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Business Integration Applies across 5 Distinct Situations

Bus Combo Core Competences

3 to the 3rd addresses each specific client situation with custom-tailored methodologies based on the end-states and financial results desired. In the case of acquisition integration, merger integration, consolidation of business units, functional centralization, and creation of shared service organizations, we believe a common set of business objectives exists across all business integration programs. Same client drivers, same end games, same challenges, same consulting services.

However, 3 to the 3rd does not pull methodology books off the shelf and apply standardized approaches to all clients. We start with a baseline based on our years in the integration business. We then custom design and implement integration with a client’s organization engaged every step of the way.

What Works in Business Combination Integration

alchemists

So what works when integrating acquisitions, mergers, and business unit consolidations? After 3 decades performing business integrations, here’s a list of “better” practices we have developed from experiences in over 20 integrative situations.

(We say “better” practices as opposed to “best” practices because we do not believe there is ever truly a best. In the context of ever improving competitive advantage, there will always be a business practice or strategy which is better than the one you have. Assuming you can effectively adopt someone else’s practice, better firms always look for the next better approach to beating competitors or improve internal processes.)

  • Articulate vision in financial and non-financial terms
  • Focus on both customer and employee retention – pay attention to the details that matter most
  • Develop detailed plans pre-close involving stakeholders from the acquirer and the acquired
  • Determine specific value milestones across the business
  • Determine specific risk mitigation milestones across the business
  • Communicate, communicate, communicate
  • Resolve people and organizational issues quickly
  • Understand and leverage the cycle of change
  • Build and retain integration core competencies (people, process, tools) for an acquisitive firm
  • Move quickly to complete the integration in a matter of weeks or months not years
  • Monitor progress and remediate issues rapidly

These better practices evolve over time as new business models and new operating processes emerge.

What’s Your M&A End-State Vision?

Having a shared vision of the end-state of an merger or acquisition is required for the successful realization of the original deal thesis and value to be gained from the business combination – a Critical Success Factor. In our work, what we find is the end-state vision can be portrayed by a simple picture. This picture drives alignment among senior executives, investors, and the numerous stakeholders in the transaction and integration of two enterprises.

Below is an illustration of the alternate end-states two firms can adopt and use for various purposes inclusive of integration planning and execution.

Slide0

Standalone Model

  • Holding company
  • Decentralized governance
  • Loosely coupled coordination
  • Few shared resources and capabilities
  • Synergy Model

Strategic business units

  • Cross-selling
  • Cost reduction
  • Shared services
  • Balance sheet combination

Consumption Model

  • Combined product lines, market segments, and channels
  • Integrated technologies and intellectual assets
  • Single operations and infrastructure
  • One entity and governance structure

Transformation Model

  • New lines of combined business
  • New value propositions
  • New industries
  • Integrated core competencies
  • Step beyond the obvious

In the most extreme end-state, a transformed business combination, the new enterprise need not undertake all integration challenges in one move. A direct line between the pre-transaction firms and transformation does not have to be the only pathway. Senior executives and governing boards might select a progression of strategic integration moves. For example, the transformation can be achieved through a roadmap such as:

Slide2

Multiple paths exist for achieving the end-state vision of new business combinations. Whether moving directly from the pre-transaction state to the ultimate business structure or selecting a series of strategic integration moves depends on the optimization of several variables such as:

  1. Financial goal
  2. Value drivers
  3. Market opportunities
  4. Speed requirements
  5. Risk tolerance
  6. Cultural differences
  7. Change capability
  8. And others

When considering potential mergers and acquisitions, what is your end-state vision? What are your strategic integration moves to realize that vision? Will these moves realize your deal thesis for value creation?

The Acquisition Value Leaky Pipe

We have seen in the two previous posts the 3 to the 3rd transformation-based acquisition integration method and a framework for decomposing an investment thesis into eight parts.

But where along the acquisition process are the potential risks to preserving acquisition value? 3 to the 3rd combines the transformation method, the deal thesis framework, and the “leaky pipe” concept which we had previously applied to supply chains.

Along the steps of the acquisition process, value can “leak” anywhere and anytime. We represent the acquisition value leaky pipe below.

