Degree of Integration: Strategies for Optimal Company Merging
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 always keen to underline the importance of a well planned, well structured, and well executed post-merger integration phase.
But integration teams should beware of the maxim: to a man with a hammer, everything looks like a nail.
That is to say, not everything needs the full integration treatment.
Some issues, resources, and processes are better left alone.
This is the focus of this article.
The integration spectrum, proposed by consulting firm Kearney, creates a framework for PMI practitioners to plan for the degree of integration necessary after a transaction (see below).
Kearney argues that the decision for a company about how much to integrate is almost as important as the decision to integrate itself.
Its hypothesis - one that DealRoom is fully aligned with - is ths that integrating involves balancing the need to merge operations with maintaining the value being generated by different components of the acquired company.
The four stages of the integration spectrum are:
Mentorship
The acquired company remains largely unintegrated, with only support functions such as payroll and administration being brought under the company umbrella. Above all, the value generation for the acquired company comes in the form of access to the resources of the acquirer. This form of integration works best in cases where the acquired company has something unique (i.e. a startup culture), which the buyer would only endanger by integrating.
Cooperation
Similar to mentorship but with more emphasis on shared learning and increased capability for both sides. A good example of this could be seen in a large, somewhat cumbersome technology firm acquiring a startup in an area like AI or XR (extended reality). The startup’s output could add value across the acquirer’s product and service line, but ideally, could continue to operate as before.
Targeted integration
A further step along the integration spectrum is targeted integration, which looks to integrate certain functions but not others. Unlike Mentorship and Cooperation, this does involve cultural integration - the acquired firm will become a fully fledged part of the buyer’s organization. What’s important is that value generating functions don’t change, however. For example - store branding or highly effective marketing practices.
Full integration
The thrust of this article - full integration of the two companies, where the differences between both soon become indistinguishable.
In a highly enlightening interview with DealRoom, John DeRusso, Director of Corporate Development Integration at Cisco, talks about this as well as a host of other aspects involved in successful PMI processes.
He says:
“There’s a cardinal rule in integration that says ‘do not destroy value.’ There’s a careful balancing act in integrating them as much as you can but not so much that you do harm. How integrated is too integrated is the question the governance body deals with, because they are responsible for the end state and because they’ve got representation from the acquired company and also from the acquirer.”
Assessing Integration Levels
Assessing the integration level required should be one of the core tasks of integration planning.
The PMI team needs to take data and insights about the target company’s operations obtained at the due diligence phase and decide to what extent, if any, each part of those operations needs to be integrated.
As a broad rule of thumb, anything that generates value should be maintained in its current state, or integrated with extreme caution.
The vision for the merger will drive this process, but the PMI teams needs to practice caution. Creating a vision where the target company performs tasks in the same way as the parent company, when far more value can be generated be continuing ‘as is’ is a shortcut to value destruction.
And despite the best of intentions, PMI teams - in their merited desire to merge two companies quickly - often fall into this trap.
Things to consider here include:
How much value is being generated by an activity or resource?
For example, when a company’s value is derived from its brand equity, it makes little sense to change that brand to the parent company.
What is the value to be generated by integrating?
Integration for the sake of integration is value destructive. If the cost of integrating some aspect of the target company is higher than the benefits, it should be left alone.
Use emotional intelligence.
The PMI phase is principally about winning hearts and minds. If a change risks leading to a mass exodus of valuable talent - let’s say a startup culture moving to a blue chip technology company - postpone it. The short-term value is greater by focusing on a different part of integration.
In the next subsection, we talk about the different aspects that should play into the degree of integration required.
5 Aspects That Effect the Degree of Company Integration
This list is indicative, but not exhaustive.
It should provide food for thought for any PMI teams considering the degree to which target companies should be integrated.
Culture
While some level of cultural integration is necessary, particularly around a shared vision, forcing a complete cultural overhaul can lead to employee disengagement and loss of unique cultural strengths.
Although identifying areas of operational synergy, such as shared services or technology platforms can add value, not all operations should be fully integrated. Some degree of operational autonomy might be necessary to maintain the agility and specialized capabilities that give each company its market advantage.
Leadership/Governance
A point which is often overlooked in integration is that M&A offers an opportunity to develop leadership diversity and even to decentralize decision-making to some extent. This approach ensures that innovative ideas and unique management practices continue to thrive post-merger.
Regulatory considerations might limit the extent of integration, especially in industries with stringent compliance requirements. In such cases, maintaining some operational separation can ensure that each entity continues to meet specific regulatory standards without compromising overall strategic alignment.
Market overlap
While market overlaps might suggest a potential for full integration, it's often beneficial to maintain separate brand identities or customer relationship strategies. This approach helps in preserving established customer loyalties and market segments that are critical for sustained value generation.
Kearney argues that the decision for a company about how much to integrate is almost as important as the decision to integrate itself.
