Acquisitions: Developing a Successful Integration Process


At the conclusion of the due diligence process you should have at your finger tips a great deal of knowledge concerning the acquisition target. At this point you will be making a go/no go decision. If the decision is a “go,” you have the information that you need to start your integration process if you decide to move ahead with the acquisition. You now know where the strengths and weaknesses are and where the differences are in policies and procedures. You also have an idea of what the organizational structure will look like once the acquisition is completed. But you can not develop the integration plan in a vacuum; you need the buy-in of the key players of the acquisition target.

How do you get their buy-in?
Look to the future to help determine integration priorities
Instead of getting into the details first, we find it is important for the key players on both teams (acquiring company and target) to have a similar vision of where the industry is going (Industry Scenario) and what the key characteristics are of the winning company (Winner’s Profile). If you start with the big picture, often the details fall into place and the priorities become more obvious. Another option, if time permits, is to develop a full strategic plan.

What about risk?
In the due diligence you develop Threats to the business – but you should do this as a joint team and assess which of the threats has a potentially high impact and a high probability. The combined team should discuss different ways of mitigating the risk.

Now for the details
Once you have a big picture view of the industry, have developed the key characteristics of the winning company and have assessed threats, you are ready to discuss the Acquisition Issues that arose during the due diligence process. What topics need to be addressed? At this point, you will spend time looking at the issues that arose from the due diligence – both teams need to be involved in developing solutions. In addition, you need to develop other aspects of the integration plan: Communication – what will it look like to the employees of both companies? What will we tell our customers? What will we tell our suppliers? Are there any policy and procedure changes we need to make as we go through the integration process? What is the transition plan for the health care plan and other employee benefit plans (e.g. 401k)? How are we going to transition the financial system so that we are all working on the same system and there is transparency in the numbers? What do we need to do to get the other business systems working together?

At the end of the Acquisition Issues discussion you need to determine what the key implementation Objectives are – the key projects for the next 30, 60, 90 days and the plans that need to transition over the rest of the year. You will need to set and communicate goals so that people understand what targets they are shooting at to achieve success.

Now you need to discuss the detailed plan with the owners of the business – ideally they have been involved in its development – but still you need to check back and make sure they are fully bought in – otherwise this can be a deal-breaker. This means you need to be brutally honest about what is going to change after the acquisition is complete. A financial forecast is a must – and this too must be agreed to – you must have a clear understanding of what the numbers will look like during the integration phase. You must have agreement on the integration plan and the financial forecast before you close on the deal.

In addition to the integration plan you need to think through how your company will add value to the acquisition target – because if there is no value-add, this probably is not a good acquisition.

After the closing
The first two quarters will be the most important in terms of getting buy-in from the acquired company. If this is the case, why do so many companies miss the importance of this time period? A common mistake is putting all the energy into “doing the deal” and then not focusing on the integration process in the “after deal let-down”. This lack of focus can seriously impact the success of the acquisition. The newly acquired team needs to know that they are now part of a new team and that they are appreciated for the capabilities that they bring to the table.

During the initial period after the closing
Set-up a meeting before the month-end closing to make sure that the financial accounts have been properly transferred to the financial system. Check on progress for the integration objectives – is anything veering off-track? Can you get it back on track or do we need to reset expectations? Get into this routine right away – this will help prevent large surprises down the road. Try to get the acquisition target onto your financial system within the first quarter after closing – then the numbers should be much more transparent as everyone is working with the same system.
Make sure that you have sufficient resources allocated for the integration process – providing support and follow-up as required by the integration objectives. Often people do not allocate enough of these resources and the acquisition drifts and small problems grow into crises. There should be as many, if not more, resources dedicated to the integration process as you had doing the due diligence.

Communicate
In a vacuum rumors spread both within the company walls and outside in the marketplace- make sure the acquiring company team is visible – talk about what is going on and what is going to happen – even if it is unpleasant. Hiding information does not make the bad news go away.

Monitoring
Monthly: make sure the integration objectives are on track
Quarterly: do a deep dive into the financials – are there any red flags?
After one year – release the escrow – there should be not major surprises after 12 months – unless you have not been involved. Monitor your key metrics:
– Are you meeting your financial targets?
– Are you retaining the key people?
– Has the acquiring company added value to the acquisition?
– Would you do the deal today if you knew what you know now?

Integration is a complex process and each deal will generate different objectives. We have found that, if you agree on a shared industry vision and the characteristics of a winning company, the priority objectives become clear to the teams on both sides of the table. Integration objectives and goals will flow from the common industry vision. This is not to say there will be total consensus – there still will be some difficult times, but this will get the team on the path to a successful integration process. This integration is often neglected during the after deal let-down, but if your team focuses on integration and resources are allocated to make the process a success, your acquisitions will be more successful. Remember, more the 80% of acquisitions fail to live up to management expectations.

