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Why successful M&A now depends on getting your ducks in a row as early as possible.
Randy Myers, CFO Magazine
February 1, 2011
By the time Cisco Systems announced its acquisition of Norwegian videoconferencing company Tandberg last April, company executives had spent the better part of a year traveling to, working in, and thinking very hard about the Oslo-based technology firm it was about to buy for $3 billion.
That work went far beyond the due diligence needed to determine whether to make an offer, and for how much. As Susan McDonough, senior director of acquisition integration for Cisco, explains, her company now addresses many facets of what is typically labeled "postmerger integration" well before the deal actually takes place. That is essential, she says, to foster "the very tight link between business strategy and operational strategy" that will determine the ultimate success of a deal.
For best-practice acquirers such as $40 billion Cisco, postmerger integration now begins at the very earliest stages of negotiations. Even as they begin their integration work much sooner than they once did, these companies are also becoming more flexible about which systems and operations they choose to integrate, and when. They're communicating earlier with stakeholders about their integration plans, even if that means doing it so early that they can say only that more information will be forthcoming soon. And they are conducting rigorous postmortems to identify ways to make subsequent integrations more efficient and effective.
In part, these companies are building on lessons from the past. But the new approach is also a sign of the times.
"Capital is still scarce for many organizations, and during times of scarce capital companies are more diligent about how they raise, invest, optimize, or preserve it," says Jeff Perry, Americas transaction integration practice leader for Ernst & Young. "We have found that the whole focus on integration has been elevated throughout the C-suite in order to drive better results."
That has enormous implications for CFOs and their finance teams, as they now focus not only on identifying the savings that can result from merging redundant operations, but also on benchmarking their own systems and procedures against those of the acquired company and looking for opportunities to apply the best of what each has to offer.
They also are developing metrics to track the integration process itself and its real-time impact on the business so that problems can be spotted and stopped before proving fatal. Put another way, they are increasingly helping to identify and track the synergies that deals offer, and holding the organization accountable for achieving them.
That's a tall order, and while the increased responsibilities are welcome, they come at a price: this new emphasis on early-start integration means that companies will inevitably spend time prepping for deals that never get done.
"It's all part of the investment," says Bryon Rubin, senior vice president of corporate development for $13 billion media conglomerate CBS Corp. "For all the deals we've done — 50 or 60 since our separation from Viacom at the beginning of 2006 — we've walked away from twice as many. But you learn from those, and apply what you've learned to future deals." And, as some experts note, it's cheaper in the long run than the alternative.
"Far worse would be that you end up buying a company and your plans are not ready when the deal closes," says Christopher Kummer, president of the Institute of Mergers, Acquisitions and Alliances in Zurich. He argues that by starting integration planning too late, companies often wind up wrestling with unexpected problems that jeopardize the very business case on which their deals were predicated.
The larger and more complex the organization being acquired, the more likely that will happen. Kummer recalls a recent deal in which the acquirer was disappointed to learn, post closing, that government-mandated severance packages in some European countries made it uneconomical to quickly consolidate locations it had planned to eliminate.
"In almost every large global merger, I find people underestimating the need, urgency, and complexity of the issues at stake, to the point where they underresource their integration effort," confirms John Powers, global merger-and-acquisition consultative services leader for Deloitte.
Besides overlooking intelligence that could affect the economics of a deal, companies that delay integration efforts also forfeit the opportunity to hit the ground running when their deal becomes public. That, too, can lower the odds of success.
"There is sort of a magical time around the announcement of a deal where employees, customers, and partners are very eager and open to hearing how this new combined entity is going to make the world a better place," says Cisco's McDonough. For the past few years, she says, Cisco has sought to capitalize on that "magical time" by being ready from day one to explain how the two companies are going to come together and provide unique value, and how the integration effort itself will be structured to realize that value (see "Ready on Day One" at the end of this article).
"That's key to the success of any integration," says W. Michael Kipphut, CFO and executive vice president of Tampa-based Sykes Enterprises. The $1.2 billion provider of customer contact management services acquired one of its competitors, ICT Group, in early 2010, hiring KPMG to help it accelerate the integration effort.
