The Art and Science of Acquisition Integration

Successful integration of multiple companies is one of the most complex projects any business leader can undertake. We have worked with many firms that acquired companies that promised to be great fits strategically and culturally, but the combined entities did not perform as projected.

What accounts for these underwhelming results? In some cases, new products or markets that drove the acquisition were never realized, or the planned efficiencies were not achieved. In other cases, the combined companies continued to be viewed by the marketplace as separate entities, and the advantages of a regional or national reach were lost.

Given the complexity and inherent challenges with integrating multiple companies, underperformance tends to be the rule and not the exception.

This guide was developed by a team of FortéOne executives who have led the integration of over 100 acquisitions across service and manufacturing industries. Although each executive in the group had industries and experiences that were unique, their judgments concerning the reasons acquisitions succeed or fail were remarkably consistent.

For business owners whose growth strategies include acquisitions, it is worth noting this group’s collective experience concerning the common mistakes and the recommended approaches that lead to successful integrations. These approaches include:

• Acquisition Integration is not a part time job nor is it a time to learn on the job.
• The CEO of the platform company may not be the best person to define the new strategy.
• Revenue growth and margin improvement with the combined companies will likely differ from past practices.
• Understanding and defining the company culture should take priority.
• Do not feel compelled to find a space for all employees in the combined firms.
• Plan carefully before leveraging increased market power with new supplier and customer agreements.
• Unless you believe the acquired systems are likely to fail or seriously impact the business, delay the IT integration.

An Art, A Science

Integration of multiple companies is both an art and a science. Some of the successful practices seem counter-intuitive and therefore are often not followed by high performing leaders.

Because integration means taking people well outside their comfort zone, it takes a special combination of experience, emotional intelligence, and comfort with ambiguity to orchestrate and lead a successful integration. You do not have the luxury of separately handling “soft” elements like client integration, staffing, and strategy and “hard” elements like systems, supply chains, and facilities. They all need to be understood and managed from day one.

If leadership is the ability to identify and build consensus around (often unpopular, but necessary) change, then acquisition integration is the acid test.

Seven Common Mistakes with Acquisition Integration

Mistake #1) Acquisition Integration is a Part Time Job for a Capable Leader, and a Capable Leader should be able to Learn on the Job.

An early mentor of mine told me: “it is a full time job to run a business and a full time job to lead major change for a business.” If you give one person both jobs, you invite failure. Most of the underperforming integrations we observed had one leader performing both jobs. Since running the business is usually top priority, integration becomes an all-consuming new priority, especially for a manager who has little prior experience with this process.

What usually results is a partial integration, with many of the initiatives left for later, “when there is time to focus.” Without adequate time to guide the change process, the company quickly settles into old patterns, absent the predicted synergies. Or worse, lack of progress leads to frustration, and the integration process is “forced” to make up lost ground. When that occurs, the leader loses support and top talent may leave, taking important customers with them.

An Alternative Approach: Task Dedicated People, Ideally with Acquisition and Industry Experience, who can Direct all the Integration Duties.  The rationale for this approach is compelling. You have invested millions of dollars in a new company, and if the integration is successful, the investment will have great returns. If handled poorly, you risk not only losing the synergies but also losing your most talented (and mobile) staff and customers from both companies. Acquisition integration, done well, is both time-consuming and very detailed.

Integration requires dedicated project leadership working closely with the CEO/President, whose focus should remain on running the newly combined businesses. The urge to add this project as “another job” for the leader of the combined entities must be resisted. It is also not recommended to entrust the project to any manager who has a full time job.

One option is to temporarily assign a talented manager who already works in the business to plan and implement the integration, and backfill their position temporarily. However, be cautious in selecting internal people. Ensure they do not have organizational baggage, which could affect their ability to work in all areas of the company.

Another option is to retain an external project manager with integration experience. In either case, make certain the project leader has the capacity and experience to manage all of the elements noted in the graphic above. The dollars you invest in dedicating an internal manager, or hiring a consultant, will be returned many times over.

The Integration Plan that is developed should be shared with everyone affected and regularly updated. It should include schedules, milestones, and KPIs that will demonstrate progress to the organization. There is great value in “over-communicating” the Plan with managers and staff and in keeping everyone updated on a consistent basis. In any integration, trust is the coin of the realm. Consistency and leadership build trust.

Mistake #2) The Leader Should Define the New Strategy.

Very often, the CEO of the platform company is expected to define the strategy for the combined firms. The high-level investment thesis is usually established pre-purchase, and now the detailed initiatives must be put in place to achieve this ROI. This works well when that executive has experience with a larger, more complex firm and was hired specifically to orchestrate an industry consolidation.

But often the CEO of the platform company has experience within a limited region, and/or with a single company. Post-purchase, the CEO now has a more complex company to lead with a larger staff that is anxious about their respective roles in the combined firm. A whole host of tactical issues now become priorities, including sorting out new sales territories, compensation plans, facilities, staff overlap, product/service overlap, and branding for the combined firms.

