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Are You Ready for Your Next Acquisition?
The acquisition cycle is heating up. Companies are sitting on unprecedented cash
reserves, organic growth is nearly flat for most industries, and P-E ratios are
at their lowest in many years. Add to this brew the fact that management is under
pressure to use the cash to benefit shareholders by paying dividends, reinvesting
in the company, or making acquisitions. Among these choices it is clear that acquisitions,
which can fuel immediate growth, will be a serious contender. Unfortunately, acquisitions
do not have a great record overall for increasing shareholder value. Some studies
have shown that more than half of all acquisitions don't provide favorable returns
for the acquiring companies. The reasons most commonly cited for these failures
include underestimation of the cost and effort of operational integration, and poorly-executed
integration efforts.
When brought into the confidence of the deal team for a pending acquisition,
operational managers are often challenged with how to develop reasonable benefit
forecasts and integration plans when very little supporting information is available.
Typically, interviews of the target's operational managers are off limits, and little
detailed planning has been conducted.
Despite these limitations, the integration effort is expected to start quickly
after "Legal Day One," and there is typically little time for operational due diligence
before then. Success depends upon being able to quickly validate assumptions (and
make necessary adjustments) between the time an acquisition announcement is made
and the target company is legally acquired. Three critical activities for building
this agile foundation are:
- Create an Acquisition Integration Team (AIT) - Due to confidentiality
concerns, an initial deal team is usually composed only of the most senior management
plus financial and legal advisors. Usually, operational managers are not brought
in until a financial deal is close to being struck, but that doesn't mean that
operational managers must sit idle. If a company's strategic plan includes acquisitions,
it is only practical to assign a team to develop operational due diligence and
integration frameworks. There may be many members on this team, as just about
any acquisition will touch a wide cross-section of the acquiring company's organization.
When building the team, it is highly valuable to include staff members who have
been through an acquisition-from either the acquiring or acquired perspective.
Lessons learned and previous planning experience will translate to valuable
insights for team members without that experience.
- Create an "Acquisition Playbook" - When the AIT is brought
into a deal, there are four major activities driven by two key dates. The dates
are "Announcement Day" and "Legal Day One." Two critical efforts must be executed
swiftly between these two dates:
- Conduct on-site operational due diligence of the target company
to validate and/or adjust assumptions and forecasts regarding the integrated
organization.
- Finalize the details of what will take place on Legal Day One,
when the acquiring company formally takes over the target company's operations.
And, there are two major streams of work that must be executed starting on
Legal Day One:
- Continue regular day-to-day operations. This can be much more
complex than expected. Many of the target company's management staff will,
out of necessity, refocus on integration activities as opposed to their
normal operating duties. New priorities, reporting relationships, and approval
processes will also be needed, adding to the workload as well.
- Execute integration activities. Hundreds of new activities will
be launched simultaneously on Legal Day One by both the target company and
the acquiring company, most of which have to be finely coordinated. As part
of a detailed action plan, establish appropriate and definitive authorities,
develop a proactive and multifaceted communication plan, and define escalation
procedures to address integration problems and unforeseen issues that will
definitely arise.
When all these activities are taken together, the plans may encompass
thousands of tasks. However, an integration team may be given a window of
only 4-8 weeks to develop them! Most acquisitions have similar core activities-as
they say, the devil is in the details. By proactively establishing an AIT
prior to an acquisition and developing an "acquisition playbook" with templates
for the activities previously noted, the AIT will be ready to act quickly
and eliminate the costly mistake of making it up as they go.
- Define "Done" - With integrations there is a tendency to place
certain activities into the integration plan when in fact they actually belong
in the scope of daily operations. This creates a never-ending integration effort.
The goal of the AIT is to phase out the integration efforts as quickly as possible.
Significant management discipline is needed to ensure that only integration-related
projects and activities remain on the integration plan and to reclassify tasks
back to the day-to-day management environment as quickly as possible and without
mercy.
Acquisition integration, much like consolidation, is among the most complex and
difficult activities that most managers will face in their careers. Being prepared
with the right execution framework, tools, and organization structure is the key
to a successful integration.
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