Some of the industry’s most high profile executives have set the markets abuzz with predictions around impending merger and acquisition (M&A) activity. The financial markets remain strong and competition is fierce, leading companies large and small to consider how they will meet new opportunities and overcome emerging challenges. To that end, M&A presents attractive prospects for a broad range of consolidations players. But striking a deal is just the first step in achieving M&A success. To ensure a successful completion of a deal, it is critical that the proper integration approach be identified, developed and instituted from the start. M&A provides companies with an opportunity to “acquire” sought-after capabilities, infrastructure, technologies or customers. These range from increased competencies across the value chain, expertise in a new vertical or sub-segment, increased market share or expansion into new markets. The end goal is typically to improve profits and corresponding shareholder value. Economic, regulatory and competitive forces generally combine to dictate merger activity levels. The easing of the retrenchment from 2009’s M&A activity lows combined with past cyclicality suggests an increase in M&A volume in 2013 and beyond, as illustrated in follwing photo.
While dealmakers suggest that these assets can easily be acquired, the post-close challenges are often underestimated, leading to disappointing results. In fact, analysts suggest that, on average, less than half of mergers are successful. This whitepaper provides insights into how to make merger integrations successful across the spectrum of merger types. Successful mergers share several common planning and execution characteristics. At the same time, Affinity has found that different acquisition types, characterized by the degree of symmetry across both organizations, call for significantly different integration tactics. This whitepaper outlines the two acquisition types, the specific challenges related to each, common pitfalls of a singular integration approach and a comparison of integrated areas. It also identifies some best practices to be followed, regardless of merger type.
The strategies and goals driving M&A activities differ greatly as companies continuously evaluate and pursue new growth opportunities. To ensure that the integration of merged or acquired companies is successful, Affinity believes that it is critical to match the integration approach to the key characteristics of the specific M&A strategies and goals. While M&A plans can have a wide range of goals and facets, there are two types of integrations: symmetrical integrations and asymmetrical integrations. Although many mergers fall along a continuum somewhere between these two bookends, the majority can be considered as primarily one or the other, as highlighted in Table 1 below. Each type faces specific challenges, which must be addressed to ensure success.
Symmetrical vs. Asymmetrical Integrations
Symmetrical integrations apply when both companies operate the same type of business, are in analogous geographies and have similar products and/or customer bases. The goals of these deals are focused on achieving operational synergies, as well as gaining tactical expansion by increasing existing reach, market share, customer bases and/or product lines. A common example is a multichannel video programming distributor (MVPD) acquiring another MVPD in a similar operating environment as it seeks to increase its subscriber base and revenues, while using its scale and infrastructure to reduce the acquired company’s cost structure. Affinity finds that the biggest challenges of symmetrical integrations center on three key areas: comprehensive integration planning and execution, the need for timely cultural alignment, and infrastructure optimization.
Comprehensive Integration Planning and Execution
A symmetrical integration touches almost every aspect of a business for both companies; hence, virtually all aspects need to be integrated to realize the anticipated synergies. It is a good idea to instill upon key stakeholders that deep integration is the paramount goal. Many expected savings quickly erode when the difficult aspects of a symmetrical integration, ranging from billing systems to engineering management, are delayed by the expediency of seeing other aspects integrated. In supporting an M&A integration for a large multiple-system operator (MSO), Affinity outlined a clear integration plan that was aggressive, but also realistic. The plan incorporated all functional groups and was built from the ground up, rather than with arbitrary top-down dates. When possible, a phased approach is used to allow for a controlled execution of several key integration steps. This is due to the complexity and high number of dependencies across functional areas. These dependencies require clear communication across, and active participation from, the key resources in all areas to ensure that each unit is executing the integration plan based on the defined approach. Any deviation or delay can have a ripple effect on the synergies that were identified as part of the deal model.
