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Merger and Acquisition Integration - Four Groups

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Acquisitions vary widely in ambition and scope, ranging from relatively small bolt-on transactions to transformative mergers. Whilst it is true that deals based solely on acquiring a new technology or …

Acquisitions vary widely in ambition and scope, ranging from relatively small bolt-on transactions to transformative mergers. Whilst it is true that deals based solely on acquiring a new technology or product can be relatively straightforward to integrate, the majority of transactions require a more sophisticated approach and therefore pose more complex challenges and ultimately risks to the acquirer.

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  • 1. 4G M&A Integration Linking Behaviour to Bottom Line Performance Merger and Acquisition Integration Acquisitions vary widely in ambition and scope, ranging from relatively small bolt-on transactions to transformative mergers. Whilst it is true that deals based solely on acquiring a new technology or product can be relatively straight- forward to integrate, the majority of transactions require a more sophisticated approach and therefore pose more complex challenges and ultimately risks to the acquirer. On the whole, acquirers are adept at executing the technical or process side of the transaction, such as technology, systems and infrastructure. However, many acquisitions fail to deliver the anticipated benefits because they do not take into account the more intangible aspects of integration. The difficulties encountered when it comes to integrating two independent enti- ties can quickly lead to unexpected costs, increased frustration, poor morale and require considerable time and energy from senior management. Four Groups has developed a set of simple processes and tools which address some of the potential pitfalls of the integra- tion process; by identifying where difficulties or problems are likely to emerge and where easy wins can be made, it is pos- sible to accelerate and smooth post-acquisition integration, reducing the risk of the transaction failing to deliver the antici- pated benefits. Specifically, these tools address cultural compatibility, assembling the optimum integration team, retaining and motivating key staff and managing formal and informal communication. Background careful management of the people technology or in most cases a combina- involved and other intangible factors tion of factors. Underlying nearly all Acquisitions vary widely in ambition surrounding the integration. Assuming transactions is the belief that the com- and scope, ranging from relatively that only motivated employees add bined organisation will be stronger and small bolt-on transactions to transfor- value, treating each transaction as more profitable than the current entity. mative mergers. Whilst it is true that unique and understanding the type of deals predicated solely on acquiring a approach required to optimise the On paper and in financial models, a new technology or product can be rela- potential of the acquisition lies at the transaction may make sound commer- tively straightforward to integrate, heart of a successful integration strate- cial sense, however the reality is often requiring the assimilation of new tech- gy. very different. This is generally because nology and know-how, the majority of the data used to justify a transaction is transactions place some value in the There are a number of reasons why the information that is most readily people and values of the acquired com- companies acquire others. The ration- available and easily quantified. Rarely pany, requiring that morale and good- ale behind an acquisition may range does one come across a quantitative will is maintained through what is a from; gaining entry into new markets, comparison of organisational cultures, period of considerable stress and acquiring new capabilities, diversifying and key internal and external net- uncertainty. In order to achieve this, product range, boosting market share, works. Numerous studies over the past acquirers need to pay attention to the accelerating growth, accessing new 40 years, using a variety of criteria sug-
  • 2. Merger and Acquisition Integration gest that historically only around a third cultural aspects of an acquisition is the relative ease or difficulty with of all acquisitions deliver the benefits often cited as a cause of a poor or dis- which the two organisations can be originally envisaged. Given the amount appointing outcome. In this case, integrated. One pertinent question bid- of time and money put into undertak- acquirers should not only focus on the ders should ask themselves is, “Do our ing these transactions, this is a statistic strategic or commercial rationale corporate values and culture represent which should make companies think behind the deal but also take into con- an attractive alternative to those of the long and hard before executing such sideration how the transaction will target?” If the answer is yes, fully inte- projects1. impact the identity and values of the grating the target should be a relative- organisations involved. ly smooth process, if the answer is no, Whereas the process side of making an alternative scenarios should be consid- acquisition is well understood, such as Despite thorough due diligence and ered such as letting the target maintain dealing with IT systems, accounting planning, many acquirers fail to take a higher