Integration Process – Option 1 – 2-3 Days
This process can occur either before or after the transaction is completed, ideally before.
1. Industry Scenario
2. Winner’s Profile
3. Strengths and Weaknesses
4. Threats
5. Acquisition Issues
6. Objectives
7. Communication
8. Monitoring Process

Integration Process – Option 2 – Full Strategic Plan – 3 Months
1. Situation Analysis
2. Strategy Formulation
3. Implementation

Some Case Studies
Wyeth: Traditional Pharma vs. Bio Tech
During the mid-1990’s WyethPharma developed a vision of the pharmaceutical industry, in their scenario they saw that traditional pharmaceutical development would not be as fertile for opportunities as a biotech approach which mimics what actually occurs in nature. Understanding that this technology would foster significant future growth, Wyeth faced the decision to build from scratch or buy. The Wyeth team decided that an acquisition would be faster than building from scratch and they acquired two companies: Genetics Institute and American Cyanamid (now Wyeth Biotech). Wyeth did not hesitate – they jumped in with both feet with a significant investment to fund these acquisitions. During this timeframe many other pharmaceutical companies dabbled in biotech but dabbling did not position these companies for success. A decade later Wyeth is still reaping the benefits of its investment decision – the biotech industry is blooming. Their success has lead to their acquisition by Pfizer.

Some Insight into the Wyeth Integration Process[1]
Wyeth used strengths and weaknesses analysis to help determine “best practices”. Often this analysis leads to the acquiring company bridging areas of weakness in the acquired company but not taking advantage of the strengths of the acquired company. WyethPharma saw that WyethBiotech needed to understand market needs and market niches early in the development life cycle to ensure that the resulting drugs would have commercial viability. This moved WyethBiotech from developing drugs looking for a problem to solve, to seeing a market need and solving it by developing a drug.

What was unusual is that WyethPharma identified some strengths within WyethBiotech that would help its traditional pharmaceutical business. It is unusual for an acquiring company to learn from its acquisition. WyethPharma made changes in two key areas:
1. Pay for performance culture
2. Flexible manufacturing, by focusing on using a small number of processes in the production of pharmaceuticals rather than a unique process for each drug.

So, during the implementation process it is important to understand the strengths and weaknesses that both parties (each party) bring(s) to the table and to capitalize on the strengths of each to develop “best practices” that are a combination of the best from both companies.

Pharmaceutical Company uses a Full Strategic Plan for Go/No Go Decision
Another pharmaceutical company was looking to buy its supplier of excipients. These are the compounds that allow for the time-release factor in drugs (e.g. your 24 hour tablets). The team wanted to develop a full understanding of the supplier’s business before making the final decision. So teams from both the acquiring firm and the targeted firm set forth to develop a strategic plan. Over the course of three months the two teams went through the Simplified Strategic Planning process including:
1. Situation Analysis
2. Strategy Formulation
3. Implementation

During the process, the acquiring team developed an in-depth understanding of the business including details about the markets served and the competitive environment. They also had a hand in developing and understanding the possible opportunities for the target company.
At then end of the process they decided to go ahead with the acquisition. Having the strategic plan in hand, they had an integration plan in place and they had developed a good working relationship with the target company senior management team. After finalizing the transaction the team kept the strategy on track through the monitoring process, ensuring a smooth transition.

[1] ” Wyeth’s Multibillion-dollar Biotech Bet”, by Elizabeth Svoboda, Fast Company, January 14, 2009
Posted by Denise Harrison at 1:45 PM 0 comments
Monday, August 31, 2009
How Can Smaller Companies Compete and Win?
Denise A. Harrison
Vice President

Smaller companies often feel dwarfed by the giants in their industry, especially during tough times. Often industry giants are better at weathering economic downturns with their wide array of resources. But Arena Resources’ strategy not only allowed the company to survive this economic downturn, but turn in exceptional performance – better than the industry leaders. Arena Resources, a small oil exploration and production company, has less than 2% of the revenue of the industry leaders (Shell, Exxon Mobil). In addition, very few industries have had to endure greater fluctuations than the oil industry with oil price highs of $147 per barrel in July, 2008 and lows of $30 per barrel in December, 2008. How did Arena Resources make it onto the Fortune list of fastest growing companies (#8) in spite of this industry turbulence?