Slide2

Risks begin with corporate strategy pre-transaction (usually a growth strategy) and continue through integration.

When you undertake acquisitions, be cognizant of these potential risks to deal value. These risks can form the basis for acquisition integration and a means for mitigation and scenario planning.

Acquisition Investment Thesis Decomposition

Buy Sell

Many reasons exist for a firm to execute a strategic acquisition. Investment theses vary from deal to deal but a general framework such as the one shown below effectively sets expectations for buyers, sellers, financial backers, and stakeholders chartered to integrate an acquired company.

3 to the 3rd works with strategic acquirers to clearly define the specifics of a deal and leverages the following eight component framework throughout an acquisition’s lifecycle.

Slide1

A deal thesis decomposes to eight elements:

  1. Growth with new markets and new products or services
  2. Marketshare gains in existing theaters or product categories
  3. Innovation usually enabled by disruptive technologies
  4. Portfolio of offerings expansion into adjacent or step-out spaces
  5. Combined valuation of the integrated firm
  6. Talent acquisition to add capabilities
  7. Culture shifts to evolve or transformation legacy organizational behaviors
  8. Process, new business models, and new infrastructure capabilities

Different Industries Weigh Thesis Components Differently

Each deal will have different relative weights for each thesis component. Through hands-on experience and research, we have found a generalizable pattern based on industry sector.

Modeled below are deals in technology, consumer products, and financial services. The orange components receive heavier weighting in each industry example shown.

Technology firms include acquisitive companies such as Cisco, Google, and Yahoo.

Slide4

Consumer product companies include PepsiCo, InBev, and Heinz.

Slide5

Financial services companies include Capital One, TD Ameritrade, and Charles Schwab.

Slide6

Not surprising, common across the industries is an emphasis on growth and the valuation of the combination.

What we find in acquisition integration is the value of clearly articulating the strategic intent of the deal and using the decomposition framework to align deal makers, executives for buyers and sellers. and post-acquisition integration stakeholders.

Things to Consider

When you undertake your strategic acquisition which investment thesis components do you emphasize most? Does the seller agree? How will you communicate your investment thesis and gain alignment from all stakeholders pre- and post-transaction?

3 to the 3rd Acquisition Integration Method: Manage the Transformation

Strategic buyers. Private equity. Venture capital. Banks. Foreign concerns. All manner of players participate in the current acquisition frenzy. Dealogic predicts that 2015 will see a record level of acquisitions – $4.6 trillion worldwide. 3 to the 3rd’s work in this space is focused on post-acquisition integration with a smattering of work in pre-transaction financial analysis, operational due diligence, and acquisition integration planning.

Acquisition integration methods abound. Many are focused on the what – the business operations and financial aspects of absorbing the acquired into the acquirer. Best practices highlight the importance of the human capital factor in the integration process, also known as change management. Unfortunately, change management often receives no more than lip service and often includes no more than communications.

In our experience, successful acquisition integrations weave change management throughout all activities and actions. Change management spans executive alignment, stakeholder alignment, communications, training, business case development, managing resistance, and coaching & counseling.

With this in mind, we use a 5-stage Acquisition Integration approach with an overarching theme of Transformation. These post-transaction 5 stages are depicted below.


3TT3 Acquisition Integration Slide


Stage 1: Mobilize: Engage all stakeholders in the acquired and the acquirer’s organizations from the front-line to the executive team; gain alignment with integration vision, strategies, and plans

Stage 2: Launch: Flawlessly execute first 90 day plans; retain key employees; retain customers; retain channel partners; develop product and technology roadmaps; re-think go-to-market actions

Stage 3: Transform: Integrate strategies, operating processes, systems, organizations, financial reporting; and G&A functions

Stage 4: Remediate: Monitor against acquisition integration critical success factors; proactively course correct and re-align integration; stabilize operations

Stage 5: Harmonize: Optimize the combined business; grow the top-line; drive out avoidable costs; realize the original deal thesis

In future 3 to the 3rd Knowledge Transfer pieces, we will further explore various aspects of acquisition integration.

