Rapidly Integrating an Acquisition

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Note:  This is a follow-up to an earlier post on preventing an acquisition from becoming a distraction (located here).

Over the last decade, acquisitions have become very common in the world of business.  With all the collective experience gained from the enormous amount of M&A activity that has taken place, you would think the process of integrating a newly acquired company would have been perfected.  Unfortunately, this is not the case.  Studies continue to show that up to 70% of M&As fail to meet expectations in terms of financial performance.

There are a variety of reasons for making an acquisition, but all relate in some way to benefiting the acquiring organization.  With this in mind, the longer it takes to integrate the newly acquired company, the longer it will take to reap the benefits of the transaction.  The process of assimilating the new organization needs to be planned and executed with at least as much care as the due diligence process, and quickly enough to prevent the acquisition from becoming a distraction to the business.

The Focus of the Process

Integrating an acquisition requires focus on the technical (processes, systems, etc.) and human elements.  Although the technical element often gets most of the attention, it is the human/cultural issues that cause most of the problems.  In fact, the majority of technical issues could be handled much more easily if enough focus is given to the human element of the integration process.

This post will deal with the human aspects of acquisition integration with specific attention to two areas:  fear and alignment.  With serious and proper focus on these areas, integration can be done quickly and with surprisingly few problems.

Fear

Fear is an obvious by-product of any acquisition.  Mergers almost always lead to job losses, and it is most often the acquired company that loses the most jobs.  With this in mind, the integration plan needs to include honest and open communication about potential job cuts, as well as some type of bonus for those who stay until the end of the process.  Ignoring this subject will serve to demotivate employees, break down teamwork, and increase the length of time it takes for full integration.

Alignment

Alignment refers to indoctrinating those in the newly acquired organization with the purpose, values, and focus of the parent company.  Indoctrinating the new team members with this focus clarifies expectations quickly by communicating to the employees of the acquired company that they are now part of a new, larger, and different organization.

The Integration Plan

Just like any change initiative, integrating the acquisition needs to follow a carefully developed plan with a responsible person leading the effort.  The process must include frequent reviews with senior leaders to assure that problems are addressed quickly and effectively.

Specifics of the plan will differ depending on the size, type and culture of the company, but need to include the following components:

1.  Indoctrination with Purpose & Values (Alignment)
   
   Time must be spent discussing the fundamental purpose of the company (mission and vision) and how they will operate (values).  Every organization is different and integration will most likely involve some type of shift in purpose and values.  I have found that this is best accomplished in two phases.  First in a general message from a senior leader (preferably a C-level executive), and followed up by smaller group discussions led by a function leader and HR representative.
   
   
2. Leadership Coaching (Alignment)
   
   To protect the organization's values, it is important to work with leaders at all levels of the acquired company to assure they possess the values of the acquiring company.  A good amount of coaching will most likely be required to give those who don't display the values a chance to modify their behavior and leadership style.  Obviously, some people will need to be replaced when it is determined that they are not capable, or do not desire, to change their style to fit in the new organization.
   
   
3. Employee Survey (Fear)
   
   A survey of existing and new employees can provide information about the fears, concerns, frustrations, belief in leadership & direction, and confidence in the future as related to the acquisition.  To be effective, however, people must believe in the confidentiality of the survey and that action will be taken based on its results.

Remember the People

The people issues increase the complexity of successfully leading an organization.  It is a difficult and never-ending responsibility to keep people united toward a common purpose in a way that leads to continual growth in revenues and earnings.  This complexity grows exponentially when a new group of people with a unique set of values and concerns are added to the mix.

Recognizing the complexity of the process and attending to the human elements of integration - specifically, fear and alignment - can greatly increase the speed and potential benefit of the acquisition.

When an Acquisition Becomes a Distraction

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With business finally showing signs of recovery, the amount of M&A activity is sure to pick up again as money becomes more readily accessible.  We have already begun to see the increase with large corporations including ExxonMobil's acquisition of XTO Energy, Stanley Works purchase of Black & Decker, and Google's announcement to purchase AdMob.

Small company M&A activity has also begun to increase and I expect the trend will continue as the level of confidence in the future grows.  Although true of any size company, small companies must be especially careful that an acquisition does not become such a distraction that it pulls management attention away from running the organization, as a whole.

Fighting the Distraction

Since an acquisition ties up a lot of a company's capital, there  is often a great deal of pressure to assure the newly acquired company becomes profitable as quickly as possible.  Unfortunately, it is common for a number of problems that were undiscovered during the due diligence process to surface fairly soon after the acquisition takes place.  These problems have a tendency to become a drain on management resources, and can easily pull the attention of the company's senior leaders away from running the business.

