Acquisitions And Mergers
KEY CONSIDERATIONS WHEN INTEGRATING BUSINESSES.
In today’s fast-paced world, growing an organisation organically may not suffice. Mergers and acquisitions have long been a key strategy in achieving business growth goals. To ensure an effective integration and a successful acquisition or merger, organisations must consider the following:
What are you choosing to integrate and what will be kept separate;
Who will the integration process be managed by;
What is the company’s core strategic objective;
How will you manage the cultural integration process; and
Which IT systems will be retained and which will be decommissioned?
This article explores ideal integration approaches to ensure a successful merger and acquisition. Integration models Once an organisation has decided to take the step towards acquiring another company, they will need to decide which integration model would be best to adopt. There are four main integration models that organisations can choose from and which one is chosen largely depends on the goals of the acquisition.
1. CROSS LEVERAGE MODEL
The acquisition is left as a separate business unit but the technology and people are merged into the main company.
Used when the acquired company is very large or has coinciding portfolio elements that must be streamlined.
2. NEW BET MODEL
The acquisition is turned into a new, standalone business unit within the acquiring company.
Used when trying to pursue a new market segment.
New entity needs to overcome some challenges including the acquiring company’s lack of brand value in the new space and the differing business processes.
3. TOP UP MODEL
The acquired entity is broken up into portfolio elements and is consolidated into the acquiring company.
Provides internal business units with additional resources and fills gaps more quickly than can be done organically.
4. DOUBLE DOWN MODEL
Both companies’ assets are consolidated into the acquired company.
Used when the acquired company has the market momentum, brand, customer base, channel or an effective leadership team.
Definitions ACQUISITION: The process of buying another business outright MERGER: When two or more businesses join forces to operate all services under one company name INTEGRATION: The process of combining two companies into one entity at every level. This involves the amalgamation of people into one corporate culture; combining the companies’ systems into one set (e.g. company emails, intranets, purchasing departments, policies and procedures); and merging the companies’ production processes into a uniform system.
Reasons for acquiring a business Depending on the size and lifecycle stage of the business, there are various reasons as to why an organisation would acquire another business. For larger companies, the main factors contributing to this decision is the ability to quickly access new technologies, new customers or market segments and the ability to increase portfolio capability for broader customer opportunities.
Acquisitions are a particularly attractive exit strategy for start-ups wishing to leverage the larger company’s capabilities. Integrating means the start-up company can access funds for growth and the larger company’s existing channels and brand association. Key considerations when integrating businesses An acquiring company should begin planning the integration process even before the deal is announced. This enables the organisation to identify everything that must be done prior to finalising the deal, hence minimising the possibility of challenges that may arise.
Planning for integration revolves around a clear vision and communication process. As part of the vision, the acquiring company needs to identify the best features of both companies that can be used to make up the culture of the new company and work towards ensuring that these features remain intact and in focus throughout the integration process. It is also important to share a consistent message with all stakeholders throughout the integration process to avoid confusion, fear and lack of faith in the process.
The most effective integrations employ a management team whose main responsibility is to oversee the decisions of the merger or acquisition. This team lays out a decision roadmap and manages the organisation to a dedicated plan to ensure that each decision is made by the right people at the right time with the best available information.
To ensure an effective integration strategy and successful acquisition, organisations must consider the following:
The nature of the deal – the dedicated management team needs to ask the following questions to determine the nature of the acquisition: What will be integrated and what will be kept separate? What will the organisational structure look like? Which employees will be retained? How will the cultural integration process be managed?
The impact of the deal – it is important to have an objective explanation of how the deal is expected to enhance the company’s core strategy.
The management of the deal – too often, organisations manage the integration through endless templates and processes which results in too much office bureaucracy and paperwork. This creates a distraction from critical issues and can negatively impact the integration and demoralise all those who are involved.
The culture associated with the deal – one of the biggest challenges of most acquisitions and mergers is determining what to do about culture. It is important that the organisation commit to one culture and communicate this through actions during the integration period.
