A NEW FOCUS FOR POST-DEAL INTEGRATION: EXTRACTING THE POTENTIAL REVENUE FROM MERGERS AND ACQUISITIONS

In most mergers and acquisitions, the focus is on internal issues, particularly on aligning the organizations. These authors, however, suggest that managers should also look outward and focus on external issues like market fluctuations, changes in customer business cases and competitive threats. For, like organizational synergies, market synergies will drive value to the customer and to the organization.

On the face of it, growth by acquisition seems to be the easiest and fastest way for companies to expand their revenues. Most companies acquire other companies with the goal of advancing their position in the marketplace, by:

  • pre-empting the competition
  • expanding their product line
  • moving into new markets
  • increasing market share.

While it is also true that acquisitions offer cost-based synergies and economies of various kinds, in the months following the acquisition, companies often face depressed revenues. Studies by McKinsey and Co. show that companies experiencing a one-per-cent shortfall in revenue growth after a merger have to achieve a 25-per-cent increase in planned cost savings in order to stay on track. This is a key issue for companies in their efforts to extract value from acquisitions.

This article explores solutions to four common problems associated with acquisitions and mergers. In cases where the amount of money paid for an acquisition has crippled future earnings, or the strategic fit of the two entities was extremely poor, management’s options may be limited. However, where revenue or value creation was not the priority in the months following the deal, top line-focused remedies can recoup lost or stranded value.

Background and challenges

Statistical research underlines our practical experience that revenue-producing issues are not treated as rigorously as cost-reduction issues in the months following a merger. There are a number of reasons:

  • Processes and metrics are easier to devise for cost reduction than for revenue production.
  • Customer-facing personnel and channels-to-market are harder to align than internal processes.
  • The acquirers, or the acquired, are often overly optimistic in their expectation that customers will automatically see the value of the new company. As a result, the new partners may not do the necessary hard work of communicating and positioning the exact benefits to each customer or customer group.
  • The human-resource focus on aligning salary and benefits, or on identifying poor performers and over lapping skills, often takes precedence over understanding the impact of different cultures on customer relations and the work at hand.

There is indeed a significant challenge in achieving market synergies, balancing the demands of economic results, and dealing with HR issues in the hectic months after an acquisition or merger. While acknowledging that “the street” demands consolidation and efficiency, many seasoned acquisitions executives believe that these objectives can be allowed to lag as long as the management team knows where the savings will be realized. The primary goal is to ensure that customers and customer-facing personnel are secure in the benefits of the acquisition, and then to enact the processes that will deliver the promised benefits.

The focus: Internal systems or external returns?

The president of a fast-growing information technology services company with four recent acquisitions undertook a staged restructuring program. The company’s main goal in making the acquisitions was to use to increase its range of capabilities to win larger and more complex jobs, and in turn, maintain and increase its revenue.

As a first step in aligning the disparate groups, the company installed high-end internal systems. During the course of this work, the president noted that anomalies in the project pricing and sales pitches of the different acquisitions were causing confusion among customers and having a negative impact on margins. In response, he restructured the organization so that the sales forces were not bidding against each other.

The second step was to develop a process that organized all operations under one company. The president believed that this process should be driven by the needs of current and future customer groups. He was overruled, however, by his cabinet and board, whose primary focus was to achieve operational synergies and cost reductions. The staff and executive teams of the different companies were already divided over the best process for installing a resource management system. Now they also had to deal with uncertainty about job security and corporate objectives. Management’s assurance to employees that high growth would offset the impact of rationalization was in fact undercut by poor revenue. While the company did achieve cost synergies, sales and employee morale continued to fall and the competition made inroads with several of its customers.

More than a year passed before the company introduced a plan to achieve the market synergies it had hoped to achieve from the acquisitions. It assessed the needs of disparate customer groups and took steps to ensure that all customer-facing employees were trained and appropriately compensated. The president convened round-table discussions with customers and the company’s sales and business-development teams to better understand organizational barriers and the needs of the marketplace. The research was then used to increase sales, formulate an internal communication plan and build a strong benefits-oriented message that appealed to customers. Although key customers and employees were lost, the firm steadily recovered ground.

There are two important lessons here: timing and focus. Cisco Systems is one company that has perfected integration. While not all companies have the culture or methodologies to achieve Cisco’s 90-day integration timeline, it is important that every company deal with customer-facing resources and customer issues as quickly as they can. The phased restructuring approach of the engineering services company was not wrong given the firm’s history and resources. Since the first two integration phases were internally focused, however, the company’s revenue momentum slowed, and the opportunity to create the optimal organization through responsiveness to customer needs was lost.

Post-deal integration and differences in product life-cycle focus

For many small high-tech companies and the venture capitalists who back them, the end game is be acquired. The cultures that shape the acquired and acquiring companies can clash if due diligence does not cover off alignment issues based on size and operational issues.