The Road Less Traveled

Arena Resources chose not to compete directly with the industry giants, instead it focused on oil production assets in the southwestern United States that were no longer attractive to the industry Goliaths. The cost of drilling and producing oil in this region exceeded what was acceptable in the larger companies’ financial models; these companies prefer to concentrate their resources on exploration of large oil fields with large potential. When Arena purchased land in this region (approximately 11,000 acres), the land produced 200 barrels of oil per day. Arena knew through its research and evolving technology, which through investment the land could be more productive. Through Arena Resources’ focused efforts this land is now producing 6000 barrels per day. The company does pay a high cost to produce a barrel of oil – almost $35 per barrel, so when oil prices decline significantly, profitability plummets; but when oil prices are over $60 per barrel the company makes a nice profit. Arena is betting that the price of oil will remain over $60 per barrel for the significant future. The high cost of production and the relatively small output is not attractive to its behemoth competitors, so this strategy to take the road less traveled allowed Arena Resources to grow profitably without going head-to-head with the major industry players.

What about Your Company’s Strategy?

Many companies decide to compete in markets that are attractive, even though larger competitors with greater resources are already firmly entrenched or aggressively pursing these markets. Going head-to-head with industry giants often drains the resources of a smaller player with little forward progress in their market position. Are you going after the attractive markets that set you in direct conflict with industry giants? Are there niches that you could pursue that are not interesting to the larger companies? As you develop strategy your team should consider:

1. Market segment attractiveness (including growth and profitability)
2. Your competitive position in a market segment – what is the competition’s market share? Are competitors already firmly entrenched?

a. What other companies compete in this segment? In this case companies like Exxon and Shell focus their resources on exploration, looking for the big prizes. Arena focuses on production, but the production increases that are attractive to Arena Resources are too small to concentrate on from a larger company’s perspective.

b. What are the competencies required to compete this market? Do we have them? Are there strategic competencies that give us significant differentiation? In Arena Resources’ case, its competency is secondary recovery from known oil and gas resources – little exploration risk but a requirement for execution excellence. Their competency comes from their knowledge of the geology in the basin in which they work, combined with their technical skills in secondary recovery.

In order to compete and win, you must consider both market attractiveness and the competitive landscape of all of your market segments before you select the ones on which you will focus. You will often find a segment that is smaller has less competition and will provide your company with significant growth and profitability. In strategic planning selecting the road less traveled may be a key ingredient to your company’s success.

Copyright 2009 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.Acquisitions: Developing a Successful Integration Process
October 6th, 2009
By Denise Harrison, Vice President

At the conclusion of the due diligence process you should have at your finger tips a great deal of knowledge concerning the acquisition target. At this point you will be making a go/no go decision. If the decision is a “go,” you have the information that you need to start your integration process if you decide to move ahead with the acquisition. You now know where the strengths and weaknesses are and where the differences are in policies and procedures. You also have an idea of what the organizational structure will look like once the acquisition is completed. But you can not develop the integration plan in a vacuum; you need the buy-in of the key players of the acquisition target.

How do you get their buy-in?
Look to the future to help determine integration priorities
Instead of getting into the details first, we find it is important for the key players on both teams (acquiring company and target) to have a similar vision of where the industry is going (Industry Scenario) and what the key characteristics are of the winning company (Winner’s Profile). If you start with the big picture, often the details fall into place and the priorities become more obvious. Another option, if time permits, is to develop a full strategic plan.

What about risk?
In the due diligence you develop Threats to the business – but you should do this as a joint team and assess which of the threats has a potentially high impact and a high probability. The combined team should discuss different ways of mitigating the risk.

Now for the details
Once you have a big picture view of the industry, have developed the key characteristics of the winning company and have assessed threats, you are ready to discuss the Acquisition Issues that arose during the due diligence process. What topics need to be addressed? At this point, you will spend time looking at the issues that arose from the due diligence – both teams need to be involved in developing solutions. In addition, you need to develop other aspects of the integration plan: Communication – what will it look like to the employees of both companies? What will we tell our customers? What will we tell our suppliers? Are there any policy and procedure changes we need to make as we go through the integration process? What is the transition plan for the health care plan and other employee benefit plans (e.g. 401k)? How are we going to transition the financial system so that we are all working on the same system and there is transparency in the numbers? What do we need to do to get the other business systems working together?

At the end of the Acquisition Issues discussion you need to determine what the key implementation Objectives are – the key projects for the next 30, 60, 90 days and the plans that need to transition over the rest of the year. You will need to set and communicate goals so that people understand what targets they are shooting at to achieve success.

