Integrating Companies After an Acquisition: How to Have A Powerful Strategy
Kison Patel
CEO and Founder of DealRoom
Kison Patel
Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.
CEO and Founder of DealRoom
DealRoom is regularly asked by companies that have recently conducted transactions about how to integrate an acquired company.
The answer depends to a great extent on how well the transaction itself was conducted.
Integrating a company after an acquisition (or post-merger) is not a process in itself, so much as an integral part of the entire acquisition.
Below, we look at some of the issues surrounding integration, and why, if you have just closed a transaction, you should utilize the same project management tools used to navigate the deal to closing.
What is Post-Acquisition Integration?
Post-acquisition integration is the process of integrating the operations of two companies, which have partaken in an acquisition. The aim of the integration phase is to ensure that maximum value is extracted from the acquisition. The same process is sometimes referred to as post-merger integration.
Why is Integration so Important to M&A?
Integration is one of the biggest value generators in M&A.
Ongoing research by consulting firm KPMG suggests that 70% of the value erosion for deals that fail, occurs at the post-integration phase.
The primary objective of acquisition integration is to generate cost, capital, and revenue synergies. At the time of closing, most CEOs will talk about the synergies they expect to generate from the transaction (synergies really being a synonym for ‘deal value creation’). These synergies are created during the acquisition integration.
A common misconception about integration - and probably a trap that many acquirers fall into - is that acquisition integration is all about changing everything at the acquired company to match that of the acquirer.
Instead, its goal is to find the solution that adds the most value to the newly merged entity.
Typically, that does mean the target firm making changes to assimilate with the buyer, but not always.
For example, in the case of Morrisons’ takeover of Safeway in 2004 (more of which below), the acquirer was still using paper-based accounting and management systems.
The acquisition gave it an opportunity to move into the 21st century and begin using CRM and ERP systems (hint: it didn’t).
Similarly, when Disney acquired Pixar, it used it as an opportunity to integrate CGI-based animation across its business rather than force traditional forms of animation onto the Pixar team.
Aspects Impacting the Eventual Performance of an Acquisition
It’s important to underline that integration is just one (extremely important) component of a successful acquisition.
If the process has been a shambles until closing (poor company selection, overpaying for the acquisition, poor marketing timing, etc.), there’s not a whole lot that even a well implemented integration phase can do to save a transaction.
The business environment over the last two decades has significantly changed, but the M&A integration process has been stuck in the 1990s.
Thus, the whole acquisition phase has to be managed well, according to Nitin Kumar.
This being said, it’s important to finish integration with certain components in place to ensure that the company is in a good position to generate long-term value:
Strong management (and staff)
The best integrations take the best people from both companies - the A-gamers - and make them part of the new company.
This is a tricky issue to maneuver, as often, the best people aren’t recognized until put through a challenge that shows them in a certain light.
The acquisition of a new company will probably mean that the buyer’s existing strategy will have to be adapted at the very least, if not changed entirely.
This then places an onus on management to develop a new strategy that best leverages the strengths of the new entity.
Quickly getting costs under control - operational and costs associated with the integration such as redundancies - is essential to the company generating value after the deal has closed.
Communication
Keeping all stakeholders informed will at least mean that the process has been transparent. Communicating how the deal is progressing post-closing is good for suppliers, customers, shareholders, and staff.
Planning the Post Integration Strategy
As with any phase of the M&A process, the exact steps in how to plan a post-merger integration can vary, but the below steps are usually applicable to most integrations:
Define the Goals
What are the realistic synergies that you’re looking to achieve?
Acquire Tools
As mentioned elsewhere, DealRoom is a highly effective management tool designed for end-to-end M&A processes.
But it is just one of many. You will need technology for a proper integration phase - that much is a certainty.
Don't take just our word for it - check out the ways DealRoom has been able to help hundreds of companies with their M&A.
Put a Team in Place
This will involve managers from each department, who will identify the ways in which their department plays into the bigger corporate goals of the integration. Check out this resource to learn how to achieve the right integration team structure.
Identify the goals for each functional work stream
Some goals will be cross-departmental(e.g. bringing target company customers onto the buyer’s CRM system) and others will be intra-functional.
The goal of this stage is to develop the workstream so that each knows what they’re trying to achieve and in what timeframe.]
Assign a change management leader
The best integrations always involve integration specialists. Someone that is specialized in identifying the issues before they arise. Hire one as soon as possible. It will be an investment that pays off massively over the long-term. You can learn how to overcome change management challenges here.
How does DealRoom Help with Company Integration?
If M&A is a complex project management process, then integration is level-pegging with due diligence as the most difficult part of that process.