Organizations do not run themselves.  Even with the most successful organizations, bad habits can creep in that will lead to long-term problems if not dealt with quickly.  Since senior leaders in small companies tend to be much closer to the organization's activities than do those in medium and large companies, they often have more of a direct effect on the company's operation than they realize.  A long-term distraction - like an acquisition requiring a lot of attention - can fundamentally change the parent organization before the leaders realize it has happened.

What to Do

If at all possible, attempt to understand the critical issues before the acquisition takes place.  For a variety of reasons, this is not always possible, so it is important to assess the acquired company quickly to learn about the problems that can prevent or delay success.

Once the issues are understood, it is critical for the leader to assign responsibilities and clarify expectations quickly to keep from getting too wrapped up in the issues.  There needs to be frequent updates about the progress in addressing the issues so action can be taken quickly to keep the changes on track.

Dealing with an acquisition without ignoring the overall business may require temporarily assigning people and/or bringing in outside help for a short period of time to help with the transition.

There will obviously be situations where additional attention is warranted by senior leaders to put the merger back on track, but it is essential to remain sensitive to the possibility of distraction in the process.  Above all, never forget the company's fundamental purpose throughout the process and focus effort on integrating the acquisition in a way that does not compromise the mission and vision of the new, larger organization.  Doing this will greatly enhance your ability to assimilate the acquired company quickly and successfully.

Culture: The Critical M&A Element

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As we make our way to the other side of the economic downturn and confidence in the future increases, M&A activity will most likely return as a common fixture in the world of business. As this occurs, people involved in the process will make decisions like they always have, by evaluating deals in terms of market capitalization, cash flow, EBITDA, goodwill, etc. Unfortunately, many will ignore a critical element that can ultimately make or break the merger: culture.

Studies continue to show that a vast majority of mergers fail to ever achieve intended results. The intensity associated with the traditional due diligence process pretty well assures that the reason for failure does not lie in the financial analysis. Since culture is considered a subjective element, many people think it can't be effectively assessed. Whether assessed or not, though, cultural issues will appear after the deal is done, often resulting in excessive costs and stress that can greatly lengthen the time it takes for the merger to produce results - if not kill it altogether.

In my experience, I have found the cultural elements that interfere with a successful merger consist of the following:

• Misaligned values between the acquirer and acquiree;
• Misunderstood purpose of the new/larger enterprise;
• Poor communication with team members of the acquired company;
• Fear throughout the organization.
  

As a consultant, I spend a lot of time with companies helping to sort out problems encountered after an acquisition occurs. Too often, investors discover well after the merger takes place that there is ab enormous mismatch in culture between the acquiring company and the acquired company. And the longer these problems are allowed to continue, the more damage that is done to the organization as a whole.

What to Do

An organization, by definition, is a group of people who work together for a shared purpose in a continuing way. Along this line, a due diligence process is not diligent if it does not include a cultural assessment. Although there will never be a perfect match, an upfront cultural assessment will at least provide a picture of the issues to be faced after the merger takes place.

A cultural assessment consists of observation and a series of interviews with people at all levels of the organization to address the following topics:

• Values: Determine the values that exist within the target company (or whether a consistent set of values actually does exist). The objective is to understand how aligned the values are with the acquiring company and where problems may occur;
  
  
• Fear: Assess the level and causes of fear within the company. Fear will obviously exist in any organization that is being acquired, but the key is to discover whether it is a fundamental part of the organization's culture;
  
  
• Leadership Style: Ascertain whether the target company's leaders use a command and control or participative style of management. This will be important after the acquisition to give an idea of how much work will need to be done at the supervisor and management level;
  
  
• Teamwork: Understand the level of teamwork between people, departments, and facilities. If there are problems, it is important to understand what is interfering with people working together. Teamwork needs to be assessed at all levels within the organization;

As part of the cultural assessment process, it is also important to develop a plan to address the issues as quickly as possible after the acquisition. Cultural problems tend to grow exponentially - especially after a merger - and the longer the issues are allowed to continue, the greater the chance they will interfere with the performance of the new organization.

If a cultural assessment had not been performed before the merger, it is important to do one as quickly as possible afterward. Acquisitions generally consume an enormous amount of time and money, and the quicker the new organization begins performing as expected, the better for everyone involved. Unless the cultural issues are understood and corrected, however, the merger has no chance of living up to its potential.