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Mergers and Acquisitions Best Practice

Acquisition Integration: How to Do It Successfully

by David Sadtler

Executive Summary

  • Successful integration of an acquisition by the acquiring company is often the most important determinant of the overall success of the acquisition process.

  • Gaining financial control of the acquired company and tight cash management are essential from the start.

  • Integrating management processes and systems can be difficult and time-consuming, but it is essential if the newly acquired management team is to be involved and empowered.

  • Use all available sources of information to make key management appointments as quickly as possible.

  • Ensure that the key drivers of value creation are known to all involved in the project, and that the process of searching, negotiating, and integrating reflects the most important of them.

  • Move as quickly as possible when integrating.

Introduction

Acquisitions of any size are a major undertaking for both the acquirer and the target. Substantial returns—in particular returns in excess of the cost of capital employed in the entire initiative—are required not only to create stockholder value, but also to justify the enormous investment of managerial time and effort that goes into a takeover. Many acquisitions succeed. Indeed, many corporate acquirers do a large number of deals and become really good at it. Making money through acquisition, for them, is a key skill to be nourished and developed. But, as repeated studies have demonstrated all too well, many acquisitions—according to some, the vast majority—fail to justify the investment involved.

The success or otherwise of acquisitions is a much studied field, and we can therefore readily identify the principle causes of failure and disappointment.1 Among them are the payment of excessive prices, missing problems during the due diligence phase, and even the use of faulty financial logic. But perhaps the biggest contributor to the failure of acquisitions is inadequate attention to the process of integrating the newly acquired business.

Major Causes of Failure

  • Paying too much—especially likely in an auction.

  • Targeting the wrong company because the value creation logic is inadequate.

  • Power struggles among top management and disagreement about who is to be the boss.

  • Cultural obstacles, especially in cross-border deals.

  • Incompatibility of IT systems.

  • Applying obsolete strategic rationales such as sector diversification, vertical integration, financial synergy, and gap-filling.

  • Resistance by regulatory authorities and pressure groups.

  • Use of faulty financial logic—i.e. getting the numbers wrong.

  • Sloppy due diligence.

  • Poorly planned and executed acquisition integration.

Successful integration requires that four tasks be done well. The more attention and skill that is marshaled for this purpose, the better the result is likely to be. The four tasks are: assuming financial control, integrating processes and systems, making key managerial appointments, and ensuring that the value creation logic for the acquisition drives the whole process. Inattention to any of them can cause big trouble.

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Further reading

Books:

  • Galpin, Timothy J., and Mark Herndon. The Complete Guide to Mergers and Acquisitions: Process Tools to Support M&A Integration at Every Level. San Francisco, CA: Jossey-Bass, 2007.
  • Sadtler, David, David Smith, and Andrew Campbell. Smarter Acquisitions: Ten Steps to Successful Deals. Harlow, UK: Pearson Education, 2008.

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