Why M&A Integration is Hard … and What to Do About It

Everyone has read studies proclaiming the majority of acquisitions fail to create shareholder value.  Yet we are witnessing a roaring M&A market with very frothy valuations and no lack of buyers willing to venture into the game.  Great for sellers.  Timing is everything – private equity groups are finding rich exits to vintage deals entered into prior to the great recession that for years looked like they would be losers.  These favorable returns are giving private equity investors even more reason to bring fresh capital to the table.  Meanwhile, strategic buyers, armed with high valuations on their publicly traded shares and plenty of cash on hand have the wherewithal to bid aggressively, further driving up prices.

High purchase prices raise the bar even higher on the task of creating value.  Over the past decade, buyers have clearly understood that value is created not only from opportunistic buying and clever financial engineering, but also from building fundamental business value.  This means executing a business plan that in many cases requires integration of the newly acquired asset with existing operations to achieve a specific business result.  And hence, the discipline of M&A integration has flourished.

Yet, a decade later, M&A integration experts and operating management are still frustrated by the enormous challenges of successful M&A integration.  Despite the good intentions and efforts of management to perform exhaustive strategic analysis and endless due diligence, enabled by scores of strategy consultants more than willing to proffer their ideas and analysis, the ultimate key to success remains execution.  Without confidence in the integration plan, the prospects of executing a successful value-creating deal are no better than the old days.

So why is M&A integration planning and execution so difficult? Here are three reasons:

  1. Lack of information

No matter how exhaustive the pre-closing due diligence, a buyer cannot possibly have full, detailed knowledge about all areas of the target enterprise.  There is no other situation in business where management is asked to create a plan and execute it when the known-unknowns and the unknown-unknowns loom so large.  In truth, most buyers would confess that critical assumptions in many integration plans are based on substantially imperfect information.

The problem is that buyers ignore the root cause, forge on ahead, and assemble the integration plan anyway.  In the heat of the transaction, no one wants to delay the closing date to do more analysis.  That could be a career ending move.   So buyers bluster ahead, create a plan, and promise to senior management that every action will be completed and every objective will be met.  But merely hoping for the best is never a reliable strategy.

  1. Blindly Optimistic Assumptions

Most buyers assume the target company does things pretty similar to the way they do it themselves.  However, companies have vastly different approaches to any operational function.

IT is a great example.  One company utilizes IT as a competitive business function creating value-added service elements.  Another company minimizes IT spending as a necessary evil.  Depending on your starting point, any point-of-view about the IT integration plan and budget will be colored by the differences in your experiences and the common practices of the acquired company.

So, this is what happens.  For planning purposes, the integration team will try to take these differences into account. They do not make aggressive assumptions but consciously try to make “middle-of-the-road” assumptions.

Think of a probability graph – the bell shaped curve, which describes the likelihood of an outcome.  If you specifically plan to be at the mid-point, thinking that you are being reasonable and not too aggressive, this actually means there is a 50% probability that your timing and cost assumptions will be exceeded.  Hence, without realizing it, integration teams regularly put forth plans and budgets with no more than a 50% chance of success.  That, multiplied across many initiatives, spells disaster.

  1. Narrow Mindsets

Amazingly, the source of the greatest asset of an acquisition target will likely be the source of the greatest misunderstandings in the integration process.  Picture a bolt-on acquisition target with an outstanding product portfolio being acquired by a buyer that lacks latest generation product technology.  On paper, it is a perfect fit.  However, the buyer lacks the sophistication and depth of experience to understand how to manage a mature and well-functioning product development group.  The buyer does not have the self-awareness to understand that its mindsets and assumptions about world-class product development are all wrong. What happens to the product development organization in the integration plan?  Whatever the truly value-maximizing approach, it is clear that making decisions through ignorance and faulty mindsets is dangerous.

Another example is management style.  Suppose a buyer is highly analytical in its management process and decision making and the acquisition target operates with a qualitative approach.  One classic trade-off to managing with high analytical accuracy is speed of decision-making. The result is these two companies operate with different velocity in the marketplace.  They each think they have it right and cannot understand the trade-off the other has made.  During integration planning, is there time to thoughtfully value and respect such diversity? Or are differences viewed as weaknesses?

One more example.  Many companies still run with a classic command-and-control style.  Tightly controlled operating and budgeting processes usually mean that results are highly predicable.  However, one classic trade-off to command-and-control is creativity and innovation, which rarely can be predicted.  Do you want predictability or the possibility of maximum upside performance?  In an integration, these two management teams would see each other as either wildly undisciplined or horrifically rigid.

The problem is magnified when embedded assumptions cloud vital, strategic issues and opportunities to create enterprise value.  Usually when strapped for time and marching to a deal closing, broad-minded thinking gets ejected in place of the comfortable approach which has always worked before.

What should buyers do differently? Here are some effective ways to address these challenges and do a better job at integration planning without lengthening the planning timeline:

  1. Incorporate Discovery into the Post-Closing Integration Plan

Incorporate discovery into the post-closing integration plan.  Don’t turn the initial 90 days into a “gotcha” process.  Allow time for discovery.  Expect assumptions to change as guesstimates evolve into thoughtful predictions. Allow expanded knowledge and insight to unfold as business leaders get to know each other.  Plan for a 90 day process to turn contingency placeholders into firm forecasts.  Reward business leaders for uncovering insights and opportunities during the initial post-closing period.

  1. Use Probabilities to Model Assumptions and Outcomes

This can be simplified by using “high”, “medium” and “low” confidence factors when developing project timelines and budgets.  Add in safety factors and contingency spend based on the level of confidence for each initiative.  Recognize that the objective is not to have 100% certainty on every line item – that would be infeasible if not impossible.  Target an 80-90% probability of success which is far better than the 50% probability of success the existing “blind” process generates.

  1. Confront Narrow Mindsets and Lack of Self-Awareness Head On

Using some outside help, conduct facilitated interviews and seek honest answers about culture, style, and the drivers of success.  Ask people what accomplishments they are most proud of, and why?  Ask about the enabling factors that have allowed the historical successes to occur.  Employ a facilitated comparative assessment process to highlight the differences between organizations.  Bridging these differences, and exploiting the underlying strengths, can have a multiplicative effect on enterprise value creation.

About the Author

Daniel Fuhrman

Daniel Fuhrman advises Fortune 100 companies and private equity groups on acquisitions and partnerships. He has assisted in hundreds of transactions and performed numerous post-transaction integrations in many industries.