In addition to lack of available time, a CEO may not be the best choice to develop the new strategy for cultural and conceptual reasons. Culturally, the CEO may find it difficult to get candid input from current and new staff, who are understandably anxious about their roles and retaining their positions especially if the CEO has not had time to understand the nuances of the acquired company. Conceptually, it may be hard for CEOs to see “outside the box” and envision the best options for the combined companies.

Quite apart from leading a strategy process the CEO may be unable to manage the combined firm’s additional complexity. We have seen many examples of leaders who do a fine job running a $30-$50MM regional firm but struggle when charged with defining the direction for—and leading—a larger firm with opportunities for geographic and market expansion.

An Alternative Approach: Run a Strategy Planning Process with a Skilled Facilitator.  The strategy that worked for the platform company is seldom adequate for the combined companies, even those in the same industry serving similar clients. Effective strategy development requires a deep understanding of the leadership, people, and capabilities of each company as well as the market opportunities, (often new) competitors, barriers to success, and risks/rewards for multiple potential paths.

These factors may be considered at a high level when modeling the acquisition, but the detailed planning process usually happens post-acquisition as part of the integration process. Because it is very difficult to get the true picture of an acquired company pre-purchase, a strategy process that involves their key staff is very effective at understanding the firm in detail early on.

The benefits of getting strategy “right” with the integration are enormous. Culturally, an in depth understanding of the people, issues, and opportunities are gained, and staff from all firms are heard. Conceptually, there is an objective appraisal of “go to market” options to pursue. Equally important are decisions about products/services the firms should stop offering.

In a well-run strategy process, critical questions are not constrained by the current way of doing things. They are evaluated objectively, along with the capacity of the firm to implement these options, and priorities are set for the critical first 100 days post-purchase.

Strategy development may be perceived as expensive, time consuming, and of limited practical value for a middle market firm. This can be the case if a Fortune 500 approach to strategy development is taken. But there is an inexpensive, non-intrusive process tailored to middle market firms that can be accomplished in a few weeks. Most important, when the process is inclusive, the direction and priorities will be authored and embraced by the staff of the combined firms.

Mistake #3) Revenue Growth and Margin Improvement with the Combined Companies should follow Past Practices.

As companies grow in size and complexity, CEOs find themselves wearing many hats, although the focus of the CEO and staff is often limited by those things they have historically done well. In many cases, CEOs have been elevated through the ranks of sales or operations, and they are excellent at building new business or achieving operational efficiencies. When faced with integrating multiple companies, these CEOs lead with the mindset and tools they have developed in the past and the results are often disappointing.

Underperformance occurs when a talented CEO, who is leading many key functions and was able to effectively lead a smaller company, finds him/herself unable to understand and manage effectively in their new role. The complexities of the combined firm require new skills that the current CEO and supporting staff, especially the CFO, may not possess.

We recently worked with a company that had grown sales by purchasing a number of smaller firms over the years. Rather than improvements, they found their margins declining. The firm did not have an analysis of profitability by customer segments, and early on, we found they were losing money with several of their largest “big box” clients. We also learned there were dramatically different margins in the three segments they served. The management team did not initially agree with these findings, as they contradicted the “all growth in sales is good growth” mantra that had existed at this company for many years.

An Alternative Approach: Understand (intimately) the revenue and profitability of each customer and segment within the Combined Company.  Many firms we work with have a position labeled CFO, but the individual occupying that position is functioning as a Controller, focused on financial accounting and not providing the CEO with the financial analysis required to make informed business decisions.

With firms that are a product of multiple acquisitions, it is easy to lose sight of where the money is being made. At a minimum, we recommend that profitability analysis be completed, with monthly updates that show profit by customer and product. If the firm services multiple segments, then clients and products/services should be consolidated within these segments to show profit by segment.

If the financial skills do not reside within the firm to perform these analyses, then hire this out as part of the integration process, and build repeatable processes that can be updated by staff within the firm. Without knowledge of where money is being made or lost, the CEO of a complex firm is unable to make informed decisions.

Mistake #4) Find a Role for All Staff in the New Companies.

We see it often. An acquisition is made, and months later, the staff and their respective duties in the combined firms have not changed. The thinking was to avoid any precipitous actions until the capabilities of the individual firms and people were well understood. However, with the passage of time, the mandate for change seems to pass as well. As a result, both investor and leaders struggle to understand why the integration progress is so slow.

A variation on this theme occurs when an investor chooses to combine two portfolio companies in related industries that have been running well separately. The thinking is to leverage client relationships and build a regional or national brand, while retaining all executives and staff in modified roles at both companies. Internal systems and go to market processes are also retained because the cost and disruption of combining them is considered too risky.

At first blush, this seems logical and safe. But it often misses the mark on three counts. First, the new leader may struggle in the larger role until he/she changes the way the combined companies are run. Second, without an integration plan that defines the new market positioning, the employees at the combined company drift back into their old ways.

