Integrate Acquisitions

Creating value: generating the expected results in a defined timeframe

Minimizing the underlying risks and maximizing the desired synergies through a planned and well-managed execution.

Like any investment, an acquisition must be based on measurable objectives for value creation, and be implemented by means of a business plan and a competent team. However, this type of investment is subject to specific risks, such as underlying risks in financial years preceding the acquisition date, and the execution risks associated with cultural, organizational, and functional differences. 

For example:

  • Insufficient analysis of the costs and time required for integration,leading to a reduction inexpected value creation
  • Poor understanding of the complexity of a merger of different operational and organizational models
  • Loss of know-how associated with a drain of talent in the acquired company
  • Overvaluation of the expected synergies
  • Decrease in revenue due to an inaccurate assessment of customer reactions

In order to minimize these risks, it is essential to assess the complexity of an integration through an accurate upstream analysis, and the development and management of an appropriate execution plan.  An acquisition process has two phases:

 

1. The Pre-Acquisition Phase

  • Identification of a target: it is important that management defines explicit rules guiding the choice of targets: the sector of activity, the size of the company, and the financial criteria. These rules will maximize the efficiency of this expensive process by focusing the effort and expertise on realistic goals.
  • Assessment of a potential target: when a target has been identified, a preliminary business plan must be developed in order to determine the potential gains. The preliminary business plan must include the anticipated financial impacts of the expected value to be created.
  • A non-binding offer: at this stage, a non-binding offer can be considered, with or without exclusivity. The due diligence phase can then begin.
  • Due diligence: this phase is crucial for the identification of risks. Experts covering fields such as operations, finance, legal affairs, HR, computing, and taxes are commissioned to carry out the work, internally or externally. Among the internal stakeholders, it is advisable to involve employees who will potentially play an important role in the integration of the target. 
  • Integration strategy: the management of the purchasing company must devise an integration strategy in order to achieve the desired objectives by providing answers, for example, to the following questions:
    • Commercial: how should the sales force and sales approach be structured after the acquisition? Should the organization be segmented or merged?  How should the brands be positioned?
    • Operational: should the acquiring company’s operating methods be applied to the acquired company?  Should the two operational organizations be maintained during an initial phase before considering a merger? Should the company generate operational capacity synergies upstream of the integration? 
    • SG&A (Selling, General and Administrative): should the company rapidly restructure the support functions in order to generate a maximum of synergies? Should it integrate them into an existing model?  Should the company seek to deploy best practices from both organizations? How can computing services be pooled? How will specific computing applications be handled?
  • Finalization of the business plan: the elements of the due diligence process must be integrated into the business plan (provisions for risks and charges, execution risks, the necessary time-frames for the creation of synergies, etc.). The generation of value also depends on these elements and their impact over time. In addition, an integration budget must be included in the plan. This budget may be significant (costs of restructuring, IT integration, retention plan, etc.). From experience, the cost of integration can cost an average of 3% to 5% of the acquisition price.  

 

2. The Acquisition and Integration Phase

  • The takeover: once the legal and financial execution of the transaction has been completed, it is good practice for the acquiring company to rapidly place a member of its financial staff in the new organization, whatever the integration strategy.  This makes the investment financially more secure, promotes a financial connection between the acquired company and the treasury of the acquiring company, and rapidly facilitates the implementation of financial reporting procedures—a major issue in listed companies.
  • The creation of an integration team: an integration team must quickly join the acquired company. The members of the new management team of the acquired company can be a part of this team and play a dual role. The team’s first task is to reassure the acquired company’s employees, present the company plan and organization, and, above all, avoid imposing a new paradigm. It is initially essential to ensure operational continuity. There is, of course, no unique integration model. 
  • The validation of the integration strategy: the integration team will make a comprehensive assessment through a gap analysis aimed at strengthening the integration strategy. 
  • The integration plan: the integration team, working with the directors of the acquired company, will take the required time (100 days) to draft an integration plan that encompasses all of the company’s operational and functional areas. During this period, it is essential to identify and motivate the key members of staff; securing cooperation is one of the major objectives of this phase. In line with the integration strategy (change of governance, progressive integration, and major restructuring), an action plan broken down into areas, accompanied by anticipated synergies and impact analyses (financial, social, fiscal, etc.), associated data dashboards, and a communication plan will be presented to the Board at the end of this period. Depending on the issues, the Board will define priorities and execution times.
  • Construction of synergy reporting: it is important to be able to monitor the value creation linked to the acquisition over time. The integration team will establish specific reporting arrangements for the acquired company in order to monitor its performance over time, despite the financial integration into the acquiring company’s organization. This reporting will incorporate a series of KPIs measuring the performance of the integration.
  • Monitoring and correction phase: a steering committee should be set up with Board members, the directors of the acquired company, and the integration team. This committee will ensure that:
    • The integration team has all the internal and external resources required to carry out its tasks at its disposal
    • The integration plan is executed within the established time-frames and budget
    • The synergies presented in the business plan are generated
    • The integration phase is completed
  • Post-acquisition review: it is recommended to carry out a complete review of the acquisition and its integration after 3 or 4 years in order to assess the overall results of each phase of the process, and thereby contribute to the continuous improvement process.  

It is good practice to base the integration plan on three types of actions:

  • Achieve “Quick Wins” such as identifying talent, retaining targeted customers, and renegotiating supplier contracts
  • Develop organizational structures
  • Transform industrial and logistics models

Strategic consulting firms will put themselves forward as partners in the upstream phase, whereas Argon will also provide operational and functional expertise in order to carry out a successful integration and achieve the anticipated resultsin the implementation phase.