Tag Archives: organization

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.

Effective Visions

For those senior executives seeking to develop a new vision for their firms, I offer these key attributes of an effective vision. The effective vision should:

  • Be differentiated. Is the vision substantially unique when compared to competitors and substitutes? Does the vision avoid the “motherhood and apple pie” trap?
  • Instigate change. Is the new vision aligned with a change strategy? Are we trying to “fix” something that could not be addressed with the prior vision?
  • Be inspirational. Does the vision attract people? People include clients, client prospects, employees, recruiting candidates, and people in the general community.
  • Be motivational. Does the vision cause people to enthusiastically jump out of bed each morning to help realize the vision?
  • Be enduring. Does the vision reach far into the future? How enduring is the vision? Will it catch a mega-trend in the firm’s chosen markets? The duration of an effective vision should be measured in decades, not single digit years.
  • Be out of reach. Is the vision impossible to attain? If it is, then the vision is something employees will always strive to achieve. The vision will last beyond the lives of each generation of the firm.
  • Be measurable. How do we know we are making progress? Is there something tangible that is not subject to interpretation?
  • Be aligned with a human resource strategy. Will the vision cause employees to behave the way we want? Will the vision attract and retain the people we want? Do we expect the vision to drive out the people we don’t want? Is it okay for people to opt out and leave the firm?
  • Be proudly shared. Is the vision one which can be whole-heartedly share inside and outside the firm? How will clients, recruiting prospects, competitors, and the population at large react to our vision? Does the vision align with the firm’s brand promise?
  • Be easy to articulate. Can people consistently communicate the vision without stumbling or fumbling?

Some examples of what I consider to be effective vision statements, which admittedly do change over long periods of time, include:

  • Coca-Cola: A Coca-Cola within reach of everyone in the world.
  • Apple Computer: A computer on every desktop.
  • Honda: Three Honda motors in every household.

For more about effective visions, please feel free to contact me at rowland.chen@gmail.com

Business Architecture & Design Thinking

I often take on the role of Business Architect for my clients to design for them front-to-back enterprises that embody future state visions, innovation, and sustainable competitive advantage. Business architecting is a blend of science and art with the role of the Business Architect requiring the integration of multiple perspectives and multiple disciplines to create a tight package for the client. Some call this “Design Thinking”.

Tim Brown, CEO of IDEO, and Roger Martin, Dean at the Rotman School of Management, currently evangelize the application of Design Thinking in the context of entire businesses, going well beyond traditional product development role of designers. Brown and Martin have both developed powerful frameworks that drive mindset change for interdisciplinary teams as those teams develop creative solutions to business and social problems. Brown and Martin have authored books on Design Thinking (among them, “Change By Design” by Brown and “The Design of Business” by Martin) which I highly recommend.

Multi-Layer Business Architecture

Here is a Multi-layer Business Architecture framework that I have used successfully on consulting engagements with numerous senior executives over the years. Layers and “plumbing” comprise the architecture model, which provides an executive a means to envision the transformed business. The framework also gives interdisciplinary, cross-functional teams a hard deliverable to create as they formulate the right, insightful problem statement and develop innovative solutions to tackle the complexities of transformation.

By design, the framework sets up detailed planning, management of business impact, mitigation of risks, establishment of implementation teams, integrated execution, and comprehensive transformation management. Business architecting applies Design Thinking to an entire enterprise. The Multi-layer Business Architecture helps business design teams organize work, provides structured play areas for creativity, and serves as an integrated rendering of a senior executive team’s vision.

Substructures of the Architecture Serve to Both Inform and to Define the Outputs of the Business Architecture Process

The Layers and Example Substructures

  • Macro-economic environment
    • Trends and forecasts
    • Growth or decline
    • Globalization
    • Deep and prolonged recession
    • Slow recovery to the new normal
  • Context of the industry or industries
    • Industry constructs and constraints
    • Eco-systems and sub-systems
    • Influencer maps
    • Porter’s 5 forces
    • Disruptive innovations and chasms
  • Business strategy
    • Chosen markets
    • Unique, attractive, and defensible value propositions
    • Portfolio of companies and products
    • Growth scenarios
    • Long term vision and short term objectives
  • Financial model
    • Revenue generation processes
    • Internal strategic costs
    • Capital structure
  • Interactions with the Enterprise
    • Interaction design
    • Empathy and insight
    • Customers’ experiences with the enterprise’s products and services
    • Ease of doing business with the enterprise: channel partners, suppliers, service providers, financial capital providers
  • Organization and process
    • Organizing principles
    • Facilitation of strategy execution
    • Core processes along the value chain
    • Inter-organization coordination
    • Support processes
    • Key performance measures
  • Information technology
    • Information strategy
    • Technology and systems architecture
    • Competencies
    • Right-sourcing
  • Business integration
    • Frameworks
    • Connections
    • Dependencies
    • Communities
    • Performance measures and performance management

The  Plumbing and Example Substructures

  • Leadership
    • Decision process
    • Leadership style
    • Management changes
  • People
    • Human capital strategy
    • Staffing levels
    • Skills and development
    • Organization knowledge and learning
    • Rewarded behaviors and cultural alignment

Change Spectrum

Change is not an absolute. Degrees of change reside along a spectrum ranging from incremental change to larger scale, strategic change to up-heaving, fundamental change. As a Business Architect, I map the change occurring or required along each layer of the Multi-layer Business Architecture. The end goal is to aid an executive to achieve or sustain competitive advantage and other measures of business improvement for the executive’s firm. The leadership of a firm might choose to lead change in certain layers, follow a leader in others, and do nothing for the rest. Senior executives pick their spots. Map it out. Select a change strategy. Manage it. Beat the competition.

Reverse Architecting and Forward Implementation

For implementation, an executive team cannot simply jump in and start transforming an enterprise into the vision captured by a Business Architecture. The team must know enough about the current state to know where to begin the transformation. Here, a process of Reverse Architecting lays out the current state of an enterprise in the same framework as the future-state vision. With this construct, leadership and implementation teams have detailed blueprints and plans for transformation. Consider the remodeling of a kitchen. It is best to know where the plumbing and wiring are behind the walls before beginning to tear down, re-plumb, re-wire, and re-build.

Become a Draftsman

Consider adopting the role of Business Architect when your enterprise is challenged with the need to transform. Use the mindset, techniques, and tools of design thinking to create a vision for the transformed business. Develop a Multi-layer Business Architecture to provide detailed blueprints and plans to implement the vision. Do not neglect the Reverse Architecture to know what you are changing, where to start, and how to direct implementation teams.