In the relatively long term, SMEs seeking growth need to make acquisitions, but between 50% and 70% of acquisitions fall short of buyers’ needs.
When a transaction is finalised, a genuine integration strategy needs to be established to avoid any fall off in growth or employee departures, which together cause 30% of the hidden costs of M&As. Employees need to be reassured and synergies implemented, with financial, operational and organisational goals.
Employees: key agents of change
Before the transaction is finalised, it is not always easy to access information about employees. When possible, it is paramount to gain an insight into each person’s role in the company and how important this role is in the company’s day-to-day running. The buyer also needs to find out about and understand the processes and structure in place. At a purely human level, it is essential to identify the company’s key employees and all those who are on board with the acquisition, as these are a real asset to the success of the transaction. Understandings and misunderstandings within the acquired company also need to be taken into account to get to grips with what drives the employees.
Acquisitions show the extent to which each company is different: organisation, state of mind, values, working atmosphere, etc. One of the biggest difficulties for target company employees is adapting to a new work environment. They need to be encouraged to integrate an unfamiliar system, and compromises need to be made based on individual differences. The acquiring company’s employees also need to deal with the changes however. People from the two firms are coming into contact for the first time and they have little choice but to move forward together.
Although the ins and outs of the transaction must be kept secret, at least initially, employees still need to be kept up-to-date to avoid stress and unproductivity. The existing teams are generally concerned that management is hiding something from them and this can affect their moral and enthusiasm. Even if not everything can be revealed, the CEO needs to provide at least some information to reassure employees and let them know they can count on him.
The target company’s employees sometimes see the acquisition as a personal and collective failure. They feel abandoned, and worried about the unknown. For their part, the absorbing company’s employees sometimes question the merit of the transaction and chose not to facilitate the integration of new arrivals, towards whom they tend to feel superior. Managers need to ensure that the integration policy provides genuine support, by explaining how the employees will be consulted and brought into the integration process, thus easing fears and lack of cooperation or, to the contrary, dampening the flames of those that see it as an opportunity to expand their territory. Managers also need to rapidly identify and surround themselves with people who are positive and enthusiastic about the project in order to manage the change successfully. They need to get to know the new employees quickly and well to lay the foundations for future working relationships.
The degree of integration varies in accordance with the acquisition strategy. Each type of integration has its key success factors.
Once the acquisition is finalised, the business integration phase begins. There are three possible scenarios, depending on the acquisition strategy:
- The integration of a company with a view to diversification;
- The integration of a company in the same line of business;
- The integration of a company with a view to regenerating business.
When the purchaser acquires a company with a view to diversifying, the integration phase does not require particularly strong synergies between the purchaser and the target, in light of the purpose of the transaction (purchase of brands, diversification policy, entering a new market). The purchasing company’s involvement is generally low, but decisive. The purchaser needs to avoid interfering, whilst injecting enthusiasm and providing the necessary means to expand the acquired company. Above all, the purchaser takes the risk of helping a high-potential entity to grow by granting it considerable autonomy and the resources it needs to achieve its objectives, thus behaving essentially like a shareholder. The conditions for a successful integration therefore involve:
- Protecting the structure of the acquired entity and the scope of its activities, and preventing managers from imposing their management style on the acquired company. The challenge in this instance is to ensure that acquired entity retains significant independence, and avoid interfering with its corporate mission or with any factors liable to strengthen its growth, culture, method of organisation or competencies.
- Providing the acquired company with the funds and know-how it needs to expand. Like all companies in an expansion phase, a target that is liable to grow rapidly must, when the growth cycle so requires, have the necessary resources to meet its often significant research and development costs. The difficulty lies in achieving the right mix.
- Identifying managerial and relational skills that can foster exchanges between two entities. Even if their business lines are different, it may be possible to transfer certain resources from one to the other.
This type of integration takes time and the capacity to support the acquired entity’s business without influencing its vision and strategy.
