The cash flows of the combined businesses will depend on how the businesses are run. Integration planning therefore has a direct input to valuation and, as already mentioned, the due diligence phase should include critical testing and challenging of the estimated synergies. These are often misjudged. Figure 4.1 shows the relationship between integration, valuation and due diligence.

Figure 4.1. The relationship between valuation, due diligence and the integration plan

Post-acquisition planning should address the most important issues which impact on valuation; the most important of these are where synergy benefits are going to come from and how they are going to be realised. A deal has the best chances of success when it helps create competitive advantage and therefore profit growth. Due diligence questions which have impact on value include:

Private equity investors develop detailed business plans with their management teams, which are effectively integration plans, before a deal is completed. Acquirers should do the same. These plans should work from the same financial forecasts as are used for the valuation.

Since there must be a connection between the strategic thinking behind an acquisition and the approach to its integration, it should be a short hop and a skip from acquisition strategy to the creation of a structured framework within which the assets of the acquired company (people, plant, processes, intellectual property) can be combined with those of the acquirer to generate the highest possible levels of return. The starting point for integration, therefore, must be the rationale for the deal in the first place.

The main reasons for acquiring are shown in Table 4.1. As can be seen, there are only five.

Being crystal-clear on the acquisition rationale and on what the acquisition is supposed to achieve will help define the broad framework for integration. Use due diligence to help fill in the details, specifically to help:

For very practical reasons the acquirer may not want, or be able to, fully integrate the business it has acquired. Barriers to the level of desired integration need to be identified as early as possible so the negotiating and acquisition integration teams can assess their impact. Some significant operational barriers to integration are set out in Table 4.2 below:

Operational integration barriers can increase the risk and even become ‘deal-breakers’. It is a mistake to allow such operational barriers to pass largely unnoticed during negotiation, as they can become real problems later on.

Operational constraints will obviously affect the speed and depth of integration. Choices will have to be made about the way in which the target will be managed, ranging from allowing the target to have effective operating independence through partial integration to taking full control.

The acquirer should be clear about the type of parent it wants to be and the level of independence it will allow the acquired business. Table 4.3 below shows the options.

For most acquisitions, the ideal is to achieve full integration, though the speed at which this is achieved may be influenced by particular circumstances. It took Reed International and Elsevier Science about five years to integrate properly into Reed Elsevier. Broadly, the less the target is integrated, the greater the level of risk. Risks include failure to achieve cost savings, and conflicts on strategic direction, investment and sales and marketing or other policies.

Whilst taking control, acquirers should not forget that integration should be a two-way process. Acquirers are not perfect and acquired companies are not run by dummies. The best acquirers know that there may well be some tricks to learn from the business it is buying and that the integration policy and process must not be allowed to bury this value.

As the buyer you will have convinced yourself that you can run the business better and will be itching to get on with it. The first concern of those who you are going to rely on to make all those changes is: what does this mean for me? They all know that acquisitions mean job losses so where do you think their logic takes them? And having got there, is their next instinct to work productively and serve customers with a smile? People like certainty. Even if there are to be mass redundancies and closures it is best to say so up front and then get on and get them out of the way. Do not procrastinate; there is no ‘right’ time to make this sort of announcement. With it done at least everyone knows where they are. As long as restructuring is handled with sensitivity people will respond much better than they will to creeping, piecemeal changes. They only add to the anxiety.

There should be no secrets, no surprises, no hype and no empty promises. This includes being able to say, ‘we don’t know’ or ‘we haven’t decided yet’.

Whilst the acquirer may be pumping out a consistent message about how great the new world will be, this will not by any means be what everyone will be thinking. Figure 4.2 below outlines some of their concerns.

Figure 4.2. Various stakeholders interpret the same core message according to their concerns

This illustration shows that communication with stakeholders is complex. There must be a consistent core message. Underneath this, different messages are required for different audiences. Each one must be honest and accurate, but tailored to address the real concerns of real people.

Best practice in communication is to:

Remember that actions and non-verbal signals are very important and that a physical presence is the best way of confirming the written message.

Worst practice is for the message to get out in the wrong way. One British group forgot about time zones. It prepared a press release with a time of release embargo for the morning, but because it did not specify GMT in the UK, employees in Asia heard about the acquisition on the radio on the way into work. They immediately got on the phone to colleagues elsewhere in the world and the communication team had to back-pedal its way out of a mess.

Yes, you should appoint an integration manager. Like any other big project you need one person accountable for the project’s success otherwise there will be delay, false starts and confusion. Integration is a full-time job. It cannot be done part-time by, say, the buyer’s MD or the MD of the relevant subsidiary. These people have a business to run and besides that they will concentrate on the urgent day-to-day issues. Nor should it be left to some bright MBA unless the integration is small and highly-structured. An integration manager needs to be a well-respected all-rounder who understands the industry, who knows his or her way round the acquiring company and who has the confidence of its senior management. Other skills and attributes will include:

Ideally, the integration manager will be in the midstream of their career, with a broad experience while remaining receptive to ‘new’ and evolving business practices.

