most complex and difficult activities that most managers will face in their careers. Being prepared with the right execution framework, tools and organization structure is the key to a successful integration.
James Dean is a VP at The Robert E. Nolan Co., a management consulting firm specializing in the insurance industry.
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