When the purchaser acquires a company in the same line of business, the integration mainly involves streamlining, at the initiative of the purchaser, which reorganises the entire structure, adjusts the Group strategy (resource sharing) and reallocates roles. The integration can be rolled out immediately thanks to the similarity of activities (with some even existing in duplicate), which facilitates the streamlining process. In this type of situation, the target company sees its identity more or less disappear as a result of the deep-seated changes to its structure. This can lead to a risk of arrogance on the part of management, with a significant gap between the “conquerors” (the buyer) and the “conquered” (the purchased entity). For this type of integration to succeed the company needs to:
- Draw up a precise and detailed integration plan. The main advantage of this type of integration is the possibility to set specific operational targets connected with the link-up. A common framework can be defined quite rapidly for the new entity, spotlighting the new structure and division of staff, as well as the way in which resources are shared and existing systems and processes are being reorganised.
- Promote its new approach by showing overall consistency: maximum visibility is required when drawing up the integration plan. By implementing a precise timetable, the company can communicate more about growth and development perspectives, in particular with regard to revenues and consolidated market share after the acquisition.
- Be wise in terms of its streamlining policy: a successful integration means prioritising, removing any overlap, and seriously re-examining management levels.
- Effectively manage potential conflict: when faced with a very fast implementation, management needs to correctly determine any HR problems posed by the merger and be careful to reassure as many people as possible.
- Avoid eliminating certain benefits of the acquired entity: during the integration the purchaser must not lose sight of certain target-company practices that should be retained or even promoted.
Integration through streamlining offers the advantage of being able to act in the short term, thus producing rapid results. It is important not to confuse absolute dominance and the stringency required to ensure the Group’s strategic coherence. If the purchaser tries too hard to streamline things, it may end up preventing any form of initiative and destroy some of the acquired entity’s hidden benefits.
When the purchaser acquires a company with a view to regenerating business or innovating (creating new capacities that don’t yet exist on the market), it is often difficult to adopt “typical” managerial behaviour. Objectives cannot be defined in advance. A certain degree of unexpectedness and creativity can be necessary to see what emerges. This approach generally occurs in sectors that are mature (regeneration) or undergoing rapid change (strategic innovation). Acquiring innovations is a way for companies to prepare for the future. This type of integration naturally involves risks connected with the challenges involved (creating something out of nothing) and the complexity of the acquisition strategy (having to combine “mutual dependency” and “autonomy”), as well as the presumed absence of short term results. To carry out this type of integration under optimum conditions, a company needs to:
- Develop a cooperative relationship, with the purchaser as the sole authoritative voice: integration does not necessarily mean consensus management. Although the two firms need to be on board for the integration to be successful, a status quo situation should be avoided. It is imperative that the new entity has one sole management authority, in this case the purchasing company.
- Respect cultural and organisational differences: to avoid the risk of destroying the acquired entity’s resources the integration needs to start with preventive action aimed at preserving the entities’ cultural and organisational differences, and in particular those of the acquired entity.
- Show understanding and be open to incorporating the other company’s strengths: a way of fostering this understanding, beyond group meetings, could be to build knowledge about the businesses by transferring key personnel between the two entities.
- Highlight the mutual benefit of the undertaking, which would bring the two parties together. The integration hinges on momentum, giving rise to new initiatives and overall adherence to the project. It is crucial that the cooperation between the two entities be based on the idea of solving a common problem, involving all the employees, as opposed to simply achieving synergies. This means highlighting a real and legitimate problem, which involves the future of the new entity and, as a consequence, the two structures.
- Legitimise the contributions of the acquired entity: the purchaser needs to assume its responsibilities and give an accurate view of the situation and any weaknesses observed in order to complete the project successfully. Only then can genuine cooperation between the parties be achieved, with firm initiatives from members of the acquired company in particular.
Beyond all this, the purchaser needs to accept that this type of integration can involve mistakes or even, at times, failure. An open mind and perseverance are essential to the project’s success.
Creating an integration policy is rarely an easy task, and a preparatory phase is crucial if the acquisition is to bring added value. How this phase unfolds depends on the purchaser’s objectives (vertical integration, diversification, internationalisation, strategic innovation, etc.). Managing a post-acquisition integration process requires both precision and attention, and the ability to properly convey the challenges of the transaction and the appropriate integration method. Only in this way can the purchaser hope to ensure the success of the transaction and enhance value creation.