Integration | alainlarocque

Integrating an acquisition

Updated: Nov. 11. 2018

Let’s say it right up front: nothing is more dangerous and risky than the integration of an acquisition. Know that in the case of merging similar-sized companies, the rate of success is below 50%.

Here is what you are facing. Key employees, pillars, will feel threatened and leave you for the competition. Those that stay on run the risk of a relentless power struggle. Some clients who don’t like the company you have joined forces with will go elsewhere. You will have to align wage scales, which is a costly exercise as it is generally goes in an upward manner.

And obviously, financial systems must be integrated. When you retire, you will remember it as the worst headache of your career. Systems integration means getting rid of one and migrating to another; or worse, migrating to a whole new system. In the best scenario, six months will be needed to make a decision on the chosen system, and another year to plan and carry out the migration. A minimum of a year and a half, if your CFO does not leave with a burn-out, and during which the right hand does not know what the left hand is doing, and where the consolidated data will have to be compiled manually.

For a mid-size company, the integration will extend over almost two years, a period during which you and your management team will be taken up managing internal projects and putting out fires. Your clients will be neglected. Improvement projects planned prior to the integration will be put aside. And competitors will be quicker than you to seize new business opportunities.

It is not surprising that examples of disastrous failures abound. Time Warner bought AOL for $164 billion in 2001. The acquisition was devalued by $100 billion in 2002, before disposing of it totally in 2009. General Electric proceeded with dozens of acquisitions, which precipitated its fall over the last decade (See ‘Praising Focus’ in this same blog). eBay acquired Skype for $2.6 billion in 2005 before disposing of it for $1.9 billion in 1997.

In terms of risk, organic growth is therefore always the safest option.

Next would be the merging of small businesses that are easier to carry out.

Gerald Levine of Time Warner, on the left, with America Online’s Stephen Case, announcing their agreement in 2000.

And lastly, acquisitions completed by strategic consolidators, meaning acquisitions by market leaders of much smaller companies. Couche-Tard, for example, created billions in value for its shareholders by successfully integrating dozens of regional convenience store chains over the past 20 years.

For an acquisition to succeed, you must consider favourable conditions, and then proceed with concern for the people that are affected.

Favourable conditions

First, the successful acquisition model is one of a profitable company, with a strong management team that benefits from marked competitive advantages and which acquires underperforming companies in the same sector – ideally smaller companies - to accelerate their growth, help them benefit from their competitive advantages and thus create wealth. Companies whose business model has not yet been proven, unprofitable ones, those who have not yet recruited high-level managers for each one of their key positions (sales, operations, TI marketing, finance, human resources), should abstain.

Just as you don’t save a couple by having children, you don’t save a company in difficulty by buying another one.

An acquisition should only be considered if it reinforces the existing business model and contributes to speeding up the achievement of the business plan’s objectives, and never challenges them.

When I joined Van Houtte’s group of retail sales products, our objective was to become the first Canadian roaster in the bulk coffee bean and Arabica coffee sector. In North America, our coffee plant was one of the most admired for its quality control, and our logistic operations for direct-in-store delivery (for coffee beans) were the most efficient. The core of our development was accomplished by natural growth. We did, however, accelerate our penetration in Western Canada by acquiring Gold Cup Coffee, because this company operated with a business model similar to ours and controlled 60% of the market with a very small team, easy to integrate.

In contrast, when Schenker, a German company specialized in international transport of goods, decided to buy BAX Global in 2006 for US$1 billion, the challenge was very different. I was working there as regional VP. While Schenker subcontracted the transport of their clients’ goods, BAX operated some twenty cargo planes from its own airport in Toledo, Ohio. Fixed costs were high. Schenker was very profitable, BAX less, and Schenker’s managers had no experience whatsoever in fleet management. Schenker terminated the air transport operations inherited from BAX Global in 2011. The four years during which Schenker integrated, then tried to save BAX operations, led to a shrinking market share of its traditional business operations. The company never really recovered completely in North America.

Aligning two organizations

To be successful with an integration, we must first listen, and concentrate on the concerns, small and big, of people working in the company. We must bring an alignment of all towards new common goals. And we must act quickly and communicate.

Start planning the integration as soon as possible, i.e., as soon as the transaction is public but maybe even before the closing, which means months before.
Meet the new employees as soon as possible, even if you don’t have answers to all the questions.
This planning must be based on listening to all opinions and points of view, regardless of the hierarchical position of those expressing them. My experience is that first-line employees often have the clearest vision of the challenges to be faced and the possible solutions likely to work.
Be ready to create your new management team as soon as the transaction is confirmed. Be sure to include the strongest elements of each of the two entities that are merging. No favouritism for your old colleagues as that would send a very wrong message. Immediately confirm each manager or VP in his or her role and explain why. Be clear about the expectations and objectives right away. Destroy the silos, reassure people and remove the uncertainties.
Listen and communicate. Speak individually to each member of the management team regularly to know what is going well or not so well, and communicate the latest developments and decisions with the greatest transparency. Conduct meetings with the management team at least every week, or two weeks. Use the forum to discuss resolving sensitive issues as a group.
Don’t forget the sales team: each member’s responsibilities must be confirmed immediately as well. Who takes care of each territory and each client? There should be no grey areas. Sales meetings must regroup the members of both companies right away.
Communicate again. You must speak directly with major clients to reassure them about the continuity of service and answer their questions. As for the sales team, it must speak to all the other regular clients with the same message.
Communicate even more. All the company’s employees must get news from you on the progress of various on-going integration projects. There should be regular communiqués (a minimum of one per week during the first weeks), questions and answers group meetings, and informal visits to each team.

Be honest and upfront. It won’t all be positive; some things will not go as planned: face it! And let your people know what you are doing to minimize the consequences. Employees really abhor sappy corporate speeches.
Work at obtaining quick gains, those which are only possible by transaction, and achieved with the work of team members on your new management team. Producing a positive effect quickly is a source of pride and removes the fears. Target gains in market share, new clients, new products and/or ways of doing things made possible by the integration, rather than reducing costs with layoffs. But if layoffs cannot be avoided, proceed quickly, and when they are done, communicate that clearly.
One of the most complex tasks will be systems integration. To succeed, systems integration must be seen as a change management project, a mobilization challenge rather than a technical project. You will have to communicate and listen to comments of the greater majority, involve first-line employees, and communicate what you will do, and why. To handle it, appoint someone with strong leadership skills and ideally also very comfortable with the analysis process and information systems. For the project team, it must be a full-time job for as long as it takes.