degree of autonomy and dis- practices, payroll and benefits, it is the into account the more intangible tinct identity. more abstract or intangible issues of aspects of integration, in particular a the transaction which often cause the thorough understanding of the cultural Retaining, engaging with and moti- most trouble. Common factors under- differences between bidder and target. vating key personnel mining the success of acquisitions Culture is often an intangible or include; abstract concept which is difficult to When executing an acquisition, one of quantify and compare. In simple terms the key issues facing acquirers is how • Failure to accurately understand and culture can be summarised as “how we to identify and retain key personnel. gauge the cultural implications of com- do things here” and represents consid- Considerable value can be destroyed by bining the two organisations erations such as how information is departures and the subsequent loss of • Failure to understand the networks communicated, how decisions get knowledge. Many acquirers will look to and relationships which are key to the made, the working style of the organi- avoid this outcome by identifying key functioning of the target company sation, attitudes to risk and other vari- individuals and offering them financial • An inability to identify, retain and ables which define each organisation and other benefits in order to remain motivate key staff at the target compa- as unique. with the enlarged organisation. ny Although effective in the short-term, • Failing to assemble an effective inte- Taking a systematic approach to com- this strategy often turns out to be a gration team pare organisational cultures and under- divisive and negative influence on • Poor formal and informal communica- stand areas of compatibility helps morale. tion between acquirer and target develop a clear and consistent under- standing of the challenges and poten- In order to understand how best to deal In summary, many acquirers fail to take tial pitfalls facing the acquirer. with this issue, it is important to bear in into account the often intangible or hid- Furthermore, understanding how the mind that when making an acquisition, den aspects of what makes each trans- combined organisation will be different companies buy more than the assets action unique. Taking a one-size fits all from the current reality is also a rele- and infrastructure of the target compa- approach or ignoring the personal and vant consideration. This process of ny. Acquisitions also involve a series of cultural element of the acquisition is “acculturation” is worth investigating, relationships and networks, between likely to lead to missed opportunities particularly for relatively large transac- individuals, teams, departments, sup- and an inability to maximise the tions where effects of the transaction pliers and clients. The challenge facing expected gains from the transaction. will be felt across all areas of the com- the acquirer is to understand the key bined organisation. relationships which are likely to enable Cultural Compatibility the fulfilment of all the goals of the The compatibility or lack of it between acquisition. This means that acquirers The failure to appreciate or manage the bidder and target is likely to indicate need to do more than identify the
  • 3. Merger and Acquisition Integration “stars” or key performers, it is also nec- informal day to day aspects of the inte- where individuals are fully aware of the essary to understand the networks and gration. By aligning the integration culture and values of the target audi- relationships which allow these individ- team with the senior management at ence and capable of forming a strong uals to excel. the target company, the acquirer is collaborative relationship with key maximising the chances of strong rela- executives at the target company, com- By identifying and prioritising the rela- tionships and understanding develop- munication is likely to be consistent tionships and networks which allow ing between the organisations. and transparent on all levels. key staff to perform, acquirers can identify where the most value lies in Communication Where Four Groups fits in; terms of people and resources. Efforts to maintain and develop these net- Communication is another key factor Four Groups has developed a set of pro- works make the success of the integra- often neglected or mis-managed by prietary tools and processes which shed tion far more achievable. acquirers. Done well, it can accelerate light on some of the more intangible and strengthen the links between the aspects of information gathering prior Assembling the right team to lead two organisations and increase the to and during the integration process; the integration likelihood of the goals of the transac- in particular providing systematic and tion being realised. Done badly and it quantitative information comparing Failing to allocate sufficient resources will have the opposite effect. corporate cultures, assembling the or assemble an effective team to man- most effective integration team and age the integration process is a further By delivering a transparent and clear identifying key individuals and relation- cause of poor post-deal performance. communication programme, acquirers ships necessary to make the acquisition An integration process that is under- can address a number of key concerns successful. resourced and lacking commitment and of personnel and avoid widespread effort from senior management rumour and speculation