Customers are confused for a time but eventually continue to buy just like before. Finally, the opportunity for efficiencies with shared services is lost, which can be millions of dollars for middle market firms.

An Alternative Approach: Build an Organization that Enables the (combined) Firm to Execute their New Strategy.  Jim Collins (Good to Great) identified the importance of the right “people in seats.” Making staffing changes, and in some cases eliminating positions or bringing in new talent, is difficult. But getting the organizational design right is critical for a successful integration because that is the Team that will own and execute the Plan Forward. The successful leader will sort out strategy and talent quickly, with a particular focus on retaining second level managers, which is often where institutional knowledge and hidden talent resides.

A note on change. Integrations are often a shock to many people, and everyone accommodates change very differently. Not everyone in the companies will be an agent of change, but everyone on the Team needs to actively support the new direction. When designing the new organization, it is a mistake to retain staff who undermine the new direction, even if they are high performers. Culture always trumps strategy (see #5), and staff who threaten to undermine the new direction should be a focus for the implementation leader. If their view cannot be changed, they must be replaced.

Mistake #5) Focus on the Business Issues because that is where the Money is Made. Culture will sort itself out over Time.

In some examples, like a manufacturing firm that acquires competitive product and moves it to their own factories, the above mandate often works. But the majority of acquisitions involve the blending of cultures, and if a common culture is not defined, the firm will lose momentum. Culture always trumps strategy.

An Alternative Approach: Make Understanding and Developing the New Culture a Priority.  There are two approaches that we have used when combining cultures. You can take time to understand the new culture and blend in those elements that strengthen the whole, or you can use the GE model and subsume the new firm into your culture. Both approaches can work, and each has its advantages.

By understanding the new culture, especially the 20% that is truly unique, you may find values and practices that belong in the combined organization. You will ease the transition for incoming staff and increase the chance of retaining people from the new firm. The downside of this approach is speed; it takes more time to integrate two cultures. If you choose to subsume a firm into your culture, you gain speed but also send a not so subtle message that the acquiring company is fully in charge and new employees need to “get on board.” If the acquiring culture has been carefully nurtured over time, then this may be a workable approach, provided the process of bringing people into the new culture is carefully orchestrated.

Mistake #6) Rapidly Leverage Increased Market Power with New Supplier and Customer Agreements.

There is a certain hubris that can take hold when companies combine with their competitors. This is especially true when the Acquisition falls beneath the HSR (Hart Scott Rodino) limits, and the companies are in a niche market where they now believe they have increased pricing power with customers and suppliers. This hubris may be seen in aggressive post-merger price increases and tough negotiations with suppliers for cost downs.

The initial financial gains from these actions can be material, but in our experience, the long-term impact is often harmful to these relationships.

An Alternative Approach: Improve Service, Capabilities, and Innovation before you change Terms/Prices with Customers or Suppliers.  The approach we advocate with both customers and suppliers for newly merged firms is to ensure that there is a clear understanding internally of the new value proposition for clients and partners and most important, an ability to demonstrate it with clients in the field. Then you are in a position to carefully consider how to leverage your new market power to create win-win relationships with customers and suppliers.

Mistake #7) Transition the Company onto a new Finance and IT Systems early on.

There are a number of larger firms, for example ITW and Cisco Systems, with dedicated staffs and well-oiled processes for systems integrations. These firms have a process for absorbing and integrating acquired companies that has been developed over many years. Some middle market firms look to emulate them, believing that acquired companies should quickly adopt their processes for integrating financial and ERP/CRM systems.

The challenge with this mindset is that middle market firms rarely have IT project people who are capable of managing the complexities of moving a new company to a different application environment. The one exception would be when both firms are on identical GL and ERP systems, and the data in both systems is known to be “clean.” However, in our experience, we have never encountered a firm where all those stars aligned and a clean transition could be easily performed by internal IT staff. Quite the opposite is true. We have witnessed several cases where firms were brought to their knees by systems transitions that were initially thought to be “seamless.” The bottom line is that any system transition for a middle market company is likely to be disruptive and should be approached with caution.

An Alternative Approach: Unless you believe the acquired systems are likely to fail, delay the IT integration.  In most companies today, the financial health and continued operation of the business depends in some measure on the availability of data. We do not advocate setting an arbitrary deadline for system integration until an assessment of all systems has been completed. There are other integration tasks that are more immediate and more easily recoverable if changes need to be made.

It is also possible that systems integration, even for the long term, may not be the best course. We have seen examples of combined companies successfully running multiple systems for years, with the caveat that they adopt consistent KPIs, reporting, and tools to integrate their Business reporting and financial statements.

Closing Thoughts

Successfully integrating multiple companies is a very complex initiative, involving both art and science that is not well understood by many business leaders. This complexity explains why acquisitions often underperform the investment thesis that led to their purchase. Fortunately, there are well understood practices, including those we have covered, that dramatically increase the odds of a successful integration.

If you need help planning for an integration, or perhaps fixing one that didn’t go as planned, contact us today.