How to Create M&A Integration Strategies Suited for Modern Day Business Environments
It goes without saying, the business landscape has changed greatly over the last two decades, but integration strategy, planning, and execution remain in the 1990s because they are all too linear in a world that is constantly changing. Further complicating this situation are the many contradicting shifts that have occurred.
Consider, for instance, how brick and mortar companies are buying into e-commerce and digital companies, while at the same time, you have a powerhouse such as Amazon entering the brick and mortar space with its Whole Foods acquisition. The takeaway here is value creation has shifted. Consequently, value creation must be malleable and generated even during times of uncertainty, thus affecting integration practices.
Current M&A Integration Challenges & Trends
With the above premise in mind, there are a couple of major challenges currently facing integration and a few trends practitioners must be cognizant of:
- Types of deals have changed - Types of deals and how we define these deals have changed. For instance, the definition of a serial acquirer has been adapted. Consequently, acquirers cannot have a single playbook or put too much value in one approach. Additionally, the term “serial acquirer” is no longer synonymous with a company that has strong integration practices and can extract maximum deal value.
- Functional Integration is outdated - On a related note, functional integration, once highly regarded, is no longer as powerful a tool because it cannot be scaled.
Additionally, three other industry trends are of note as companies work to improve integration practices in this ever-changing landscape:
- The importance of determining IMO by value drivers - This is a nonnegotiable practice; IMO needs to be established by value drivers.
- Increased emphasis and effort on diligence - This is a new trend most likely due to the ever-growing presence of technology in our world. With technology, stakeholders want to know up front if the technology is secure, stable, and scalable. Where is the value in the technology truly unlocked?
- The importance of customer diligence - The focus here is on the commercial market and how one quantifies the value synergies. It is critical to note that value does not equal synergy. Here stakeholders need to realize again that a playbook does not create value and that synergies do not automatically transform into stakeholder value.
Reasons Deals Go Awry in 2019:
While mature companies understand integration diligence needs to happen earlier and they need to operate in a more Agile way, deals can still fail. The following are four areas where modern businesses tend to make mistakes that hurt their deals:
- Lack of structure to the cross-functional model -There is a lack of definitive governance structures for cross-functional models. All governance models are built for the functional side, which creates problems.
- Misaligned incentives -There is often a grey area surrounding who is responsible for the deal’s success and the creation of shareholder value. There does appear to be a growing acknowledgement of the important role team incentives can play in ensuring success, but the alignment of business units and their respective ownership and accountability are still a bit patchy in many integrations.
- Key players do not know the business well enough - People often think they understand the business they are in, but commercial integration doesn’t always go into the nuts and bolts of the company. Business units’ maturity, or lack thereof, also comes into play here.
- Underestimated ability to execute on revenue synergy - There is a significant problem related to revenue synergies when product and sales teams are not in unison. Take for example the challenge a global Fortune 500 company faced when it acquired a company whose sales force was structured regionally and managed by regional executives. These salespeople had no added incentive to focus on selling the new company’s global products and services. Within this deal, there were underestimated levels of revenue synergy (i.e. pricing and customer experience). Overall, a critical takeaway here is that revenue synergy has to be more of a science and less of an art. Specifically, revenue synergies need to come in three waves - not all at once. First, you can begin integrating before actual integration through alignment; alignment gives you momentum as you then think about issues such as product bundling and pricing. Finally, you’ll want to consider new product innovation, which takes a bit more time. You simply cannot have all three waves taking place at once if you want a smooth integration.
Dream Integration Teams:
So with these challenges and trends in mind, who should be on your dream integration team? First we must acknowledge here that the skills of integration players have changed; we no longer look to process people for integration, but rather we look for people who understand value creation - from value protection, to value capture, to value creation.
Additionally, you need players who are knowledgeable of the business, operationally strong, and possess strong IMO and project management skills. Obviously, it is hard to get all of these skills in one player; therefore, you want to take a cohort of individuals with these skills and put them through integration training. Ultimately, you should end up with players who are product experts, specialized in pricing and branding, and sales and marketing.
Of course, you’ll also want to round out your team with Human Resources, although not necessarily the operation side of HR, rather the organizational development side of HR. It should be noted not all of these players will need to be full time members of the team.
Change Management - Beyond the “Touchy Feely Stuff:”
To say change management is paramount is beyond obvious. More and more companies are taking notice of the importance of change management, which is great, but change management needs to go beyond what we like to call the “touchy feely stuff” - change curves, HR presentations, etc.
First, you must size the change - get into the specifics of what exactly is changing - is it location, is it systems or processes, is it reporting relationships? Where is this change taking place? Is it in a business unit? Is it in a function? Is it in a geography? The magnitude of change needs to be measured with specificity so that you can design the right change interventions into your approach and plan for human capital, productivity, and deal value.
Change should be looked at not as an IMO lead process, but rather as an IMO governed process, which is facilitated by HR and led by the parties of the business unit; this is a shift from how change management has previously been run - usually it has been run by HR or the IMO unit.
One of the most pressing challenges related to change management is culture. While it takes years of gradual, well-planned changes to transform and create culture, the right first step can support long-term sustainable shifts. Best practices prove that you should not initially look at changing culture (culture is not inherently right or wrong), rather you should isolate the top three behaviors that need to change in both organizations, and both executives need to combine forces and align these behaviors.
Integration will continue to evolve; going forward we expect the following three things to happen:
- Agile principles will become more prominent in the world of M&A
- Artificial intelligence will automate certain parts of integration
- Staffing and configuration will shift from a functional approach to a cross- functional/value driven approach
The question, then, becomes how do you develop the capability to execute under uncertainty and preserve and create value for deals? Companies must take a step back and see where their integration processes are with respect to what they’re buying; they must also truly understand what type of acquirer they are and what their goals are.