Smaller companies are populated by brilliant product development personnel, often led by rainmakers. While larger, acquisition-minded companies have brilliant development staff, the newly acquired individuals are more likely to interact with managers who implement projects. Project implementation, and the corporate memory of customer requirements that it fosters, is also critical to the revenue and earnings of a merged corporation. But the cultural gap between the two groups can be a barrier to integration and delivery.

In one corporate marriage, an acquired new product line was billed as the answer to customer problems and creating a competitive edge. Sales quotas were set, promises were made to customers, and expectations were high. Project implementers and account managers alike were pleased with the promised ability to deliver customer satisfaction, and reporting and documentation were the primary alignment issues. Meanwhile, staff from the acquired company, who saw themselves as the developers of a truly advanced product line, refused to listen to the development and implementation concerns of seasoned project managers, because these concerns were totally outside of their experience and world view. Product teams did not know how to work back into the organization to get things done, resulting in delays and budget overruns.

Customers grew weary of a stream of ever-changing product specialists who did not understand the totality of their concerns. As costs mounted, senior executives in the acquiring company spent an inordinate amount of time flying in to assuage customer concerns. Throughout the process, there was acrimony at all levels, resulting in a loss of staff.

The goal of the acquisition was to move very quickly into an advanced product area, pre-empt the competition and satisfy customer needs into the future. Much of the customer confusion and lost revenue, and some of the cost overruns, could have been avoided if the teams had been forced to develop an implementation plan that considered the total impact on the customer business case, rather than on the benefits of pure technology.

The acquiring company needed to look at the added personnel required to deliver and implement a disruptive technology. It also needed to invest considerable time in aligning processes and lines of communication. The acquired company needed to understand its significant weakness and lack of knowledge in the areas of implementation, delivery and granular knowledge of customer requirements.

What happens when differences are underestimated

Service companies, particularly in the banking and insurance fields, have unfounded optimism about the alignment of market-facing employees after a merger or acquisition. During the courtship period, potential partners tend to focus on the similarities of their organizations, and this can cause problems in the integration phase.

The CEO of the acquiring company in an international financial-services acquisition set up task teams to identify best practices in each functional area in both companies. It was determined that the administration of the acquiring company could handle the ongoing administration of the merged entity. It was also determined that the sales and marketing practices of the two companies were similar, and the task forces decided not only what the best products would be, but what the “best practices” were in terms of compensation, customer relationship development and solution delivery. Essentially, the practices, approaches and compensation of market-facing and support personnel in both companies would change based on the task team’s recommendations.

Unfortunately, the task teams did not also take into account the cultural commitment to current practices and compensation. As the CEO later said, “We did not communicate and educate enough on the benefit of the changes. We were systematic in developing the best approach, but not systematic in communicating it. We had excellent reasons for the changes, but did not sell them through the organization.” Sales and sales agents were faced with changing products, practices and compensation structures, and uncertainty about their future. They lost their revenue drive, and top-line results suffered.

The CEO realized that the vision for the merged company had not been articulated in a form that would both motivate and lessen the uncertainties of the sales force. In addition, the task teams had not incorporated feedback mechanisms for the functional areas where they had implemented changes. Once a systematic internal communications thrust was developed, including an iterative feedback process, the performance of market-facing personnel in both companies improved.

How important is sales force alignment?

Combining sales forces and channels to market are top-of-mind issues for executives who have been through unsuccessful mergers.

The CFO of one financial-services industry “merger of equals” frankly admits that market synergies were not achieved. As often happens at the pre-merger phase, the two organizations celebrated the many similarities in their products, markets and cultures, and gave priority to internal integration projects. Although its external communication was better than its internal effort, customers could see that the merger process had caused the new company to take its eye off the ball. One of the biggest mistakes was that the sales force was not organized, or appropriately compensated, or was not provided with positioning information on the expanded product line until months after the announcement. The company suffered the usual consequences of dissatisfied customers, demotivated employees and falling revenues. Executives spent a lot of time with customers they were in peril of losing, thereby adding to the costs of the merger.

The issue in cases like these is how to get back on track to extract the value that was envisioned in the days of the courtship. The first step is to focus on product overlaps and extensions, and to project, on a segment by segment and/or major account basis, what value the combined product line will drive to the customer. The company is then ready to assign bundles of products to each group, looking for opportunities to deepen sales into customer segments and to rationalize the product line.

Ambiguous roles and responsibilities are a major cause of the failure to create value from a merger, and nowhere is this more evident than in customer-facing organizations. The customer benefits accruing from the combined and rationalized product line must be carefully positioned to the sales force, customer service departments and the various channels at the earliest possible moment. Each must understand not only the features, benefits and positioning of the expanded line but also the areas of market on which they should focus.

Prioritizing market-oriented value creation

New mergers and acquisitions must be doubly focused on external issues like market fluctuations, changes in customer business cases and competitive threats, at a time when their energies are all too often taken up with the alignment of the organizations. Market synergies, like organizational synergies, do not just happen. They must be pursued objectively, swiftly and rigorously. Once interconnected, they will drive value to the customer and to the organization.