Integrating an acquisition is like riding a wild beast. The ride starts fast, it’s hard to hold on, and about 50% of the riders get bucked off long before the beast wears out. What make the odds really tough: The acquisition beast is in addition to our own “company beast” that we’re trying to ride at the same time!
Amidst the hyper-activity of integrating an acquisition, CEOs often look back a year or two later and realize they had little or no oversight over the integration. They see decisions made (or not made) that took the acquired company off course. They see priorities were set incorrectly. They often realize that some leaders within the organization were screaming about critical issues, but no one was listening. Why?
I have seen four issues throw acquisitions off course:
One team trying to do two jobs. Mid-market firms are accustomed to running as a single management team with a single focus. But an acquisition often involves a mega-leap in growth and complexity, and it happens instantly, with the stroke of the pen on the deal documents. For a management team not nearly as deep as those of big firms, juggling several top priorities becomes taxing and risky.
Disconnects between deal makers and deal integrators. Pre-close negotiations are often done by a select few, but other managers are usually charged with conducting the integration and “making it happen.” Commitments by the acquiring deal team on resources promised, corporate support, strategy and tactics to support earn-outs often have not been vetted by the operating unit executives who actually have to deliver on the deal.
Original deal vision forgotten. A year out, both the acquired and acquiring teams may have failed to deliver on the deal makers’ goals: that incurs significant emotional and business damage. When the board or the CEO asks why the acquisition failed (which happens 50% of the time), it often becomes clear that the team wasn’t really focused on the fundamental motivation for doing the deal in the first place.
Overshadowing by big brothers and sisters. Upper mid-market companies (those with revenue of $400 million to $1 billion) and Fortune 500 companies with multiple business units can “lose” a strategic acquisition that has no clear place inside one of the units. For example, a construction company’s goal in purchasing a software vendor was to transform the workflow of its big revenue-producing business units. But the company relies on the short-term revenue generated by those business units. The software firm can’t get business unit attention and cooperation.
It is not as if acquirers aren’t trying to solve these problems. Mid-market companies often build financial metrics and project benchmarks for acquisitions into their reporting structure. They appoint an operating executive (the COO or CEO in smaller mid-market companies, a business unit president or corporate development executive in upper mid-market companies) to manage the acquisition. The project management office (PMO) may appoint a project manager to keep the integration on track. If the acquisition is large enough, the board may show interest in its progress. All of this is good practice, yet it often fails to produce the expected results. The stumbling blocks lie in three main areas:
Acquired team has no strong guidance. Seller and seller teams retained usually don’t feel like they have the ear of anyone. Seeing themselves in a “foreign” firm, they get angry or de-motivated. For example, a technology company was acquired by a much larger firm, bringing a new business unit to the firm. The senior leader of the acquired firm was one of 130 people at his rank in the new firm. As he tried to connect with peer business units and support units, he met roadblock after roadblock, despite trying to execute the plan under which the acquisition had been made. He had no one above him with the power and obligation to act as a steward of the acquired firm within the acquirer. On his own, he had to educate and persuade dozens of people about the reason for the acquisition, and gradually negotiate cooperation. Although he made slow progress, he left after 2½ years, convinced that the results had fallen far short of the promise of the deal.
Tactics destroy strategy. As managers see the details of executing the integration, they often make pragmatic decisions e that fall below the “radar” of typical mid-market oversight. That creates stumbling blocks or incrementally moves the acquisition away from its intended path. There is often no one with both the knowledge of the tactical realities and the authority to make hard decisions to deal with these derailments. For example:
- What appeared to be the straightforward combination of two research labs ran into regulatory safety issues, which caused delays.
- Big gains anticipated from cross selling by both side’s sales teams didn’t develop as planned. Upon closer review, the comp systems discouraged it, and the teams needed much more training to successfully cross-sell.
- Some key acquired talent became dissatisfied and left, hobbling progress.