"If you know what needs to be done, you can set priorities ahead of time," Kipphut says. "Any idle time can really kill momentum. People start to think about other things and don't stay focused on the work at hand."
Rubin of CBS agrees. "You don't want the organization in limbo," he says. "On potential layoffs, for example, you don't want things to drag out regarding what roles people will have, or whether they will have roles at all. You need to think about these things even before you start due diligence, so you can make quick, smart decisions."
Fast, but Focused
While early integration planning aims to let companies hit the ground running once a deal is announced, it doesn't require the immediate integration of every aspect of an acquired business.
"An inexperienced acquirer will launch every single work stream on day one, and it just crushes the organization," warns Steve Miller, leader of KPMG's U.S. integration and separation practice. "The experienced integrator will say, 'Here's the stuff we absolutely have to launch now, and [from there we will] continuously manage the integration and people's workloads.'"
Some systems or operations may, in fact, never be integrated. "It depends on the strategy," Miller says. "Sometimes, leaving something stand-alone is much better than integrating it."
"Every deal is different," agrees Steve Burke, director of M&A integration for Intel Capital, the investment arm of $35 billion semiconductor manufacturer Intel Corp. Ten years ago, he notes, the prevailing practice in Silicon Valley was to do a full integration of every acquisition, an approach that resulted in "a relatively mediocre track record."
For the past several years, Intel has employed what Burke calls a hybrid integration model in which it picks and chooses which systems and operations it wants to integrate fully with its own. "We've tried to design an approach based on the business needs of the acquired company and what we seek to achieve by combining it with ours," he says.
That model works well when acquirers identify the key value drivers that make the deal appealing in the first place. Miller recommends that companies home in on three or four and then define the concrete operational steps that must be taken to realize them. By assigning accountability to individual leaders of the integration team, Deloitte's Powers adds, companies can boost the odds of success.
"Somewhat differently than in the past, I now drive this team of accountable individuals to come back very quickly — in two to four weeks — with an opinion on how and where they plan to meet their objectives," Powers says. His goal is to develop a holistic model for the entire integration effort that can be quickly disaggregated so that those accountable can quickly spot and address problem areas. "The net effect," he says, "is to force clarity on the organization, and on any risks associated with your expectations, which helps you very quickly move the needle toward your end goal."
Still, it's worth remembering that speed itself is not the ultimate goal. Companies that focus solely on how fast they can integrate an acquired business may overlook potentially catastrophic risks. Powers recalls working on a deal a few years ago in which the acquiring company and its target both provided real-time transaction processing services for financial institutions, with huge databases operating in the background. A key value driver for the deal was the savings available from combining the data centers, and the acquirer wanted to do it quickly — within a year.
But Powers and his team pointed out that the need to maintain service levels during the combination far outweighed the need to capture data-center savings quickly. "We had to change the client's perspective," Powers says. "The combination of the data centers required a great deal more planning to make sure there was a better focus on preventing any disruption of service."
That called for building more redundancy into the systems and doing far more testing, which extended the integration timetable by six months. But Powers says it was the right thing to do. (To make up for the additional costs and delayed savings that resulted, Deloitte helped the company identify less-risky operations it could integrate sooner, and encouraged it to put off other activities that could have compromised cash flow while the data-center integration was under way.)
Getting the Word Out
In addition to coming up with an integration plan that focuses on a deal's key value drivers, experts say it is also important to share relevant details of the plan not only with the integration team but also with business-unit leaders and the employee population at large.
"Surveys consistently show that most deals don't fail because of poor strategy but because they have not been properly executed," says KPMG's Miller. "And the first part of proper execution is communicating the strategy to your teams in a manner they can viscerally understand." Burke advocates creating a "succinct one-pager" for management and the integration team that summarizes what the company is buying, how much it is paying, and what it expects to get for its money.