Now you need to discuss the detailed plan with the owners of the business – ideally they have been involved in its development – but still you need to check back and make sure they are fully bought in – otherwise this can be a deal-breaker. This means you need to be brutally honest about what is going to change after the acquisition is complete. A financial forecast is a must – and this too must be agreed to – you must have a clear understanding of what the numbers will look like during the integration phase. You must have agreement on the integration plan and the financial forecast before you close on the deal.

In addition to the integration plan you need to think through how your company will add value to the acquisition target – because if there is no value-add, this probably is not a good acquisition.

After the closing
The first two quarters will be the most important in terms of getting buy-in from the acquired company. If this is the case, why do so many companies miss the importance of this time period? A common mistake is putting all the energy into “doing the deal” and then not focusing on the integration process in the “after deal let-down”. This lack of focus can seriously impact the success of the acquisition. The newly acquired team needs to know that they are now part of a new team and that they are appreciated for the capabilities that they bring to the table.

During the initial period after the closing
Set-up a meeting before the month-end closing to make sure that the financial accounts have been properly transferred to the financial system. Check on progress for the integration objectives – is anything veering off-track? Can you get it back on track or do we need to reset expectations? Get into this routine right away – this will help prevent large surprises down the road. Try to get the acquisition target onto your financial system within the first quarter after closing – then the numbers should be much more transparent as everyone is working with the same system.
Make sure that you have sufficient resources allocated for the integration process – providing support and follow-up as required by the integration objectives. Often people do not allocate enough of these resources and the acquisition drifts and small problems grow into crises. There should be as many, if not more, resources dedicated to the integration process as you had doing the due diligence.

Communicate
In a vacuum rumors spread both within the company walls and outside in the marketplace- make sure the acquiring company team is visible – talk about what is going on and what is going to happen – even if it is unpleasant. Hiding information does not make the bad news go away.

Monitoring
Monthly: make sure the integration objectives are on track
Quarterly: do a deep dive into the financials – are there any red flags?
After one year – release the escrow – there should be not major surprises after 12 months – unless you have not been involved. Monitor your key metrics:
– Are you meeting your financial targets?
– Are you retaining the key people?
– Has the acquiring company added value to the acquisition?
– Would you do the deal today if you knew what you know now?

Integration is a complex process and each deal will generate different objectives. We have found that, if you agree on a shared industry vision and the characteristics of a winning company, the priority objectives become clear to the teams on both sides of the table. Integration objectives and goals will flow from the common industry vision. This is not to say there will be total consensus – there still will be some difficult times, but this will get the team on the path to a successful integration process. This integration is often neglected during the after deal let-down, but if your team focuses on integration and resources are allocated to make the process a success, your acquisitions will be more successful. Remember, more the 80% of acquisitions fail to live up to management expectations.

Integration Process – Option 1 – 2-3 Days
This process can occur either before or after the transaction is completed, ideally before.
1. Industry Scenario
2. Winner’s Profile
3. Strengths and Weaknesses
4. Threats
5. Acquisition Issues
6. Objectives
7. Communication
8. Monitoring Process

Integration Process – Option 2 – Full Strategic Plan – 3 Months
1. Situation Analysis
2. Strategy Formulation
3. Implementation

Some Case Studies
Wyeth: Traditional Pharma vs. Bio Tech
During the mid-1990’s WyethPharma developed a vision of the pharmaceutical industry, in their scenario they saw that traditional pharmaceutical development would not be as fertile for opportunities as a biotech approach which mimics what actually occurs in nature. Understanding that this technology would foster significant future growth, Wyeth faced the decision to build from scratch or buy. The Wyeth team decided that an acquisition would be faster than building from scratch and they acquired two companies: Genetics Institute and American Cyanamid (now Wyeth Biotech). Wyeth did not hesitate – they jumped in with both feet with a significant investment to fund these acquisitions. During this timeframe many other pharmaceutical companies dabbled in biotech but dabbling did not position these companies for success. A decade later Wyeth is still reaping the benefits of its investment decision – the biotech industry is blooming. Their success has lead to their acquisition by Pfizer.

Some Insight into the Wyeth Integration Process[1]
Wyeth used strengths and weaknesses analysis to help determine “best practices”. Often this analysis leads to the acquiring company bridging areas of weakness in the acquired company but not taking advantage of the strengths of the acquired company. WyethPharma saw that WyethBiotech needed to understand market needs and market niches early in the development life cycle to ensure that the resulting drugs would have commercial viability. This moved WyethBiotech from developing drugs looking for a problem to solve, to seeing a market need and solving it by developing a drug.

What was unusual is that WyethPharma identified some strengths within WyethBiotech that would help its traditional pharmaceutical business. It is unusual for an acquiring company to learn from its acquisition. WyethPharma made changes in two key areas:
1. Pay for performance culture
2. Flexible manufacturing, by focusing on using a small number of processes in the production of pharmaceuticals rather than a unique process for each drug.

