The success rate for mergers and acquisitions could increase considerably if managers from the two companies jointly developed what these authors call the “merger intent,” a picture of what the combined organization should look like one year later. Readers will learn how managers in two organizations can collaborate to develop a merger intent that will make the deal work.
The M&A landscape
Based on activity so far, 2011 is showing promise of a return to the “good old days” for mergers and acquisitions (M&A). Yet, the likelihood that announced deals will prove to be successful is not much higher now than it was during the last boom in M&A activity. Most senior executives know that bringing together two organizations is, at the very least, risky and in some cases potentially hazardous to a prosperous future. More often than not, integrations don’t achieve the value that senior executives anticipate. In short, the odds of success are not in their favor.
One of the reasons that deals fail to deliver value is the inherent psychological dynamic of “in group/out group,” which plays out in the context of “acquirer” and “acquiree,” and often keeps the two organizations at a distance during integration planning. Legitimate legal and regulatory constraints typically reinforce an overly cautious posture with respect to collaboration before and after the merger. Thus, organizations that will eventually combine operations and need to learn what it will take to be successful together often miss opportunities to work together. So, at a time when it is most important for organizations to collaborate, they do just the opposite.
Cross-Business Collaboration: A powerful tool for overcoming M&A challenges
It doesn’t have to be this way. Over the last decade, we have worked with a number of clients to increase the “collaboration quotient” – the creative use of joint acquirer-aquiree efforts at all stages of the deal. These approaches have significantly improved their ability to capture deal value more quickly.
Throughout this article, we will draw on our experience with these clients to provide examples of how cross-business collaboration can enhance your efforts to integrate acquisitions – and meet expectations.
Specific opportunities to use cross-business collaboration
While there are many ways that cross-business collaboration might be used, it has the greatest impact on three areas.
1. Expanded due diligence: Getting a preview of what’s ahead
Over the past few years, organizations have become ever more reliant on electronic information — supplemented by informal industry networks and publically available information — for learning about deal partners. Unfortunately, this kind of information is often sketchy on just the areas that they want to know more about, especially things like quality, cross-functional interaction, site maintenance, efficiency – the kinds of things that require observation or dialogue. This can make it difficult to get what some business development professionals call an “intuitive feel” for the deal partner.
The adoption of the cross-business collaboration tools and techniques that have evolved over the past few years is one way to counteract the inadequate research sources such as electronic data rooms. In our experience, there has been increased acceptance and a greater willingness to experiment with cross-business collaboration as deals unfold. The promise of a better understanding of what the combined business might be able to achieve and greater insight about what it will take to operate the business successfully is often the motivation for creative collaboration in M&As. Such collaboration has the potential to yield much richer and simply better results. It offers more comprehensive due diligence than conventional research methods. While there are often legal and/or regulatory constraints about what information and contact between two M&A partners is permissible early in deal activity, assessing the strategic and cultural fit and speeding the integration planning are generally acceptable and offer potentially rich opportunities for collaboration.
Cross-functional and cross-business collaboration both play a role in what might be called “expanded” due diligence. While the deal is still in the early stages, the simple step of engaging an internal, cross-functional team in due diligence and charging them with creating an integration report can play a big role in the course of the deal. Such a charge also sets the pattern for later cross-business collaboration that will accelerate integration planning and execution.
When the diversified printing and packaging company, Westvaco, agreed to buy a paper mill in Texas from Temple Inland, it pulled together a cross-functional, cross-business team to study and analyze the integration opportunities, costs, timing and payoff. Each team, consisting of representatives from both organizations, focused on an area of manufacturing, maintenance, procurement or functional support to pool their knowledge and create an expanded due diligence report that followed a simple template. Their reports to the integration manager and executive team set integration priorities and plans. The teams had the benefit of working with the people and the data collected in the formal, earlier due diligence and they had the first-hand knowledge of the line managers who had years of experience running the plant. Agreement was reached on what projects to undertake and their potential payoff in cost reduction or performance improvements. The teams responsible for the expanded due diligence were responsible for developing action plans and recruiting joint teams to carry out the work.
This example illustrates the gains to be had from taking a collaborative approach as early as possible in the process of working on a deal. Whether the joint efforts take place pre- or post-close will be a matter of judgment and preference. Making good use of the combined resources to produce a simple, brief assessment of the integration opportunities and challenges will help to focus the planning on areas with the best potential to deliver the expected benefits, and to speed up the integration planning once the merger or acquisition has closed. And, in the process of taking a hard look at how to operate the combined business, troublesome pitfalls, cultural gaps and other complexities of the deal will become more evident.
2. The merger intent: Developing the merger intent to generate value from the deal
For many deals, there is only a vague notion about the integration goals; there may also be no clearly set agenda for achieving specific results. This often leads to significant time and energy being invested in activities that may be useful, but that have little impact on the business performance. And it postpones getting much needed resources dedicated to delivering top-line and bottom-line results expected by the stockholders and customers.
In companies where there is an open mind about collaboration, the period between when the initial agreement is signed and when the deal is closed can be used to begin a joint effort to flesh out the vision of the combined business a year or so post close. We refer to this picture of the future as the merger intent. It outlines in detail what the new organization will look like from strategic, operational, financial and organizational perspectives at a definitive point in time – usually 12-18 months post close. A jointly developed merger intent confirms the financial and operating goals the combined company expects to achieve and provides the backbone for the integration plan.
For instance, just a few years ago a large division of a global financial services organization announced the acquisition of a complementary business. In conversations with the senior leaders of the division and their counterparts at the acquiree, the CEO of the acquirer heard major differences of opinion about how the organizations would be combined. Expectations regarding which products would be emphasized, for example, differed significantly. Strategies for retaining and growing the customer base also differed. And the magnitude and pace of cost synergy capture were far apart.