Effective integration requires clarity of purpose, detailed target setting and detailed reviews. Smaller acquisitions and private equity transactions require less integration than larger complex mergers such as that of HP and Compaq, but even the smallest ‘stand-alone’ transactions require a plan, if only to establish financial, operational and strategic reporting lines.

The MD, not the integration manager, is accountable for the performance of the business. The integration manager acts like a consultant held accountable for the creation and delivery of the integration plan and reaching its milestones.

Acquisition integration is like any other major project. It has a one-off objective, limited duration, financial or other limitations, complexity, potential risk and requires an inter-disciplinary approach. The integration team should therefore include members with both project management experience and operational skills. If the required experience or skills are not available, the acquirer should consider bringing in external resources such as consultants or interim managers. Key managers must be selected as early as possible. They will then make decisions on additional assistance required during acquisition integration. The integration team should comprise a balance of different people and skills. At least some team members should have previous acquisition and integration experience.

As the probability of making the acquisition increases, the support provided to the acquisition team should increase. It is best to maintain continuity by adding additional team members to an existing structure. The level of additional resource required depends on the complexity of the acquisition, its strategic importance and its size. Experience suggests that in larger acquisitions, individuals should be assigned in at least six areas:

Each of these areas will have specific and detailed tasks which should be broken down in detail, and then built into the overall master plan. If this all sounds a bit much, remember that resource requirements are frequently underestimated.

If outsiders are needed, they can be expensive, but remember always that their cost is insignificant in the context of an acquisition. The trade-off of more effective and more rapid integration against the cost of adding a few additional internal or external members to the team is often significant. Trying to muddle through with existing resources is short-sighted and often counter-productive.

Many executives fail to appreciate the scale of the merger task. Imagine bringing together two organisations that ostensibly mirror each other in size and function: two finance, marketing and research and development departments, two sets of manufacturing or retail sites, differing information technology and international operations. The numbers can be enormous: the aborted GE/Honeywell merger involved over 500,000 employees worldwide. Add to that the extra complexity of different countries, cultures, time zones and languages, and it becomes easier to see why so many acquisitions fail.

In the acquisition wave of the late 1990s, most successful mega-acquirers used external consultants to assist with implementation, which was considered a unique skill and process. There were additionally at the time few companies with the in-house expertise to undertake large-scale implementation on their own. Moreover, many employers felt they had insufficient manpower. After completing acquisitions it became clear that, even with consultants, the implementation phase required a large staff. One French banking mega-merger had 450 post-acquisition working-groups each averaging 10 employees. This equated to 4,500 executives working on implementation globally – even before they had accounted for consultants.

Increasingly, acquirers are bringing the implementation process in-house. Repeat acquirers such as Royal Bank of Scotland are hiring former consultants, among others, and building their own in-house expertise in acquisition. This trend is not just for multinational companies – smaller companies and those planning to acquire aggressively are also experimenting with in-house resources.

But why create a significant internal resource for something that happens only occasionally? In the long term, it may cost less than hiring consultants, who can charge up to £15 m a month for mega-acquisitions. It also offers companies greater control over the process. Over time, a company’s internal M&A skills may become so well-honed that they become much more likely to make future deals succeed. In some cases acquisition implementation can become a source of competitive advantage.

Potential acquirers can choose to maintain a separate implementation team, as does GE Capital, though this is relatively rare. The team remains a separate entity and is called upon to integrate several acquisitions as they arise. It is the most expensive option and requires several acquisitions or other projects to take place over a year to justify the cost. But the company can usually ensure acquisitions are integrated quickly and smoothly.

Other acquirers, such as LaFarge, the French cement producer, have a small but separate M&A unit consisting of only a few individuals. It routinely oversees the integration of acquisitions and supplements its ranks with fellow employees or external advisers who work on specific tasks. By rotating employees on and off projects, it spreads acquisition expertise throughout the company, rather than refining it to a few key integration experts.

However the team is resourced, there should be enough skilled people on the ground from day one. Do not be tempted to add resources on an ad hoc basis. Once the team is in place, each member should prepare a detailed project plan for his specific area of operation. To do this they must be absolutely clear about what they need to do, and how their roles relate to the overall goals of the acquisition.