Timely Cultural Alignment
Integration of people and processes from both companies needs to be done steadily and quickly to give the resulting entity a consistent corporate culture. The tactical approaches for a speedy cultural integration range from full assimilation to a best-of-breed model. An assimilation approach, where one company serves as the dominant model, is typically deployed when a larger company acquires a smaller entity. When both companies are of similar size, or when the acquired company’s practices are highly-prized, a best-of-breed approach can be employed. Here, the best practices from each company are identified as the end state. Clearly communicating the approach to the integration team will reduce the tendency for each team to pursue its own preferences and avoid inconsistencies and delays. However, due to the similar nature of businesses, the simple reality is that many jobs, systems and practices will become redundant. A primary task is to understand the target resource structure so that critical individuals can be approached early in the process, ideally as early as allowed by legal constraints. This helps to ensure retention, either as an interim or longer-term measure. To assist employee retention in an environment of assimilation, especially in an improving economy, it is critical for the team to communicate the benefits that the merger brings – such as the increased prestige of a highly-regarded brand, better employee benefits or broadened career opportunities. In supporting a recent merger, Affinity helped coordinate resource realignment and retention by ensuring that the target structure aligned with the plans and needs of each key functional team.
Since the goal of a symmetrical integration is typically to provide a tactical expansion of an existing business, the acquired infrastructure is usually a key element when integrating the two companies. Affinity broadly defines infrastructure to include the full range of physical plant and assets, IT and communication systems and service organization groups (e.g., sales, customer care, home technicians, etc.). This includes those that are both customer-facing and internal, within each entity. Affinity typically formulates a strategy based on the categorization of key infrastructure components into one of three categories: 1. Components that can be merged into the existing infrastructure as is or with minimal change; 2. Components that need to be improved or modified in order to meet the acquiring company’s standards; or 3. Redundant components that can be removed or decommissioned. The distribution of components into each category greatly helps define the detailed plan. For example, a larger number of re-useable elements is typically a good thing, but may incur some additional time and costs due to the amount of work needed to standardize different aspects. Similarly, realizing significant savings from decommissioning a redundant infrastructure requires all of its uses to be discontinued, typically accelerating the “long poles” in parallel wind-down tasks. We cannot overstate the importance of minimizing the instances where the infrastructure is not harmonized. In addition to the duplicate platform costs, several indirect savings become more difficult. For example, deferring the integration of billing systems can also reduce the ability to share calls across customer care centers, prevent home technicians from working across a larger footprint and increase the time required for new product introductions.
Asymmetrical integrations apply when both companies operate different businesses or engage in similar businesses, but in completely separate geographies and/or regulatory environments, with limited to no customer overlaps. This type of integration tends to be utilized when the goals of the merger or acquisition focuses on extending the value chain or diversifying a portfolio by buying new competencies, product lines or geographies. Examples of asymmetrical integrations include an MVPD buying a cloud storage company to broaden its product offerings or a domestic wireless carrier’s acquisition of an international peer as an initial beachhead to assess global expansion. Leveraging large-scale operational synergies is not usually a big driver of asymmetrical integrations, since the focus is primarily on integrating just a few functional and/or support areas. Integration of people, processes and technology from both companies tends to be done in an arm’s length manner, where only a limited number of management, strategic and/or product functions are integrated, with a focus on ensuring that both companies retain key aspects of their cultures, geographic focus and operations. The biggest challenges of asymmetrical integrations center on the following key areas: selective integration priorities, retaining key aspects of each company’s culture and a focus on longer-term evolution.
Selective Integration Priorities
Asymmetrical integrations focus on re-arranging selective areas of people, processes and technology in a new way. Ensuring that all stakeholders are clear on these specific, selective goals is a critical first step in approaching any asymmetrical integration. What are the selective areas to be re-arranged? What are the new corporate guideposts to measure success? It is important to identify and prioritize both the key business functions that will be integrated, as well as those that will not be integrated, to achieve the merger goals. Losing focus of these goals and priorities during an asymmetrical integration can divert valuable resources from the effort and cause significant delays in achieving the target benefits. Affinity’s approach to asymmetrical integrations is to examine each functional area during the early planning stages and determine the required level of integration to meet the overall M&A goals. Once those levels are identified, Affinity compiles a holistic view of the integration requirements for each functional area and prioritizes them based on their impacts on achieving strategic benefits, ease of integration and critical business needs.