Not-invented-here resistance. Internal buyer resistance to the acquired company’s plans can hobble the integration and acquisition. But this underlying feeling is hard to surface to the highest levels of the acquiring organization, and thus it often gets buried. In acquisitions of all sizes, the people in the acquiring company feel like they “won” and were smarter and better than the seller. After all, they were able to buy, and didn’t have to “sell.” Right or wrong, this attitude translates as the acquiring company considering their way to be the “right way” or the “normal way”, looking with skepticism upon all things acquired. For example:
- While integrating IT systems appeared manageable, it turned out to be much more difficult than planned. It may be significantly delayed or cost substantially more.
- The French engineering team of an acquired company preferred their approach, but the U.S. engineering team in the acquiring company preferred its methodology. An ego-driven dual fiefdom emerged and lasted three years.
- At acquisition, the plan was to combine two plants into one. It seemed that the acquired company’s plant would remain, but now the implementation is stalled due to internal resistance.
- Integrating work flow processes for this vertical acquisition held great promise. But both teams like doing it the way they always have, and change is behind plan, possibly crippled.
Acquisition Review Boards: The Key to Successful Integrations
Deloitte’s 2011 survey of 325 corporate development executives worldwide found “…the greatest opportunity for improving the effectiveness of their corporate development function is through improvements in organization and process. This underscores the importance of being able to deliberately move through the deal process in a coordinated fashion, with each stage building on the learnings of the prior stage.” Integration is the last stage, the process that needs to be layered on is a focused oversight process led by a “review board.”
Multibillion-dollar firms that are serial acquirers are keenly aware of the need for review boards and use them with success. Francine Miltenberger, Managing Director with Onyx Associates (an M&A advisory firm) and former executive with Chemical Bank, an early acquirer in the banking industry has worked on more than 15 integrations. She says, “When you do your first acquisition, you completely underestimate the issues that will develop. At Chemical Bank, we learned quickly that acquisition review boards were essential for ensuring successful integrations.”
Specifically, three types of mid-market acquisition integrations are at high risk, and must have a review board:
- Upper mid-market firms making a small but strategic acquisition. Management is so focused on big things that they risk failing to pay enough attention (larger firm, smaller acquisition). It gets lost.
- Large acquisitions (say 15%-40% of the acquirer’s revenues) with organization-wide impact. Although an acquisition of this size may land inside one business unit, it affects the parent organization much more broadly than the business unit leader can control. The BU leader has interdependencies with other corporate staff or business units that directly affect the acquisition’s success.
- Merger of equals. In these transformative deals, so much detailed analysis and decision making happens that no single person, not even the CEO, can make well-informed decisions by themselves.
How an Acquisition Review Board Works
- First, with the signing of the deal, an Acquisition Review Board (ARB) is created (with a one- to two-year life), composed of key leaders from the acquired team, the buyer, PMO, the corporate development team, and the operating business unit leader. Smaller acquisitions or smaller acquirers might have a smaller review board, perhaps the CEO and a few others. Mergers of equals often have the CEO as the leader of the acquisition review board. Most importantly, the members of the review board must have status in the organization commensurate with being able to get things done, and to overcome most internal obstacles. Additionally, some members of the board must be close enough to the action to sense problems and be able to challenge those who report to the ARB.
- The ARB adopts an acquisition/integration plan. This plan must capture the deal aspirations (as presented to the acquiring firm’s board of directors when seeking deal approval) and the detailed integration plans created by the PMO. Operating executives must be closely involved.
- The ARB acts like any well-run company board, with the chairman reporting back to the CEO of the acquiring firm. They might meet weekly or monthly at first, perhaps after nine months shifting to quarterly reviews. At each meeting, they review a report from each constituency, comparing plan to actual performance. This group must be in charge of dealing with conflicts of interest and other issues that could compromise the deal.
A great example of the power of an acquisition review board is a $200 million insurance firm’s acquisition of a competitor with a lower-priced product. The acquirer quickly increased the product’s price to better match its own core product. The acquisition was managed by the operating unit executive but had an ARB comprising a few board members, two operating executives, and the vice president of corporate development. The board noticed that sales the acquired firm’s products were dropping rapidly and made the hard decision to lower pricing. That, in turn, reduced the market share of the acquirer’s core product. However, the overall firm’s competitiveness improved—a key goal of the acquisition. The operating unit executive might never have made this decision, since it hurt his own team’s performance and would have been too big a risk for him.