Its hypothesis - one that DealRoom is fully aligned with - is ths that integrating involves balancing the need to merge operations with maintaining the value being generated by different components of the acquired company.
DealRoom is always keen to underline the importance of a well planned, well structured, and well executed post-merger integration phase.
But integration teams should beware of the maxim: to a man with a hammer, everything looks like a nail.
That is to say, not everything needs the full integration treatment.
Some issues, resources, and processes are better left alone.
This is the focus of this article.
The integration spectrum, proposed by consulting firm Kearney, creates a framework for PMI practitioners to plan for the degree of integration necessary after a transaction (see below).
Kearney argues that the decision for a company about how much to integrate is almost as important as the decision to integrate itself.
Its hypothesis - one that DealRoom is fully aligned with - is ths that integrating involves balancing the need to merge operations with maintaining the value being generated by different components of the acquired company.
The four stages of the integration spectrum are:
Mentorship
The acquired company remains largely unintegrated, with only support functions such as payroll and administration being brought under the company umbrella. Above all, the value generation for the acquired company comes in the form of access to the resources of the acquirer. This form of integration works best in cases where the acquired company has something unique (i.e. a startup culture), which the buyer would only endanger by integrating.
Cooperation
Similar to mentorship but with more emphasis on shared learning and increased capability for both sides. A good example of this could be seen in a large, somewhat cumbersome technology firm acquiring a startup in an area like AI or XR (extended reality). The startup’s output could add value across the acquirer’s product and service line, but ideally, could continue to operate as before.
Targeted integration
A further step along the integration spectrum is targeted integration, which looks to integrate certain functions but not others. Unlike Mentorship and Cooperation, this does involve cultural integration - the acquired firm will become a fully fledged part of the buyer’s organization. What’s important is that value generating functions don’t change, however. For example - store branding or highly effective marketing practices.
Full integration
The thrust of this article - full integration of the two companies, where the differences between both soon become indistinguishable.
In a highly enlightening interview with DealRoom, John DeRusso, Director of Corporate Development Integration at Cisco, talks about this as well as a host of other aspects involved in successful PMI processes.
He says:
“There’s a cardinal rule in integration that says ‘do not destroy value.’ There’s a careful balancing act in integrating them as much as you can but not so much that you do harm. How integrated is too integrated is the question the governance body deals with, because they are responsible for the end state and because they’ve got representation from the acquired company and also from the acquirer.”
Assessing Integration Levels
Assessing the integration level required should be one of the core tasks of integration planning.
The PMI team needs to take data and insights about the target company’s operations obtained at the due diligence phase and decide to what extent, if any, each part of those operations needs to be integrated.
As a broad rule of thumb, anything that generates value should be maintained in its current state, or integrated with extreme caution.
The vision for the merger will drive this process, but the PMI teams needs to practice caution. Creating a vision where the target company performs tasks in the same way as the parent company, when far more value can be generated be continuing ‘as is’ is a shortcut to value destruction.
And despite the best of intentions, PMI teams - in their merited desire to merge two companies quickly - often fall into this trap.
Things to consider here include:
How much value is being generated by an activity or resource?
For example, when a company’s value is derived from its brand equity, it makes little sense to change that brand to the parent company.
What is the value to be generated by integrating?
Integration for the sake of integration is value destructive. If the cost of integrating some aspect of the target company is higher than the benefits, it should be left alone.
Use emotional intelligence.
The PMI phase is principally about winning hearts and minds. If a change risks leading to a mass exodus of valuable talent - let’s say a startup culture moving to a blue chip technology company - postpone it. The short-term value is greater by focusing on a different part of integration.
In the next subsection, we talk about the different aspects that should play into the degree of integration required.
5 Aspects That Effect the Degree of Company Integration
This list is indicative, but not exhaustive.
It should provide food for thought for any PMI teams considering the degree to which target companies should be integrated.
Culture
While some level of cultural integration is necessary, particularly around a shared vision, forcing a complete cultural overhaul can lead to employee disengagement and loss of unique cultural strengths.
Although identifying areas of operational synergy, such as shared services or technology platforms can add value, not all operations should be fully integrated. Some degree of operational autonomy might be necessary to maintain the agility and specialized capabilities that give each company its market advantage.
Leadership/Governance
A point which is often overlooked in integration is that M&A offers an opportunity to develop leadership diversity and even to decentralize decision-making to some extent. This approach ensures that innovative ideas and unique management practices continue to thrive post-merger.
Regulatory considerations might limit the extent of integration, especially in industries with stringent compliance requirements. In such cases, maintaining some operational separation can ensure that each entity continues to meet specific regulatory standards without compromising overall strategic alignment.
Market overlap
While market overlaps might suggest a potential for full integration, it's often beneficial to maintain separate brand identities or customer relationship strategies. This approach helps in preserving established customer loyalties and market segments that are critical for sustained value generation.
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