Like due diligence, it is absolutely essential that companies undertake the process software like DealRoom or an adequate alternative.
As this article has attempted to underline, there are so many moving parts to integration that it’s completely impractical to attempt to achieve it without using technology.
Why M&A Integrations Often Fail to Achieve the Predicted Level of Performance?
Let’s make the assumption that everything has gone smoothly to deal closing.
The buyer agreed to a consideration for the target company that gave it the potential to generate considerable value in the years ahead. Strategically, the deal has a solid strategic logic underpinning it.
And the market is moving in the right direction.
Given these factors, why wouldn’t the deal achieve its predicted level of performance?
Simply put, buyers underestimate how different the two companies are.
As a general rule, the smoother the initial phases of the acquisition have gone, the greater the inclination to make this underestimation. This is a cognitive trap of M&A that destroys value across thousands of deals every year.
Below, we list some of the factors that reduce the possibility of the transaction achieving the goals that the buyer was aiming for:
Speed
Integration is better done quickly.
Research conducted by McKinsey indicates that deals are 2.6 times more likely to succeed - and deliver 40% more total return to shareholders - if the company meets its synergy targets within 24 months of the transaction closing, compared with taking four years to achieve them.
Misplanning Synergies
There’s a good chance that many of the synergies the buyer thinks that they can achieve can’t be. But by the same token, there’s also a good chance that there are synergies they’re not recognizing within the deal.
Not getting a handle on these distinctions will destroy value within the deal.
Here at DealRoom, we make sure to offer dealmakers a streamlined synergy tracking and realization process.
Operational Missteps
Operational missteps are never going to add value, whether you’re in integration mode or not.
Unfortunately, there are so many more opportunities to make missteps during integration.
HR blunders, IT integration, and misaligned strategies (short-term and long-term) are just some of the issues that dodge integrations.
Culture
So much has been written about culture that it’s fair to say that most buyers are keen to make it an important part of their agenda.
But putting it on the agenda and truly understanding it are two different things.
Investing in a change manager is usually a solid investment choice.
The post-acquisition phase of the deal that brought UK supermarket chains Morrisons together with Safeway is a case study of how not to integrate an acquisition.
Morrisons was founded in 1899 and shortly after it turned 100 years old, it was still a regional, if highly profitable, discount supermarket business based mostly in England’s industrial north.
In March 2004, it announced that it was acquiring Safeway, a more upmarket offering whose stores were mostly in the south of England in a £3bn deal. North of England added to the south of England equals a national chain, right? The new supermarket would have a national footprint with much better economies of scale.
What could go wrong?
Well, just about everything.
It’s important to note, that one of the issues that enabled Morrisons to take over Safeway was the fact that Safeway was growing sluggishly before the acquisition.
Its stores were too small to compete on a level with other leading supermarket chains, meaning that it couldn’t offer customers the same level of choice, leading to dampened sales growth.
The Lay-Off
This is relevant because when Morrisons, a smaller, but cash-rich chain acquired the much larger Safeway, it decided to turf out many of the managers they saw as being behind the chain’s malaise.
In total, they fired about 60 percent of Safeway’s corporate office staff, generating a feeling of alienation among those that remained.
But being a larger chain, these staff members were used to dealing with larger, more complex issues that Morrisons hadn’t encountered as a smaller, regional chain.
It had effectively just thrown a valuable chunk of in-house knowledge out the door, and the integration had already made its first major misstep.
Instead of generating synergies, the deal seemed to be generating profit warnings: Four in the first year.
The first was blamed on a decline in sales in Safeway’s stores.
The next two were blamed on Safeway’s accounting systems.
The fourth was put down to higher than expected costs from running parallel systems.
Next, the UK competition authority stipulated that 52 stores would have to be divested.
But the difficulties that Morrisons experienced in managing mid-sized stores for the first time with their tailored product ranges, meant that it ended up selling off closer to 150 stores in total.
Cultural issues were joined to the operational issues to exacerbate its problems.
Over a decade after the disastrous integration, Morrisons re-released the Safeway brand because it said it retained ‘residual fondness.’
Not enough residual fondness: In 2021, the chain wasacquired by a private equity firm and taken private after 54 years on the London Stock Exchange. The final insult for an integration that never really was.
Conclusion
In retrospect, the term ‘post-merger integration’ (or post-acquisition integration) may be misleading: Integration is something that should be on a buyer’s agenda as soon as they express interest in an acquisition.
Any shortlist of target companies should always consider ‘how well can any of these companies be integrated?’ Upon realizing the complex challenges that integration involves, the companies that use DealRoom for the acquisition will often end up using it even more for their integrations.