Retaining Key Aspects of Each Company’s Culture
While the integration of systems and processes can be challenging due to operational and technical constraints, it is the integration of people that has the biggest potential to derail the value of an asymmetrical integration. For many companies, corporate culture is part of the “secret sauce” that enables them to innovate, achieve strategic goals and create value. To avoid a clash of cultures that could have a negative impact on a merger, it is critical to identify and protect the defining aspects of each company’s culture. This requires both a top-down and bottom-up understanding of an organization’s internal dynamics and a development of clear rules of engagement for how both cultures will operate together. On a recent asymmetrical integration for a global wireless carrier, Affinity deployed a methodology to retain each company’s culture that was focused on innovation as opposed to integration. To ensure that both companies would continue to innovate, grow and expand their joint sales opportunities, Affinity developed a series of operational firewalls and rules of engagement that enabled each company to focus their teams on independently developing new products on a shared platform. The employees from both companies continued to focus on what they did best and how they did it. They benefited from clear demarcations of how and when they should work together, rather than forcing dissimilar cultures into one mold.
Focus on Longer-Term Evolution
Asymmetrical integrations often take longer to develop value, due to the inevitable timeframes required to learn a new business or geography and develop cross-business processes without dampening each company’s capabilities and employee morale. Hence, the legitimate integration plan may be generally less broad and comprehensive in the short-term compared with a symmetrical acquisition. The asymmetrical approach usually spans a longer time horizon with well-defined goals, activities and checkpoints. Without minimizing the importance of completing immediate merger tasks here, a singular focus on immediate activities could lead to unrealized long-term value. Often, successful acquiring companies of symmetrical integrations view mergers as “quick in-and-out” initiatives regarding efforts, resources and budgets due to their experience and honed integration steps. Asymmetrical integrations usually require a longer time horizon and complex approach. Affinity utilizes a comprehensive methodology that accounts for both the immediate integration needs and the overall merger’s evolutionary goals. In this approach, we define the plan for each functional area at the day of close, in the short-term, and in the years to follow. By defining these tactics and milestones up front, key stakeholders will understand how and when each functional area will evolve.
Comparing Integration Types
The following section summarizes common pitfalls when integration types are not recognized, and illustrates an example of functional areas impacted by each merger type. Table 2 presents some of the common pitfalls of each integration type. We have noticed that these missteps are not limited to merger integration novices. Companies with experienced integration teams and well-honed processes may naturally approach a new integration in the same manner as past ones, even when the different type suggests otherwise.
Table 2: Common Pitfalls by Integration Type
Table 3 below shows an illustrative comparison of the levels of integration for each function for both symmetrical and asymmetrical integrations. Symmetrical integrations generally aim to integrate every functional area. Asymmetrical integrates selectively integrate some functional areas immediately and others at arm’s length or over time, while other areas are left alone. Note that this table is purely illustrative and that a case-by-case understanding of a merger’s goals and organizations’ specific structure is required to determine targeted priorities and timeframes.
Table 3: Illustrative Comparison of Integrated Functional Areas
Common Success Factors
The overarching theme of this whitepaper is identifying the differences in M&A integrations, recognizing the types of approaches being pursued and understanding how to implement accordingly. At the same time, Affinity advocates that a core set of common success factors exists, regardless of integration type. These include:
1. a. Articulating a clear and simple big-picture vision for the merged company and an overall integration strategy. Defining key strategic and operational benefits of the deal, how the acquisition fits into the firm’s culture, and how it complements its offerings. Understanding how the merged company will operate and agreeing on the desired integration approach.
2. b. Utilizing a “clean room” concept in the pre-close stages to control information exchanges. Defining clear processes for sharing information to ensure that all Mergers and Acquisitions Act of Japan(2006) requirements are understood and met. Focusing information exchanges and meetings on integration planning and keeping them separate from business-as-usual activities.
3. c. Establishing an inclusive integration program structure and mobilizing the team. Assigning a small core team that reports directly to the senior executives, gaining agreement on the structure from the merged partner and securing key resources. Establishing a meeting cadence with well-managed escalation paths and clear communication leads.
4. d. Assigning functional leads and defining the integration approaches for each area to be integrated. Ensuring clear accountability of strategy and approach development for each functional area. Encouraging engagement from key executives.
5. e. Creating an integration plan that is aggressive, yet realistic to accomplish. Building from the ground up, not with arbitrary top-down dates. Integrating multiple moving parts with clear plans, enforced change controls and active cross-functional communications.
6. f. Developing a comprehensive end-to-end communication plan and deploying it using a standard set of communication tools. Communicating integration program goals, tasks and challenges clearly, consistently, and often. Facilitating cross-functional kick-offs across both entities, and establish a regular, cascading communication plan.
Contact a Affinity Group advisor, Contact us for any investment and business inquiries.