The momentum of the companies – it is imperative to maintain momentum in the base business of both companies so that the best possible outcome can be reached. This involves monitoring the performance of both businesses very closely and boosting this momentum if it happens to decrease.
The evaluation of the process – once the integration process is complete, it must be reviewed to ensure that business goals and objectives have been achieved. The organisation needs to evaluate how well the process worked and what areas they would change if they were to complete the integration again.
Once these considerations have been measured, the acquiring company must weigh up the benefits with the challenges of acquiring and integrating businesses. Advantages of Acquisitions
Ability to gain quality staff and additional skills that are not present currently
Increased knowledge of industry or sector can be combined to create competitive advantage
Business intelligence of companies may add to current experiences and knowledge
Ability to access assets for new product and business development
Increased market share due to wider customer base
Diversification of products, services and the long term prospects of the business
Reduced costs and overheads
Challenges of Acquisitions
Missed targets or the inability to determine the success of objectives due to unclear integration priorities
If the organisation delays the implementation of the organisational structure and leadership teams, there is a greater risk of losing key employees
Integration can soak up too much energy and attention or simply take too long which distracts managers from the core business of the organisation
Valuable operating synergies may evaporate because of cultural differences between the two companies
Difficulty in reaching agreement on which systems and processes to integrate
Resistance to integration processes
Difficulty in building a working relationship with, and encouraging knowledge sharing, amongst staff who may have different approaches to work
Key considerations when integrating IT systems One of the key elements to consider after an acquisition or merger is the IT systems of the two businesses. Since IT systems form the backbone of an organisation, support the company’s operations and often contribute to competitive advantage, it is important to ensure that the integration between the two organisations’ IT systems are factored into the acquisition. Getting the IT systems infrastructure correct is often the key to the success of a merger or acquisition.
When integrating the IT systems of the acquiring and acquired company, organisations should consider the following:
Day-to-day challenges – The acquiring company and the key IT people within the company being integrated should have a face-to-face meeting to learn about the challenges that are currently being experienced on a day-to-day basis. The key personnel for this meeting may not necessarily be the IT Manager, Infrastructure Manager or Application Manager but may be other individuals within the IT department.
Directory Services – It is important to define, validate and test the strategy for managing directory services (such as Active Directory) between the two organisations as early as possible. Both organisations need to agree upon this strategy to ensure the success of the integration.
In order to do this, they must ask two questions:
a) are we going to establish a trust-relationship or federate the two directories?; or b) is the potential funding available to migrate and consolidate within a single directory?
Determining the strategy early on, preferably during due diligence, will enable a solid foundation for formulating decisions around the integrated organisation’s applications, infrastructure and network.
Licensing audit – During the due diligence stage, a full audit of licensing, support and maintenance arrangements in place for software, services and hardware within the company being acquired must be completed. Key areas to look for include the transfer and assignment clauses to determine if any type of renegotiation event will be triggered. This is also a great opportunity to identify the shortfalls in existing licensing agreements (e.g. license gaps within Microsoft products or the inevitable core Green-Screen program running key processes within the business).
License agreement negotiations – Organisations need to initiate license agreement negotiations with vendors as early as possible. Vendors may provide a temporary bridging license to allow teams to work through the integration period. However, this is a two edged sword as the closer it gets to the ‘Go-Live’ stage, the less ability the acquiring company has in negotiating a fair and mutually equitable deal around the one-time purchase of the license and the annual maintenance.
Infrastructure plans – From a procurement perspective, orders for telephony services, data lines and key infrastructure such as the SAN and networking equipment should be placed as early as possible. There are usually long lead times on these services and infrastructure which can cause even the most agile project plans to go off schedule.
Conclusion To avoid getting caught up in the challenges associated with mergers and acquisitions, organisations must ensure they consider the various aspects associated with an appropriate integration process, including the specific market context and personnel involved. The key factors for the successful integration of an acquisition or merger is a clear strategy of what is to be achieved through the acquisition or merger, as well as the assimilation of the new company into the acquired or merged company. It is vital that an additional focus be placed on integrating the assets of the companies to realise the anticipated value of the deal.