Post-acquisition integration is the process of integrating the operations of two companies, which have partaken in an acquisition. The aim of the integration phase is to ensure that maximum value is extracted from the acquisition. The same process is sometimes referred to as post-merger integration.
DealRoom is regularly asked by companies that have recently conducted transactions about how to integrate an acquired company.
The answer depends to a great extent on how well the transaction itself was conducted.
Integrating a company after an acquisition (or post-merger) is not a process in itself, so much as an integral part of the entire acquisition.
Below, we look at some of the issues surrounding integration, and why, if you have just closed a transaction, you should utilize the same project management tools used to navigate the deal to closing.
What is Post-Acquisition Integration?
Post-acquisition integration is the process of integrating the operations of two companies, which have partaken in an acquisition. The aim of the integration phase is to ensure that maximum value is extracted from the acquisition. The same process is sometimes referred to as post-merger integration.
Why is Integration so Important to M&A?
Integration is one of the biggest value generators in M&A.
Ongoing research by consulting firm KPMG suggests that 70% of the value erosion for deals that fail, occurs at the post-integration phase.
The primary objective of acquisition integration is to generate cost, capital, and revenue synergies. At the time of closing, most CEOs will talk about the synergies they expect to generate from the transaction (synergies really being a synonym for ‘deal value creation’). These synergies are created during the acquisition integration.
A common misconception about integration - and probably a trap that many acquirers fall into - is that acquisition integration is all about changing everything at the acquired company to match that of the acquirer.
Instead, its goal is to find the solution that adds the most value to the newly merged entity.
Typically, that does mean the target firm making changes to assimilate with the buyer, but not always.
For example, in the case of Morrisons’ takeover of Safeway in 2004 (more of which below), the acquirer was still using paper-based accounting and management systems.
The acquisition gave it an opportunity to move into the 21st century and begin using CRM and ERP systems (hint: it didn’t).
Similarly, when Disney acquired Pixar, it used it as an opportunity to integrate CGI-based animation across its business rather than force traditional forms of animation onto the Pixar team.
Aspects Impacting the Eventual Performance of an Acquisition
It’s important to underline that integration is just one (extremely important) component of a successful acquisition.
If the process has been a shambles until closing (poor company selection, overpaying for the acquisition, poor marketing timing, etc.), there’s not a whole lot that even a well implemented integration phase can do to save a transaction.
The business environment over the last two decades has significantly changed, but the M&A integration process has been stuck in the 1990s.
Thus, the whole acquisition phase has to be managed well, according to Nitin Kumar.
This being said, it’s important to finish integration with certain components in place to ensure that the company is in a good position to generate long-term value:
Strong management (and staff)
The best integrations take the best people from both companies - the A-gamers - and make them part of the new company.
This is a tricky issue to maneuver, as often, the best people aren’t recognized until put through a challenge that shows them in a certain light.
The acquisition of a new company will probably mean that the buyer’s existing strategy will have to be adapted at the very least, if not changed entirely.
This then places an onus on management to develop a new strategy that best leverages the strengths of the new entity.
Quickly getting costs under control - operational and costs associated with the integration such as redundancies - is essential to the company generating value after the deal has closed.
Communication
Keeping all stakeholders informed will at least mean that the process has been transparent. Communicating how the deal is progressing post-closing is good for suppliers, customers, shareholders, and staff.
Planning the Post Integration Strategy
As with any phase of the M&A process, the exact steps in how to plan a post-merger integration can vary, but the below steps are usually applicable to most integrations:
Define the Goals
What are the realistic synergies that you’re looking to achieve?
Acquire Tools
As mentioned elsewhere, DealRoom is a highly effective management tool designed for end-to-end M&A processes.
But it is just one of many. You will need technology for a proper integration phase - that much is a certainty.
Don't take just our word for it - check out the ways DealRoom has been able to help hundreds of companies with their M&A.
Put a Team in Place
This will involve managers from each department, who will identify the ways in which their department plays into the bigger corporate goals of the integration. Check out this resource to learn how to achieve the right integration team structure.
Identify the goals for each functional work stream
Some goals will be cross-departmental(e.g. bringing target company customers onto the buyer’s CRM system) and others will be intra-functional.
The goal of this stage is to develop the workstream so that each knows what they’re trying to achieve and in what timeframe.]
Assign a change management leader
The best integrations always involve integration specialists. Someone that is specialized in identifying the issues before they arise. Hire one as soon as possible. It will be an investment that pays off massively over the long-term. You can learn how to overcome change management challenges here.
How does DealRoom Help with Company Integration?
If M&A is a complex project management process, then integration is level-pegging with due diligence as the most difficult part of that process.
