Growth Driven Acquisitions
Lessons on what to integrate (and what not to) and minimizing business disruption
Mergers and acquisitions commonly focus on bringing two companies together to strengthen the market position of the combined company in terms of scale and scope. While there are many different strategic reasons to pursue an acquisition strategy, an increasing number of transactions are based on the premise of portfolio expansion through the acquisition of niche or unique products. In these types of deals, very large companies with mature product portfolios seek to acquire new ‘on-trend’ products to position the company for higher than traditional growth. For example, Clorox acquired Burt’s Bees, an “Earth-friendly, natural personal care company” and Kellogg’s acquired Kashi, an all-natural whole grain foods company. These deals enable Acquirers to enter new market segments quickly on the backs of successful, innovative products and services; markets that may not be easily penetrated given the acquirers historic brand positioning and culture. A caution however, is that these markets tend to be very fickle if they perceive the niche brands to be no longer independent.
No acquisition better illustrates this scenario than Quaker Oats’ acquisition of Snapple. In 1994, Quaker Oats purchased Snapple for $1.7 billion and three years later sold it for $300 million. What went wrong? Many suggest “there is a vital interplay between the challenge a brand faces and the culture of the corporation that owns it. When brand and culture fall out of alignment, both brand and corporate owner are likely to suffer.”
Given these perils, companies that pursue these types of acquisitions are hesitant to pursue any integration whatsoever in an attempt to preserve the culture of the acquisition. Unfortunately, without integration and its cost benefits, deals will almost always come up short in expected business value. In a Deloitte survey of M&A deals over the last 20 years, it was found that almost 75 percent of deals did not achieve the value targets expressed to the financial markets.2 So, despite the challenges of acquiring unique and innovative brands, achieving some level of cost synergies should still be a critical component of making the deal work. The question is how can a company accomplish integration while minimizing the risk of brand erosion.
For these types of acquisitions, the trick lies in finding the right balance between preserving the uniqueness of the target company while developing the infrastructure to enable growth and achieve planned synergies. Keeping the strategic deal rationale in sight and understanding what aspects of the business to retain will help guide acquirers through the integration planning process. Based on Deloitte’s experience advising clients on over 700 mergers and acquisitions we have identified three fundamental lessons that are common in the most successful integrations of this type.
Lesson #1: Set the stage
What is the deal rationale? What made the target company attractive for acquisition? Understanding and articulating the deal rationale will help provide clarity to those areas that should be protected vs. those that can be integrated.
Identify what drives the creative success of the acquired entity: All acquisitions are unique; therefore before defining the integration guiding principles, you must understand what makes the target so successful. Is it the product development capability? Unique marketing? Is the supply chain different from competitors? Once you understand what makes the company so successful, these are areas you probably don’t want to integrate. On the other hand, if you ask the target what makes them special they will of course say that the entire operating model is unique from product development and marketing to purchasing and accounting processes.
Clearly articulate guiding principles: At the very beginning, the acquirer must communicate the integration guiding principles. If the intent is to integrate some aspects of the business, there is never a better time to communicate this then at the beginning. The longer an acquirer waits to communicate the intent, the more difficult it will be.
Lesson #2: Protect and preserve
Once the target’s key success drivers are understood, take measures to “protect” them during integration and preserve the essence of the company.
In 2008, a conglomerate purchased a market niche company and integrated it with its own similar business unit. The Target company leaders were well aware of the strategic drivers of the deal; growth of the market niche product group, corporate synergies and growth of their own business unit. As part of the Parent Company, the acquired unit was the brightest light within their combined portfolio. As such, management of the Target built and protected their unique culture with vigorous diligence. When the deal was announced, Parent company leaders made a point of understanding what was truly unique about its Target and made the protection of that culture explicit in the integration guiding principles. According to the Integration Leader, “We only had 5 integration guiding principles and 2 of them were devoted to the protection of the Target. From the beginning, we needed the Target to be comfortable with the direction in which we were moving.”
Collaborate on governance: One of the most contentious debates about integration is the level of authority the Target will have once the transaction is completed. Working together to answer key integration questions and active involvement in oversight procedures will help foster goodwill and ownership of the future business between the Target and the Acquirer.
During the planning phase of the combined business unit, setting up the integration steering committee and inviting the Target’s leadership to have a role was the first priority of the Integration Leader who noted, “Had we not made every effort to include them early and often, we would not have been successful. Their involvement from a decision making standpoint allowed us to build a partnering relationship with them rather than an ‘us vs. them’ culture. This paid huge dividends down the road relative to capturing synergies. Initially, their leadership wanted nothing to do with anything related to integration. But, due to the effort to include them and early, successful integration efforts, they eventually led synergy efforts, which resulted in value that considerably exceeded what they thought was possible.”
