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After Years of Trial and Error, Companies Take a More Focused Approach to M&A Integration

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RISMEDIA, July 5, 2007—Mergers and acquisitions have strongly rebounded from the downturn in 2001-2002. But many still fail to deliver value to the shareholder. To avoid pitfalls and better manage the process, many companies have begun to structure and formalize their integration practices, concludes a study by The Conference Board.

The report is based on a survey of 86 mergers and acquisitions executives. Many of the respondents also participated in follow-up interviews or provided case examples.

Documenting and sharing M&A experiences allows employees responsible for integrating future acquisitions to learn what works and what doesn’t. This is especially beneficial to “serial acquirers” – companies that pursue planned, continual growth through M&As.

After years of hard experience, many serial acquirers are building new capabilities and tools to support their integration processes, the report notes. These companies are tailoring their practices to fit their strategic intent, the size of the target acquisition, and the degree of the acquired company’s industrial or geographic similarity.

Having a Well-Oiled ‘Integration Engine’

Formalizing M&A integration practices gives companies several advantages. What worked well is highlighted, and what needs to be improved (and how) can become part of initial M&A due diligence procedures. Another benefit is the ability to render an overwhelming process more transparent. Having clear objectives and processes for M&A integration can help companies communicate their mission effectively, and defuse the political concerns that inevitably arise.

“More generally, having a well-oiled ‘integration engine’ brings a certain dynamism that encourages commitment to the objectives and goals of integration,” note the report. Even companies who are not serial acquirers can gain valuable tools from the insights harvested through a more focused approach to M&A, especially since even less frequent acquirers view M&A as a core instrument of growth.

Determinants of M&A Integration Best Practices

The degree of similarity between the acquirer and the target firm is an important issue. The Conference Board survey found that correspondence between the parent and purchased company is a key factor to success, with 93% reporting that their acquisition targets are either “completely” or “to a high degree” from the same industry. “The further you move away from your own business, the more likely there will be an exponential increase in problems,” the report notes.

There is general agreement that the earlier the integration program gets underway, the better the end results. More than 75% of M&A executives report that their integration programs are launched between announcement and close.

In terms of geographic proximity, companies often venture outside their home turf. Although 53% say that their acquisition targets are “completely” or “to a high degree” in the same geographic area, 29% indicate that their acquisitions are only “somewhat” in familiar territory or “not at all.” This suggests that cross-cultural issues might play a larger role than even corporate cultural issues when integrating a target acquisition in a different geography.

The study finds that M&A integrations are more successful for targets over $1 billion in sales than for targets under $100 million in sales.

“Large integrations might be more likely to succeed than smaller operations because they are, more often than not, led by a senior business manager who can mobilize the resources needed and pilot the entire range of activities affected,” notes the report. “A small acquisition, on the other hand, might be given to a less experienced manager, which could translate into a lack of access to and support from M&A experts.”

Case Studies: Stanley Works, Home Depot, Dow Chemical

At Stanley Works, there is a highly regimented procedure for tracking the 5-10 acquisitions the company usually has every year. Dashboards are used to track progress on a weekly, bi-weekly, or monthly timeline. Both the CEO and the CFO join the weekly M&A meetings so there is no delay in management approval. A small acquisition might be reviewed for 30 minutes, while discussion about a large acquisition may last 90 minutes.

Each year, Home Depot’s M&A group targets a dollar amount of acquisitions to complete. In 2005, these projections led the company to pursue 21 acquisitions. Due to this level of M&A activity, the company has made documenting and standardizing processes for its many acquisitions a priority. The Director of Strategic Business Development manages the process and execution of integrating acquisitions. Over the past two years, the role has expanded to include regulating the process of M&A integration, selecting and training business integrators, educating business leaders for M&A integration, and overseeing the quarterly integration review process. There is also an “e-room” that makes collaborative tools and templates available online to help pilot current integrations and prepare employees for future acquisitions.

As part of its acquisition of Union Carbide in 2001 – a transaction valued at over $11 billion – Dow Chemical established a program management office to develop and implement the overall integration. As a result of the positive experience and useful expertise gained from this effort, the company created an M&A Expertise Center in 2002. This team is made up of a small group of seasoned professionals who have both operational experience and a solid background in another area (i.e. finance or human resources). The Center is tasked with coordinating the various due diligence and implementation activities for acquisitions, joint ventures, divestitures and plant shutdowns.

Lessons Learned

The report offers several recommendations to better support the integration process:

- Build organizational capabilities and tools to support the integration process. Not only will they help pilot the integration process, but they will capture lessons and models that can be used to train those with specific integration tasks (logistics, customers, distribution, etc.)
- Create a disciplined integration process that can adjust to different types of acquisitions. Project management techniques facilitate regular reporting deadlines to senior executive management. The integration approach should vary with the strategic intent of the acquisition as well as the relative size of the target company.
- Recruit generalists, not functional specialists, to the M&A integration team. Professionals with broad business experience and credibility have a greater ability to take a holistic view of the integration process and are better able to avoid the silo approach of functional specialists.
- Access the expertise of integration professionals during the deal negotiation and due diligence phases. Getting an early start on integration planning not only eases the hand-off from the deal team to the integration team, it enables integration professionals to lead the due diligence process, thereby challenging some of the valuation assumptions of the deal team.
- Give higher priority to the greatest challenges. Integrating corporate cultures, merging IT systems, and building solid management teams continue to be the most significant roadblocks to successful mergers. Cultural distinctions in the target firm can be diagnosed through surveys and focus groups and the results can be used to develop action plans to reduce differences.
- Develop evaluation and feedback procedures. By doing so, companies can ensure that the knowledge gained from the M&A process can be incorporated into “screens” for the initial strategy and risk analysis of future acquisitions. The M&A integration team could also take a more proactive role during due diligence to identify risk factors and propose risk mitigation actions.

Source: Strategic M&A: Creating Tools and Capabilities for Successful Integration
Report No 1401, The Conference Board

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