To deal with these discrepancies and set the stage for a successful combined company, the CEO conducted a work session with senior leaders in the acquiring company to draft individual versions of a merger intent – the strategic, operational, financial, and organizational targets for one year post close. (See the exhibit “Developing the Merger Intent” for a sample merger intent document; the specifics have been altered to protect the company’s privacy). Everyone shared their ideas and spent several hours discussing and modifying the statements. By the end they had a good working draft. A week later another session was held, this one with the combined leadership team from both organizations. This group refined the initial draft with additional input and discussion, then took it to their own teams for another round of fine tuning. The combined leadership team then came back together to share this additional input and finalize the merger intent. The CEO then shared the document with the 200 members of the joint integration team during the integration launch so that every team member knew exactly what had to be achieved. Commitment to cross-business collaboration prior to the close of the deal was critical in developing a clear, agreed-upon roadmap for the acquisition.
To be sure, this isn’t the only way to leverage collaboration to drive post-announcement alignment. For example, many organizations have engaged consultants to interview key leadership team members, develop a straw man picture of the future, and facilitate one or more cross-business work sessions to refine and agree on the merger intent.
No matter the process, the experience of jointly developing the merger intent is just as important as the document that is eventually created. It gives senior executives of both organizations the chance to engage and interact around topics critical to the success of the combined organization. They recognize the groundwork in terms of objectives and priorities they are laying for the work of numerous integration teams, and how important their vision and leadership will be to delivering on the promise of the deal. Finally, it provides the framework for building clear accountability into the integration initiative.
EXHIBIT: DEVELOPING THE MERGER INTENT
3. Integration: Accelerating results with cross-business efforts
Once a definitive agreement is in place, most companies must earnestly turn their attention to combining the businesses. Whether that point is reached before or after the deal closes is of little importance. What is important is the shift in mindset from pursuing the deal to focusing on how to make the combined company work. Even if there has been little collaboration in the earlier stages of putting the deal together , there are major payoffs for initiating cross-business collaboration post-announcement.
In one acquisition, a division of a large company was being combined with a smaller, but far more entrepreneurial business. The objective was to make the division more customer focused, to provide greater diversity in the product lines and to expand markets for the combined product line – in other words to make the division more responsive and agile. When the acquisition was announced an integration manager was appointed. He was a highly respected, up-and-coming leader with a decade of experience in the acquiring company. But he was not a part of the division involved in the integration. He and the president of the company had selected a group of senior managers who would oversee the integration. That group included the president of the acquired business as well as the divisional vice president and the corporate heads of finance, legal, HR and IT. The president of the corporation chaired it. That group agreed to structure the integration around functional teams focused on cost synergies and revenue growth. Each team included representatives from both companies and had a leader and co-leader drawn from the two businesses. The steering group met with the team leaders to give them an overview of the process, a milestone timeline for completing the integration and well-defined measures of success. This groundwork laid the foundation for an ambitious, collaborative integration expected to deliver on aggressive performance goals and drive a cultural shift toward a more entrepreneurial business.
One of the most difficult areas of the integration was agreeing on how to combine the sales effort and on which customers to focus. After several months, sales revenues were still well below targets set by the steering group. At a quarterly review meeting with the integration team, the president took the opportunity to revisit the goals for sales revenue and to set a short-term goal to boost sales revenues to exceed the annual plan by 10 percent before the end of the quarter. His message to the entire team was that it would take unprecedented collaboration across the two businesses and among the functions to achieve these results. He made it clear that he could accept nothing less than a plan to make that happen. The remainder of the meeting was dedicated to developing that plan. At the end of the quarter the sales goals had been met – putting the company on a path to making the annual revenue targets they had promised investors. At the same time, many of the cultural barriers to collaboration had been overcome in the course of achieving these results.
Without a rigorous, disciplined effort to engage dozens – maybe even hundreds – of people in ambitious efforts to achieve results that accelerate the integration, it will be extremely difficult to deliver financial and operating performance that lives up to the senior leaders’ expectations for the deal. The challenge to functional and cross-business teams is to identify the most important, high-payoff integration opportunities and to launch a collaborative effort to accomplish results in 100-day cycles. Where this has been done, the benefits are significant: accelerated integration, earlier achievement of synergies and the development of leaders and managers who can play an on-going role in the success of the combined company.
Action ideas: Utilizing cross-business collaboration now
There are many ways to apply cross-business collaboration during mergers and acquisitions. In this article, we have explored but a few of the most important ones. The first step –usually taken by the most senior leader in the acquiring company – is making the conscious decision to pursue collaboration wherever and whenever it is valuable. Starting early in the game increases the confidence to make collaboration a habit as the deal progresses.
Though this may sound straightforward, the typical “acquirer” and “acquiree” dynamic can make collaboration feel unnatural and risky. No doubt there will be pockets of resistance. Leaders need to recognize and deal with those barriers through a combination of education, persuasion and demonstration – convincing their people that collaboration is essential. As senior leaders work with the integration team on the integration process and plans, they can identify key areas where cross-business collaboration has the greatest benefits and build transparency and alignment on how it will play out. Every integration effort has the opportunity to create and use tools that promote cross-business collaboration and make it innovative and fun. Jointly developed team charters, 100-day plans, regular cross-business integration team progress reports are all mechanisms that stimulate a broader dialogue and agreement on action across functions and businesses.
While there is no rigid formula for successful cross-business collaboration success, the suggestions and illustrations above aim to help those who are contemplating or in the midst of M&A activity to start joint collaboration early on. When people have gained experience working together during the due diligence and planning stages, it makes implementation of the integration smoother, easier, and increases the odds of realizing the value of the deal.