Retain the culture: Culture is sometimes difficult to define as it could refer to tangible things such as location, activity lounges and dress codes. It also could refer to less obvious things like working hours, meeting norms, communications and performance bonus plans. Acquirers should spend the time to understand what comprises the Target’s unique culture and aim to retain these elements.
In 2007, a large company acquired two small private companies to add titles and most importantly, talent, to its growing business. Retention of the acquired talent was a key integration priority and retaining the two small companies’ cultures was seen to be the best retention mechanism. Easier said than done when nearly one-third of the Target employees had previously worked for and fled the Acquirer, referring to themselves as ‘refugees.’ Demonstrating that the acquirer was not a giant bureaucracy there to swallow them up became a key tenet of the integration. This was done in big and small ways: the benefits policy was altered to allow target employees to retain certain low-cost benefits; logos, business cards and even corporate credit cards remained unchanged; and even offer letters used the target letterhead. These acts served as signals to employees that everything was being done to preserve their unique company cultures.
At the same time, the benefits of joining the large public company were highlighted by showcasing all the resources the employees could now benefit from including advanced development technologies and marketing capabilities. The focus on culture paid off; attrition resulting from the acquisition was virtually nonexistent.
Lesson # 3: Integrate everything else
Despite the most ardent dissenters, we’ve found that there are always areas that could and should be integrated. The one exception is when the Acquirer is operating as a holding company with the intent to sell the acquired business in the future. Back office functions can often be most effectively managed as shared service operations, to take advantage of the combined scale of the new company. Functional areas such as Human Resources, Finance and Information Technology are most commonly integrated while others such as Product Development and Sales may often be integrated as well. The rationale behind functional integration is timely realization of planned cost synergies and of streamlined shared service support. In doing so, it is important to be explicit about the goals of integration and not waver in the face of opposition.
Sell the benefits of integration: Rather than acquiesce in the face of early resistance, leadership should remain on message regarding its integration plans in order to achieve the deal value. Based on our experience, up to 50 percent of deal value comes from operational synergies, or those that take advantage of the combined size of the business to minimize variable costs and strategic sourcing can reduce direct and indirect costs by up to 15 percent (depending on category). At times, these savings may be significantly higher. For example, the Acquirer generally has more advanced information systems and decision support tools than the Target. Demonstrating the benefits of the more sophisticated system may alleviate concerns regarding the cost – benefit analysis of an IT integration. By selling these value propositions upfront to the Target’s leadership, they should more readily recognize the benefits to the business and the potential impact on their performance bonuses.
Integrate non-critical functions: Based on our experience, a typical ‘merger of equals’ transaction may achieve up to 50 percent of synergy value derived from redundancy synergies, or synergies based on the elimination of overlapping functions and infrastructure. While this estimate is less for niche brand acquisition, similar opportunities to streamline operations exist. Rarely is there a reason to maintain back-office functions at the Acquired company. Functional operations such as Procurement, Tax, Internal Audit and Legal are almost always more effectively done at the corporate level.
Depending on the transaction, Manufacturing, Logistics, Supply Chain and even Sales may also be more effectively done at the corporate level. The rule of thumb is to integrate all functions that haven’t been identified as driving the creative success of the company. Critical functions often include Executive Management, Facilities, Marketing and Product Development.
Integrate quickly: Integration is like pulling off a band-aid; the faster the better. As many companies find out the hard way, waiting to integrate almost always results in disruption to the business. There is never a better time to integrate than at the beginning. Best in class Acquirers have integration plans certified ahead of closing the deal and begin executing those plans on Day 1.
A company had integration and synergy plans certified well in advance of the deal closing. This facilitated immediate execution towards integration and benefits capture upon closing. Except in geographies where regulatory agencies precluded communication, within 30 days, all global employees knew of their future disposition; to remain on a full time basis, to remain on a temporary basis, or to exit the company.
While this timing is best in class, it is an achievable goal of any integration if plans are completed prior to closing. “We could not have moved as quickly as we did, had it not been for the urgency in which we completed our integration plans. By creating the partnering culture with the Target and selling the benefits of integrating, we were able to break down historically tall walls and begin to build the combined company on Day 1. We remain on target to be fully integrated less than one year from closing the deal,” explained the Integration Leader.
When the deal rationale of an M&A transaction is expanding the portfolio with a niche brand, Acquirers must develop an integration strategy that preserves the uniqueness of a Target’s brands while achieving desired operating synergies. To do this, consider the key lessons described above. When applied effectively, these strategies should improve your chances of achieving your desired results.