Keeping employees in the loop, even those not directly involved in the integration effort, is critical, even when details are scarce. Deloitte encourages clients to use the Web to keep employees abreast of a deal's progress as early as possible. "At the beginning there may not be a lot to offer, but merely acknowledging what is going on, explaining that there are people working on it, and assuring employees that you will provide information when you have it shows that you understand they are curious and will share information when you can," Powers says. "As they see you live up to that commitment, they start to trust the process, and that enables them to more quickly get comfortable with the outcome."
Communication should work both ways, not just in pushing out the news as a deal takes shape, but in analyzing its success after the fact. Despite the new focus on speed, integration managers at best-practice acquirers don't simply close the books on the most recently completed project and move on to the next. Instead, they hold postmortems to learn from their experiences.
Intel, for example, conducts what it calls "after-action reviews," or AARs, for everyone involved in a transaction. "We tear down the deal we just did, figure out what went right, what went wrong, and what we want to do in the future," says Burke. "It's cathartic, and it also reminds us that it's all these small things, these bread crumbs that we leave behind, that help us learn and change. It's what makes us better for each subsequent transaction."
For all its travails, the recession has left many companies cash-rich, and this year may see many of them looking to put that money to better use by making acquisitions. Taking the "post" out of "postmerger integration" can be one very important way to make sure that that money is spent as wisely as possible.
Randy Myers is a contributing editor of CFO.
Synergy? Don't Be So Sure
For CFOs, valuing the "synergies" to be realized by eliminating overlapping or redundant systems and operations is a fundamental aspect of M&A due diligence. It also can be a trap, especially for finance chiefs pushed to provide estimates before they can get a close look at a target's operations.
"You might see that the combined purchasing volume of the two companies is $1 billion, and know from history that a typical benchmark for procurement savings is 2% to, say, 5%," explains Steve Miller, leader of KPMG's U.S. integration and separation practice. "But whether you're going to get 2% or 1% or 6% on that particular transaction is something you won't know until you build that synergy from the bottom up in an operational fashion."
Miller's advice: Find out exactly how you are going to get those savings before you start talking about them. Understand the risks involved, the assumptions on which your estimates are predicated, when the savings are likely to be realized, the key things that must happen before those savings can be realized, and the probability of all those things working out.
"As a CFO, you do not want to start sharing big synergy numbers with the outside world that are only driven by top-down analysis," Miller says. "You want the comfort of having them validated from the bottom up." — R.M.
Cisco Systems's Tandberg Acquisition: Ready on Day One
Cisco Systems has long been renowned for both the breadth and the efficiency of its mergers-and-acquisitions activity, so it comes as little surprise that it was among the first companies to begin to focus on postmerger-integration issues very early in the deal-making process.
The catalyst may have been its $7 billion acquisition of Scientific-Atlanta, a maker of set-top boxes and related technology, in 2006. The value driver was clear enough, says Susan McDonough, senior director of acquisition integration for Cisco: "Take a product and sell it to a lot of customers." But the integration was marked by "eye-opening complexity," she says, and it taught Cisco that what really matters is "knowing at a high level of detail how you're going to enable" the value drivers that inspire an acquisition.
Five years and 37 deals later, McDonough stresses that efficiency hinges not on a checklist or standard playbook approach, in which "you start at the beginning and end at the end." Instead, Cisco works backward, figuring out where it wants to go and then developing what it calls a "plan of record" for capturing the deal's promised value.
In the Tandberg acquisition, Cisco concluded that a key value driver would be to maintain Tandberg's relationships with its business partners in the videoconferencing industry. "Engaging them early and effectively was critical to continuing the rapid growth in this business," McDonough says. "Partner briefings began as soon as the deal closed, and partners with no prior relationship with Cisco were introduced to the company through executive briefings and open-house events."
Cisco may also have learned a useful lesson from a natural disaster. On the date of the closing, a volcanic eruption in Iceland shut down air travel across much of Europe, stranding a team of Tandberg employees in the United States. Unable to get home, they made their way instead to Cisco headquarters in San Jose, California. They received their new employee badges on the spot and participated in a videocast of closing festivities that was being transmitted to Cisco and Tandberg locations around the globe.
"They kept walking around and showing everyone their badges," McDonough says. "I think that in that moment they became very committed to Cisco and felt very much a part of the Cisco team." — R.M.