By George D. Shaw, CPA
The success or failure of a business merger or acquisition is often dictated by the ability to successfully integrate the target. Each target has its own unique characteristics and challenges and a successful integration plan must be specifically designed to address these issues. The acquisition integration planning process should start early in the deal negotiation stages so that business and financial diligence is tailored to confirm the financial benefits, or deal value drivers, created by the acquisition and reflected in the acquisition financial model.
The first step is to determine what level of integration should be pursued based on the characteristics of the target. As part of this process, the acquirer needs to also make a self assessment of its own capabilities in key functional areas. While all acquisitions need to be deemed fully integrated, in broad terms, there are three acquisition integration approaches:
Minimal
This approach is generally taken when the target is in a totally different business or it has unique customers, business processes and/or culture which generate superior financial results. Normally only selected corporate functions are merged with the acquirer (i.e. HR, Benefits, Insurance etc.) to leverage cost savings (commonly referred to as "synergies"). The acquired business remains decentralized with autonomy for decision making, strategy and operational execution.
This approach has a lower risk profile and less complexity due to the fact that there are fewer integration tasks to execute and the acquisition Synergies reflected in the acquisition model are cost savings based on staffing reductions and identified corporate costs (internal and third party). However, there may be additional overall financial risk to the acquirer as they may not fully understand the targets market growth opportunity, level of investments required to support growth and/or whether the high level of financial performance is sustainable. The integration plan should consider investments in these areas to manage risk.
Full
This approach is taken when acquiring a direct competitor, closely adjacent business (similar customers or products/services "in-market") or the target is underperforming. The acquirer has a better understanding of the business and already has the systems and business process platforms in which to consolidate redundant functions and processes. All processes, people and systems are consolidated and management decisions are centralized into the acquirer.
Cost savings, or "synergies", are significant and are represented by headcount reductions, elimination of surplus facilities, supply chain efficiencies and increased purchasing power. Revenue improvement synergies represent marketing and selling new products/services to the acquired customer base, or cross selling acquired products/services to the existing customer base. Cost savings synergies are easier to quantify while revenue improvement synergies tend to involve more risk as they rely on third party variables of customer behavior. The relative size of the target as compared to the acquirer will also impact the complexity of the overall integration strategy.
Moderate
This is a hybrid between the Minimal and Full approaches whereby certain key functions are consolidated (i.e. marketing & sales, supply chain procurement and systems) but most day-to-day operations remain autonomous.
While acquisition integration communication (internal and external) is key for all acquisitions the Moderate integration approach probably requires more communication to address cultural drift issues created by transitioning the target to a new hybrid business model form its historical business model.
Selecting the best acquisition integration approach depends on the target's business profile, as well as the acquirers, and includes a thorough analysis (including comparability) of many factors such as:
• In market vs. out of market
• Existing business model vs. new business model
• Size of target vs. size of acquirer
• Degree of innovation
• Entrepreneurial culture
• Underperforming vs. over-performing
• Cultural alignment
• Sales process & channels
• Degree target fits acquisition strategy
• Leadership retention
• Operational flexibility and efficiency
The most challenging acquisition integration situations deal with targets who have a high level degree of innovation and/or an entrepreneurial culture. In these situations, the people issues are significant and talent retention is a key Deal Value Driver and is a critical factor to be considered in determining the best Acquisition Integration Approach
When structuring the deal, acquirers should consider the Acquisition Integration Approach. Transaction structures that utilize significant deferred earn-out payments tend to create artificial barriers to integration as the business may have to retain its independent status in order to accurately measure the earn-out financial benchmarks. Earn-out type structures have been utilized more frequently in recent years to bridge the valuation gap between buyers and sellers. Acquirers need to make sure the earn out structure does not created integration hand cuffs.
Experienced acquirers also recognize that each M&A transaction is different and the Acquisition Integration Approach used on a prior deal is not necessarily the right one for the next transaction. One approach does not fit all deals.
In Part II - we will discuss Deal Value Drivers.
About the Author
George D. Shaw, CPA is a partner in the Transaction Advisory Services practice at DiCicco, Gulman & Company, a regional CPA and business advisory firm located in Woburn, MA. He can be reached at gshaw@dgccpa.com or 781-937-5125.
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