from spread- Four Groups helps the integration becomes a burden on both companies. ing. By being consistent and transpar- process on a number of practical levels; For the target company in particular, ent, it is also likely that the acquirer this can lead to decreasing morale and will more develop a reputation as Pre-deal Screening and Planning a poor perception of the acquirer. being credible and trustworthy. During the pre-deal evaluation phase, In addition to allocating sufficient phys- In addition to having a formal commu- using Four Groups’ proprietary Merger ical resources to the integration nication structure in place, covering Scan system enables acquirers to sys- process, it is also necessary for the areas such as new employment terms, tematically compare the compatibility composition of the integration team to redundancies or any future relocation, between corporate cultures. This reflect the nature and demands of the informal communication is equally enables the potential acquirer to under- specific acquisition. A team that suc- important in ensuring a smooth inte- stand the cultural gaps or similarities cessfully completes the integration of gration. Day to day contact with staff, between organisations. The process is one company may not be exactly the customers and suppliers should reflect quick and simple to undertake and can same team to successfully work on the the strategy and rationale behind the therefore be used to consider and com- next project where a different approach transaction. It should also acknowledge pare a number of potential targets. may be required. Organisations need to the strengths and achievements of the Merger Scan makes the cultural aspects be aware of the need to combine indi- target company. The quality of informal of integration tangible meaning that viduals who are process specialists and communication is likely to impact on the process becomes easier to plan and capable of dealing with the nuts and the speed with which relationships are more manageable. In addition to iden- bolts of the transaction with managers formed between the two organisations. tifying cultural similarities “merger- who can execute a communication scan” also highlights areas of incompat- strategy suited to the target and other By assembling an integration team ibility or likely conflict. For relatively
  • 4. Merger and Acquisition Integration large scale transactions the use of of the integration team with key indi- “Merger Scan” will also provide infor- viduals at the target company. By mation as to how the culture of the ensuring that these key relationships combined organisation will change are strong and robust, communication from the existing scenario. between the organisations will be clear and consistent. Furthermore, strong Once the culture of a target company is relationships will help develop trust understood, it is then possible using between the organisations. Four Groups’ proprietary psychometric tool, 4G to identify and assemble the Conclusion optimum integration team to lead the project. By putting together a team that In conclusion, 4G helps quantify and understands the target company and optimise the intangible elements of a has strong levels of internal consistency transaction. Starting with pre-deal and communication, the likelihood of selection and cultural compatibility, strong mutual understanding develop- through to retaining key personnel, ing between both organisations is max- building strong relationships between imised. both parties and creating the right inte- gration team, 4G makes new and unique insights available to those The integration process charged with realising the value from mergers and acquisition activity. Once a deal has been agreed and the integration process started, 4G provides significant elements of valuable data to help acquirers manage the integration process. In particular, 4G helps the acquirer understand where the key net- works and relationships in the target company exist. This enables a far more effective approach to identifying key individuals and the people they rely on to get the job done. 4G also enables, acquirers to manage the communication process more effec- tively, in particular, aligning members Four Groups Ltd 5 St. Johns Lane London EC1M 4BH, United Kingdom Tel: +44 (0) 20 7250 4779 Email: contact@fourgroups.com http://www.fourgroups.com © 2008 Four Groups Ltd, 5 St. Johns Lane London EC1M 4BH, United Kingdom. All rights reserved. No part of this document may be reproduced without Company Number: 4650494 express written permission from Four Groups Ltd. Image by http://sxc.hu VAT Number: 817 7962 85 Registered in England and Wales
  • 5. Merger and Acquisition Integration Footnote 1. http://tinyurl.com/69yuvp About Four Groups Four Groups has developed a new approach called 4G to understanding behaviour, relationships and culture. 4G provides its users with insight into per- sonal characteristics, how relationships develop within teams and groups and how culture can be best defined and managed. 4G provides organisations with infor- mation on how best to deploy and opti- mise the performance of their people. It also enables preventative measures to be taken which prevent the more negative aspects of interaction and group dynamics such as minimising personal friction and reducing misun- derstanding between colleagues. 4G represents a systematic approach to managing previously intangible aspects of organisational life. The methodology is easily replicable and can be imple- mented quickly and efficiently.