Like due diligence, it is absolutely essential that companies undertake the process software like DealRoom or an adequate alternative.
As this article has attempted to underline, there are so many moving parts to integration that it’s completely impractical to attempt to achieve it without using technology.
Why M&A Integrations Often Fail to Achieve the Predicted Level of Performance?
Let’s make the assumption that everything has gone smoothly to deal closing.
The buyer agreed to a consideration for the target company that gave it the potential to generate considerable value in the years ahead. Strategically, the deal has a solid strategic logic underpinning it.
And the market is moving in the right direction.
Given these factors, why wouldn’t the deal achieve its predicted level of performance?
Simply put, buyers underestimate how different the two companies are.
As a general rule, the smoother the initial phases of the acquisition have gone, the greater the inclination to make this underestimation. This is a cognitive trap of M&A that destroys value across thousands of deals every year.
Below, we list some of the factors that reduce the possibility of the transaction achieving the goals that the buyer was aiming for:
Speed
Integration is better done quickly.
Research conducted by McKinsey indicates that deals are 2.6 times more likely to succeed - and deliver 40% more total return to shareholders - if the company meets its synergy targets within 24 months of the transaction closing, compared with taking four years to achieve them.
Misplanning Synergies
There’s a good chance that many of the synergies the buyer thinks that they can achieve can’t be. But by the same token, there’s also a good chance that there are synergies they’re not recognizing within the deal.
Not getting a handle on these distinctions will destroy value within the deal.
Here at DealRoom, we make sure to offer dealmakers a streamlined synergy tracking and realization process.
Operational Missteps
Operational missteps are never going to add value, whether you’re in integration mode or not.
Unfortunately, there are so many more opportunities to make missteps during integration.
HR blunders, IT integration, and misaligned strategies (short-term and long-term) are just some of the issues that dodge integrations.
Culture
So much has been written about culture that it’s fair to say that most buyers are keen to make it an important part of their agenda.
But putting it on the agenda and truly understanding it are two different things.
Investing in a change manager is usually a solid investment choice.
The post-acquisition phase of the deal that brought UK supermarket chains Morrisons together with Safeway is a case study of how not to integrate an acquisition.
Morrisons was founded in 1899 and shortly after it turned 100 years old, it was still a regional, if highly profitable, discount supermarket business based mostly in England’s industrial north.
In March 2004, it announced that it was acquiring Safeway, a more upmarket offering whose stores were mostly in the south of England in a £3bn deal. North of England added to the south of England equals a national chain, right? The new supermarket would have a national footprint with much better economies of scale.
What could go wrong?
Well, just about everything.
It’s important to note, that one of the issues that enabled Morrisons to take over Safeway was the fact that Safeway was growing sluggishly before the acquisition.
Its stores were too small to compete on a level with other leading supermarket chains, meaning that it couldn’t offer customers the same level of choice, leading to dampened sales growth.
The Lay-Off
This is relevant because when Morrisons, a smaller, but cash-rich chain acquired the much larger Safeway, it decided to turf out many of the managers they saw as being behind the chain’s malaise.
In total, they fired about 60 percent of Safeway’s corporate office staff, generating a feeling of alienation among those that remained.
But being a larger chain, these staff members were used to dealing with larger, more complex issues that Morrisons hadn’t encountered as a smaller, regional chain.
It had effectively just thrown a valuable chunk of in-house knowledge out the door, and the integration had already made its first major misstep.
Instead of generating synergies, the deal seemed to be generating profit warnings: Four in the first year.
The first was blamed on a decline in sales in Safeway’s stores.
The next two were blamed on Safeway’s accounting systems.
The fourth was put down to higher than expected costs from running parallel systems.
Next, the UK competition authority stipulated that 52 stores would have to be divested.
But the difficulties that Morrisons experienced in managing mid-sized stores for the first time with their tailored product ranges, meant that it ended up selling off closer to 150 stores in total.
Cultural issues were joined to the operational issues to exacerbate its problems.
Over a decade after the disastrous integration, Morrisons re-released the Safeway brand because it said it retained ‘residual fondness.’
Not enough residual fondness: In 2021, the chain wasacquired by a private equity firm and taken private after 54 years on the London Stock Exchange. The final insult for an integration that never really was.
Conclusion
In retrospect, the term ‘post-merger integration’ (or post-acquisition integration) may be misleading: Integration is something that should be on a buyer’s agenda as soon as they express interest in an acquisition.
Any shortlist of target companies should always consider ‘how well can any of these companies be integrated?’ Upon realizing the complex challenges that integration involves, the companies that use DealRoom for the acquisition will often end up using it even more for their integrations.
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