Strategic Implementation for M & A

By Eric Kihlstrom
Director, EQuattro Consulting (EQC), A Strategic Partner of DSI

According to a recent survey, 75% of strategies formulated are never successfully implemented with respect to M&A (Fortune, Sept 2005). More than 50% of organisations fail to fully realize their merger strategy. In addition, 70% of mergers and acquisitions end up destroying overall value for the companies involved. These stark results trace back to a number of unforeseen factors including mistimed synergy capitalization, inappropriate acquisition strategy and paying too high a premium. Additional factors are shown in the figure below.

Figure 1

Strategies related to mergers and acquisitions carry special risks and, therefore, require a flexible, adaptive plan to effectively mitigate these risks.

Approach to realizing M&A strategies

Four key challenges exist that determine if a company will realize maximum value from a deal and ensure its smooth integration.

1. The strategy challenge: The first step is to develop a significant strategic direction and ensure the organisation is aligned behind it. Organisations should employ a range of strategic tools to challenge existing strategies and to establish clear project goals and milestones. In order to build robust strategies to deal with high uncertainty and complexity, scenario planning can be an extremely powerful tool.
   
   
2. The synergy challenge: Overestimating merger synergies often lead to unattainable expectations. Organisations overpay because they are overly optimistic about the anticipated cost savings or growth targets. Organisations must identify up front key areas of expected synergy realization and have a structured approach to ensure full value is unlocked from the deal. Ideally, the key assumptions in realizing the synergies should be tested in advance of the merger if possible, such as via alliances and/or partnerships.
   
   
3. The integration challenge: A year after a merger, companies can leave up to 50 per cent of synergies unrealized. The real success or failure of the full M&A Integration can typically not be assessed until three years after integration, so it is essential that the integration plan is flexible and has a three to five-year horizon. Using a well structured 100-day integrated plan to kick-start integration activity will lay the foundation for long-term assessment of value creation.
   
   
4. Next generation change challenge: Organisations need to identify key business strengths or key success factors (KSFs) from the merger integration to enable future breakthrough improvements across a range of future scenarios. This includes understanding a company’s combined core competencies, key success factors needed to succeed as a merged entity, competitive positioning, and how to close identified gaps.

One size does not fit all

Each acquisition strategy, as shown in the table below can be, in principle, categorized as:

• Geographic expansion
• Vertical integration
• Horizontal integration or industry convergence
• Overcapacity merger
• Product and market extension

Figure 2 – Merger Integration Issues

Type of Merger	Strategic Objectives	Processes	Culture
Geographic expansion	Operating units stay local; create win/win scenario	New processes may be welcomed by the acquired unit	If culture is strong, use carrots, not sticks Integration effort hinges on how ingrained the values are
Vertical Integration	The acquiring company tries to turn certain patterns in its supply or demand chain into competitive advantage The key is to exclude the competition from the creation of a more efficient internal market for supply or demand	Integration mainly driven by economies of scope Streamline back office functions and ensure front office processes share interfaces where necessary	Understand where the overlaps are and ensure the operational model reflects this Cultural issues can be addressed by common and consistent performance management processes
Horizontal Integration or Industry Convergence	The acquiring company bets on a new emerging industry and tries to establish an early mover advantage Boundaries of the existing industry are eroding. It is critical to pull off resources from existing industries and change their capabilities	Integration to be driven by specific opportunities to create value	The integration manager needs to make a decision as to which parts of the new organisation to leave alone, but be prepared to change this decision as new discoveries are made
Overcapacity Merger	The acquiring company to eliminate capacity, gain market share and create a more efficient operation	Rationalize first, then you can run the operation, so decide what to eliminate quickly In the case of a ‘merger of equals’, expect trouble if processes and values differ greatly	Expect management teams to fight for control
Product and Market extension	The acquisition extends the company’s product line (i.e. international coverage)	Know what you are buying; the farther away the company gets from home, the harder it is to be sure	Expect cultural and governmental differences to interfere with the integration

Probe the strategic rationale

For integration to succeed it is vital for the implementation director and his/her team to understand how to create shareholder value over and above the premium paid. Activities include:

• Understand and articulate the uncertainties three to five years into the future that need to be dynamically monitored by the company
• Create a strategy canvas to articulate value innovation opportunities enabled by the newly merged organisations
• Create the business model after understanding the capabilities needed and base due diligence on the requirements of the new model
• Identify the core competencies of the current entities and break them down into processes to be implemented
• Confirm if these competencies will be assets in the new organisation
• Create an operational and financial model by:
  • Identifying what is at the core of the business, and what can/must be eliminated
  • Confirm the cash flow projections and calculate EVAs based on identified synergies
  • Ensure the financial model corresponds with the intended strategy
• Determine the inherent risks by:
  • Establishing facts that are being accepted
  • Focusing on these facts and establishing the dimension of new solutions
• Break with the old paradigm; determine which behaviors and values are required in the new model and reward the new behaviors

Parallels to implementation of other corporate strategies

Implementation of strategies for mergers and acquisitions exhibits strong similarities to implementation of other corporate strategies. Similar to M&A strategies, corporate strategies require:

• A tailored approach dependent on the type of strategy (i.e. geographic expansion; market expansion, consolidation or rationalization);
• Breaking old paradigms and rewarding new behaviors;
• 100 day plans which demonstrate tangible results and lay a solid foundation for further strategic development;
• Clear lines of authority and leadership in the implementation and execution of a strategy;
• Strong risk management and risk mitigation processes;
• Flexibility to adapt to unforeseen events as the future unfolds.

Tools such as scenario planning and dynamic monitoring can be invaluable for corporate strategies as well as mergers and acquisitions. It is critical to have a flexible, adaptive strategy for any M&A integration. As Prussian Field Marshal Helmuth Von Moltke said, “No plan survives contact with the enemy.”

For more information on Decision Strategies International and EQuattro’s approach to M&A integration strategy, please contact Eric Kihlstrom at eric.kihlstrom@equattro.com.