For acquisitive firms, we hope the 3 to the 3rd method, with its emphasis on Transformation and its human factors, helps you as you plan and execute your acquisition integrations.

Plugging the Supply Chain “Leaky Pipe”

manufacturing material supply chain

I had the good fortune of being able to help the CEO of a manufacturing firm a few years back to address the firm’s “Supply Chain Financial Performance”. The scope of the supply chain, in this situation, was the end-to-end process from product design through placing the product “in service” at the customer’s location.

Working Hypotheses

Before launching into the actual work, the CEO and I had to achieve an agreement with the senior staff that a financial problem with the supply chain existed. We were able to do this not by stating the problem in a conclusive manner, but by stating hypotheses – conjectures that would need to be validated or refuted. Typically, one cannot dismiss an hypothesis without documented facts and data.

The CEO and I came up with these two hypotheses.

  • Improvements to our firm’s supply chain can drop significant financial benefits (revenue and cost) to the bottom-line.
  • With a laser-focus on the supply chain’s financial metrics, specific improvement initiatives can be launched and executed to realize those benefits.

Being hypotheses, the senior staff could object and push back. But in order to prove or refute these hypotheses, facts were required. The staff could do nothing else, but accept the hypotheses as statements to validate or refute.

The Leaky Pipe

As an aid during the work, we used the metaphor of the supply chain being a pipeline through which material flowed. Opportunity for improvement exists if there are leaks in the pipe. This “leaky pipe” formed a great tool for the senior staff to visualize the opportunity.

ImageA Supply Chain’s Key Financial Metrics

Below is a set of financial metrics for a supply chain ranging from the cost to produce a product by design to the cost of substandard quality to logistical cost, both inbound and outbound. What executives need to keep in mind is ineffective supply chains impact both cost and revenue.

From this set of metrics, the senior staff selected the key ones on which to focus during our efforts to improve financial performance. This selection was done with input from employees working throughout the supply chain including managers and front-line team members.

Image

Improvement Approach

Here is the approach we used for identifying and fixing supply chain issues from a financial metrics point-of-view. Three major stages were analysis, targeting, and execution.

Analysis began with selecting key financial metrics which, when improved, would drive the most significant improvements to the firm’s bottom-line and hence, to shareholder value. Analysis proceeded by determining the As-Is values of the metrics and then identifying issues along the entire supply chain that impact those financial metrics.

Targeting was straightforward. Probably the most important step in this stage was the final one: assigning accountabilities for hitting the financial targets. Specific financial metrics were assigned to a single executive. And we formulated a shared goal. Individual and shared goals were linked to individual performance evaluations.

Execution is where the rubber meets the road. We found cross-functional teams using a structured 7-step problem solving process worked best. It was important that each team member was effectively trained in the problem solving approach so a common framework and a common language exist. A cross-functional team was established for each targeted financial metric.

A program management structure was overlaid for coordination, integration, and synchronization of the teams throughout problem solving and implementation. In this case, a Program Management Office (PMO) was established with additional accountabilities for training, communications, opportunity logging, business case development, financial calculation support, and benefits tracking.

Image

So How Did We Do?

The leaky pipe and the two hypotheses proved to be useful aids in aligning the senior staff to the need to address the financial implications of an inefficient supply chain. Leveraging input from employees, the staff selected “Cost of Quality” and “Cost of Inventory” as two broad categories to address.

Assigning accountabilities for achieving targeted improvements had a unique twist. Cost of Quality was assigned to the head of Sales; Cost of Inventory was assigned to the Chief Financial Officer. These assignments emphasized the requirement for a cross-functional approach.

Cross-functional teams were formed. A PMO was established. And significant reductions in inventory and root causes of quality issues were realized over an eight-month period.

The Minimum Takeaways

  • Start by aligning senior staff to the idea that opportunities exist to capture financial benefits (cost and revenue) through addressing supply chain issues
  • Select the financial metrics that will have the greatest impact to improving shareholder value
  • Form cross-functional teams, one for each financial metric being targeted for improvement
  • Establish mechanisms and processes, such as a program management structure, to integrate output from all the teams and track benefits
  • Communicate and celebrate wins throughout the organization