So, during the implementation process it is important to understand the strengths and weaknesses that both parties (each party) bring(s) to the table and to capitalize on the strengths of each to develop “best practices” that are a combination of the best from both companies.

Pharmaceutical Company uses a Full Strategic Plan for Go/No Go Decision
Another pharmaceutical company was looking to buy its supplier of excipients. These are the compounds that allow for the time-release factor in drugs (e.g. your 24 hour tablets). The team wanted to develop a full understanding of the supplier’s business before making the final decision. So teams from both the acquiring firm and the targeted firm set forth to develop a strategic plan. Over the course of three months the two teams went through the Simplified Strategic Planning process including:
1. Situation Analysis
2. Strategy Formulation
3. Implementation

During the process, the acquiring team developed an in-depth understanding of the business including details about the markets served and the competitive environment. They also had a hand in developing and understanding the possible opportunities for the target company.
At then end of the process they decided to go ahead with the acquisition. Having the strategic plan in hand, they had an integration plan in place and they had developed a good working relationship with the target company senior management team. After finalizing the transaction the team kept the strategy on track through the monitoring process, ensuring a smooth transition.

[1] ” Wyeth’s Multibillion-dollar Biotech Bet”, by Elizabeth Svoboda, Fast Company, January 14, 2009
Posted by Denise Harrison at 1:45 PM 0 comments
Monday, August 31, 2009
How Can Smaller Companies Compete and Win?
Denise A. Harrison
Vice President

Smaller companies often feel dwarfed by the giants in their industry, especially during tough times. Often industry giants are better at weathering economic downturns with their wide array of resources. But Arena Resources’ strategy not only allowed the company to survive this economic downturn, but turn in exceptional performance – better than the industry leaders. Arena Resources, a small oil exploration and production company, has less than 2% of the revenue of the industry leaders (Shell, Exxon Mobil). In addition, very few industries have had to endure greater fluctuations than the oil industry with oil price highs of $147 per barrel in July, 2008 and lows of $30 per barrel in December, 2008. How did Arena Resources make it onto the Fortune list of fastest growing companies (#8) in spite of this industry turbulence?

The Road Less Traveled

Arena Resources chose not to compete directly with the industry giants, instead it focused on oil production assets in the southwestern United States that were no longer attractive to the industry Goliaths. The cost of drilling and producing oil in this region exceeded what was acceptable in the larger companies’ financial models; these companies prefer to concentrate their resources on exploration of large oil fields with large potential. When Arena purchased land in this region (approximately 11,000 acres), the land produced 200 barrels of oil per day. Arena knew through its research and evolving technology, which through investment the land could be more productive. Through Arena Resources’ focused efforts this land is now producing 6000 barrels per day. The company does pay a high cost to produce a barrel of oil – almost $35 per barrel, so when oil prices decline significantly, profitability plummets; but when oil prices are over $60 per barrel the company makes a nice profit. Arena is betting that the price of oil will remain over $60 per barrel for the significant future. The high cost of production and the relatively small output is not attractive to its behemoth competitors, so this strategy to take the road less traveled allowed Arena Resources to grow profitably without going head-to-head with the major industry players.

What about Your Company’s Strategy?

Many companies decide to compete in markets that are attractive, even though larger competitors with greater resources are already firmly entrenched or aggressively pursing these markets. Going head-to-head with industry giants often drains the resources of a smaller player with little forward progress in their market position. Are you going after the attractive markets that set you in direct conflict with industry giants? Are there niches that you could pursue that are not interesting to the larger companies? As you develop strategy your team should consider:

1. Market segment attractiveness (including growth and profitability)
2. Your competitive position in a market segment – what is the competition’s market share? Are competitors already firmly entrenched?

a. What other companies compete in this segment? In this case companies like Exxon and Shell focus their resources on exploration, looking for the big prizes. Arena focuses on production, but the production increases that are attractive to Arena Resources are too small to concentrate on from a larger company’s perspective.

b. What are the competencies required to compete this market? Do we have them? Are there strategic competencies that give us significant differentiation? In Arena Resources’ case, its competency is secondary recovery from known oil and gas resources – little exploration risk but a requirement for execution excellence. Their competency comes from their knowledge of the geology in the basin in which they work, combined with their technical skills in secondary recovery.

In order to compete and win, you must consider both market attractiveness and the competitive landscape of all of your market segments before you select the ones on which you will focus. You will often find a segment that is smaller has less competition and will provide your company with significant growth and profitability. In strategic planning selecting the road less traveled may be a key ingredient to your company’s success.