M&A: Integrating your Acquisition

The two biggest value creators in the acquisition process are strategy and integration. In spite of this, it seems like the majority of management out there still regards integration as something of a fuzzy process: a process dominated by soft skills and textbook management theory. Take it from an M&A practitioner: I have seen millions of dollars of value destroyed by poorly executed integrations.

Much of the prevailing thinking around the integration process goes that it’s driven by size; that is to say, the size of the acquisition is directly correlated to how much time and energy should go into the integration. Sure, there’s a certain logic you can fit around this. If nothing else, when you spend more on something, you’re more inclined to want it to work well. But if you’re undertaking the acquisition at all, you should want it to work well.

The thinking around size and integrations is flawed, however. There’s a fare more sophisticated way to think of integrations that focuses on extracting value from the acquired company, whatever its size. It goes back to the strategy of both the firms and how the strategy of the target firm fits with that of the acquiring firm. Integrations should be determined not by the size of the target firm’s operations but rather based on what they were purchased for.

So, let’s take the case of a transport logistics firm taking over a rival. Imagine that the two firms operate in similar geographies but the acquirer’s customer value proposition is to be the best-in-class (i.e., the best customer service, the fastest deliveries, etc.). And say that the target firm’s proposition is to be the cheapest in the business. How do you integrate it? Well, really, you don’t want to integrate it. You keep it in the company’s family but you can’t integrate it fully without damaging its business model – what made it attractive in the first place.

This is not to say that the acquisition wasn’t a good management decision. In fact, given the different models of the two firms, it could turn out to be very interesting – perhaps a way for the acquiring firm of diversifying when there’s a downturn and clients turn towards cheaper services. But the key with such acquisitions, as the chart above outlines, is to keep them separate and feed them well (i.e., provide them with good personnel and resources).

You can’t impose a new business model on the acquired firm, when its existing business model was what drove value in the deal in the first place. Why would American Airlines take over Southwest and turn it into a luxury airline service? Examples of this are everywhere. It’s most common among companies who are placed in different segments of the market (discounters and luxury) but it can be found just about everywhere the key reason for an acquisition isn’t the target firm’s resources.

Now let’s suppose that the same transport logistics firm is taking over its main rival – they’re similar in every respect, save for a few minor differences. This company has logistics warehouse facilities in cities the acquirer still hasn’t got a presence in yet (resources) as well as a much newer fleet of fuel-efficient vehicles (resources). These resources are quite easily integrated – and in fact, they should be integrated. Unlike the previous acquisition example, you don’t have to change the customer value proposition, its profit formulas or its key processes to make the integration work. You just fold it in.

This theory has been built on practice and stands up against every case study on integration that we've come across. For example, more often that not, academic case studies on integration talk about the importance of culture - that's absolutely true and follows what has just been discussed. Dividing integrations into "big" and "small" is naive practice and only serves to destroy value. By fully understanding what needs to be integrated before the process even starts, the company maximizes the opportunity to create value from the acquisition.