Another example of adoption of the ARB practice comes from optical products manufacturer Oclaro, Inc. (NASDAQ: OCLR), which recently agreed to merge with Opnext (NASDAQ:OPXT). Oclaro will combine its $400 million in revenues with Opnext’s $300 million, putting them on the path to a becoming a billion-dollar firm. This merger is Act Two: In 2009 Oclaro was formed by a merger between Bookham ($200 million in revenue) and Avanex ($80 million).
The 2009 merger was meticulously planned. However in hindsight, some of the integration work could have been taken to the next level in depth and in creating a foundation for future scalability. For this next, larger merger, Jerry Turin, Oclaro’s CFO says, “We expect to establish a decision council as part of our integration plan, with appropriate senior leadership. The council will ensure that key decisions are being made and aligned, quickly, and will apply diligence in challenging feedback and in reinforcing timelines. So for example—a simple, big-picture example is, will it be SAP or Oracle, and the council will review the knock-on effects on everything. We have to be aligned on these key decisions. We have to be aligned on what the relationships and the dependencies are and the decision council being sure those right decisions are being made; and signing off on those decisions. We must be sure that all stakeholders are getting visibility to these decisions.”
The critical point here is that an acquisition needs governance of its own. Whether it’s called a decision council, an acquisition review board, or a cross-functional oversight team, it serves the same purpose. A review board with the right level of executives creates oversight powerful enough to create accountability and make quality decisions, yet accessible and close enough to the details to take corrective action quickly.
Overcoming Resistance to the ARB
Acquisition oversight is often unpopular, and the practice of introducing an acquisition review board may be met with resistance for several reasons:
- “We already watch our acquisitions closely.” For many mid-market businesses, any acquisition is a big event, so management may feel it already watches them closely enough. For some acquisitions in smaller mid-market firms where the management is fully focused on the integration, a review board may not be necessary. Yet statistics show that much happens that top management doesn’t hear about until it’s too late. Why? Because feedback loops don’t work well when they’re not formalized and encouraged, or when time isn’t set aside to look more deeply into the integration’s successes and obstacles. Thus in mid-market businesses of scale, having clear accountability to a review board (with direct connections to the CEO) can create the pressure that gets a fair hearing on resources and cooperation among other business units.
- “We have an open-door policy.” Too many acquisitions fail or end up in litigation because the seller and/or the acquired team feel lost within the new organization. Morale drops, the best people leave, the work and progress slow down. Telling the acquired team that they can always voice their feelings isn’t enough. Most executives have tight calendars, and hoping that problems and unhappy stakeholders in the deal will push their way in is unrealistic. The review board process draws in participation, which is powerful.
- “This feels bureaucratic.” Some acquirers may feel this is process-heavy for them, or even cumbersome and unwelcoming for the acquired team. But the manner in which the process is run is quite variable. If it is a small acquisition, and the review board finds after the first few meetings that there is little to deal with, these meetings should grow shorter or less frequent. The review board’s job also isn’t about holding “them” (the selling team) accountable. Instead, it is about holding everyone accountable to the original promise of the acquisition. The approach should be one of fairness to all parties, without a “partisan” perspective. To be sure, having a review board will take some time and energy. But after all, when one buys an expensive asset, it is always prudent to plan for some upkeep and maintenance. That is precisely what your review board does.
- “Our corporate board isn’t even this formal.” For smaller mid-market companies that may not have highly formal governance, this may seem like overkill. But compare the rate of change in a new acquisition versus the rate of change in an established company. The more change and flux, the greater the need for active governance. It may be helpful to think of the review board as a project management overview group. Any acquisition is a big, expensive project that affects many areas of a business. It needs extra process and governance.
Making an acquisition, even a small one, is a big investment. The hardest work begins after the deal is signed, and many deals fail in the critical 18 months that follow. This is the most important time to govern your acquisition with a review board that keeps the momentum building toward the original promise of the deal, or otherwise sounds the alarm. An acquisition review board gives your leaders a harness when you put them on the wild beast of acquisition integration. Run effectively, there’s far less risk of them falling off.