A properly structured and resourced induction plan therefore avoids throwing any new team members in at the deep end. They need to understand:

The integration manager will have the overall responsibility for coordinating the development and fine-tuning of the project plan. This will involve:

Once the plan comes together, the integration manager has to decide what needs to be done in what order. As with most activities, 80 per cent of the wins will be generated by 20 per cent of the activities. Focusing on the projects which yield the highest financial impact in the shortest time has two benefits:

Traditionally the early effort focuses on reducing costs, but reducing costs often proves more difficult than first thought. What looks like a simple business of eliminating duplication and reducing unnecessary overhead always turns out to be a complex long term re-engineering job in which work processes and procedures are fundamentally reorganised, people are redeployed and additional investment in training is needed – oh, and everything has to be achieved with a demotivated workforce.

Depending on the extent of the integration, there is bound to be duplication and everyone internally will be aware of this. The best way forward is to deal with any such redundant effort then get on with capturing the longer-term growth-orientated benefits. Do not get hung up on cost savings for their own sake. They are a one-off. Once they have been realised there is nothing left. Growth, on the other hand, continues forever.

At each stage of the development of the pre- and post-acquisition plan, managers must maintain information systems, including a detailed checklist, and ensure it is completed at each stage. Some managers may choose to use project management software for this purpose. Software can help to integrate cash flow and resource demands and conflicts into a coherent and integrated action plan. Developing a coherent project plan also provides a framework for assessing risk profiles.

Without quality data it is impossible to monitor the integration process. The acquired company needs quickly to start reporting in the standard format.

All the evidence suggests that the most effective integration managers are those that serve on the due diligence team.

It is vital to have a dedicated group focusing purely on integration; it must not be distracted by other operational requirements. This focus will enable the group to:

By understanding the operational and market dynamics of the acquisition in detail, the team will be able to evaluate and value the target. This quality of understanding and insight also strengthens the hand of the negotiating team.

If the integration team can hit the ground running and win the support of the acquired company, it can then implement change rapidly and avoid the immediate erosion of value.

Remember, though, that the integration and bid teams should be balanced as they perform different roles and the integration manager has different priorities to the negotiating team. His role is conciliatory and about building trust and value. It is not adversarial as that of the negotiating team can be, particularly when there is some tough deal-doing. Figure 4.3 illustrates these roles.

Figure 4.3. Roles performed in the bid and integration process

Some additional staff from the target company may join the team post acquisition. This will depend on the initial assessment of the acquired company’s management teams and the personnel review, which is part of Week One activities. Acquisition planning should always be prepared for the worst case – that none or few of the target management will be suitable for key integration roles in the early post-acquisition stages.

The culture of a company is the set of assumptions, beliefs and accepted rules of conduct that define the way things are done. These are never written down and most people in an organisation would be hard pressed to articulate just what the organisation’s culture is. However, these rules and shared beliefs are powerful. It is a mistake for an acquirer to assume that the target company will have anything like the same cultural dynamics as the acquirer. Morrisons, a leading food retailer, blamed its post-acquisition performance dip on the culture clash with Safeway while Marks and Spencer took ten years to get to grips with Brooks Brothers’ culture. It is very important for acquirers to spend time on understanding the way in which the personnel within the target company behave – both individually and within the ‘culture’ of the business. Management can then decide how it would like to see the target company’s culture develop and, in the meantime, adapt the way it manages the target. Table 4.5 below summarises the main points to consider.

Information will have to be collected from various sources to understand what is important:

It is also useful to remember that culture tends to reflect the business model, so it therefore makes sense to understand and reflect on differences between the two companies’ business models while assessing their cultures.

The ideal integration pattern is to achieve a seamless transition between the old organisation (parent) and the new (parent plus target) so that the new organisation can work with a single purpose, a single set of operating characteristics and so on. Failure to do this leads to at least some of the following consequences:

Cultural convergence is rarely achieved quickly and sometimes not at all. Operational and cultural barriers hinder progress. People within an organisation learn to accept its working practices over time. We rarely have the luxury of several months or years with an acquisition. Changes need to be made quickly. This reinforces the need to concentrate only on essential changes and those which will have a significant impact in the short term.

If a target has a significantly different culture, this can substantially increase post-acquisition costs or hold back performance. The risk increases if the businesses are to be merged as opposed to operating as independent units.

The acquirer needs to assess the impact of the cultural divide and plan accordingly. Where there is a big cultural gap between the two organisations:

The best way to overcome cultural problems is to get people working together to solve problems. Short-term projects that focus on achieving results quickly involving employees from both companies almost always serve to bridge the cultural gap.

Get the managers to communicate rather than communications professionals because they will not just say the words but engage in a dialogue too.

It is essential that financial control passes from the acquired company to the parent at once. This ensures that:

Obviously much of the groundwork will have been covered doing due diligence. With the right preparation and resources, harmonising financial controls should be relatively straightforward.