While there can be some quick cost savings to be made by removing duplication, realising the full value of an acquisition can take time. Many don’t get there. To really claim success, you need to integrate wisely: preserving what works, understanding what doesn’t and challenging yourself to over-deliver.
Gerard Keenan, CFO of highly-acquisitive delivery business CitySprint, says their preferred model is to act quickly. “Predominantly, what we do is buy the turnover and goodwill of courier businesses. The key is to move it into our operating model as soon as possible and integrate the key staff and couriers into the operation.”
However, there still needs to be some flexibility. “Sometimes it’s good to move quickly; on other occasions you’ve got to take a bit longer. You’ve got to view each acquisition independently and come up with a strategy and integration plan for it,” he says.
One of the arguments for integrating in stages is to protect the culture of an acquired business. “You need to tread carefully, particularly in ‘people-businesses’,” says Michelle Chikanda, Senior Relationship Manager at Criticaleye. “The cultural dynamic may be crucial to an acquired organisation’s success, so you must take care not to destroy the thing that attracted you to it in the first place.”
Matthew Lester, a Non-executive Director at Barclays, Man Group and Capita as well as a Criticaleye Board Mentor, agrees it can be the right decision not to integrate fully straight away: “Often you buy a business because it provides entry into something which you are not totally familiar with, so you’re looking to access the intellectual property or know-how of the business, and understand it properly, before you decide how it’s going to be integrated,” he says.
Matthew reflects on a past acquisition where these factors were considerations: “The key point was not to spook the people who were running things. We needed to learn what the business did and how it ran, and so we embedded someone in the company.
“Smaller degrees of integration were done from the start, particularly with their financial reporting, and we brought in some oversight on compliance and regulatory matters. We had to ensure the standards needed to run as a Plc were being adhered to locally, but that they were done with tact and diplomacy.”
They watched and learned. “We ran on that basis for 2-3 years, slowly understanding what we wished to preserve,” he says.
Reece Donovan, Group CEO of Nomad Digital, oversaw a similar strategic pause during the recent integration of a competitor: "The first stage was integrating the organisations, but we didn’t make changes to the operationally-critical teams that were delivering service to our customers,” he says. There was some consolidation of senior management and back-office staff, “but anything that had to do with R&D investments, project work or operations and maintenance, we left alone”.
They also rebranded the acquired business, before moving on to the next stage. “During the second wave, we’re now reviewing the two delivery and service models that we have in place to decide how to move to a single model that makes sense worldwide.
“More work will begin to be handed over to the centralised 24-7 service desk to support all of our customers internationally. If we had done that on day one I think it would probably have had a serious impact on some of our customers, which include huge state-run train operating companies. We didn’t want to take that risk until we fully understood what their model was, how they were delivering service and what the cost-drivers were.”
Gerard agrees that your customers should be at the core of your integration plan: “You’ve got to wrap your arms around customers and make sure they feel that nothing has changed except that they are getting a better service,” he says. “We have a separate acquisitions team that monitors how things are going each month, and if we need to do anything or re-engage the customers then they’re all over it.”
While pausing to preserve value can be the right approach, Roger Bayly, Managing Director at Alvarez & Marsal, cautions that letting a business operate autonomously for too long can lead to underperformance: “A root cause of things starting to go wrong, and value being missed or even destroyed, can be acquisitions not being integrated, in some cases for many years. In such cases, the purpose and value-plan for those acquisitions can be lost in the mists of time.”
He continues: “You need a very good reason for not integrating and you need to be very clear with yourself and your shareholders about why you are doing that.”
Matthew agrees: “When I reflect on acquisitions during my exec and non-exec career, some of the decisions to leave things unintegrated clearly went on too long – the world changed and so we should have acted and integrated those businesses more rapidly,” he says.
A lack of ambition
A second wave of integration might not always have been planned but may still be needed. This can simply be an opportunity to revisit aspects that haven’t worked, however, sometimes the targets you set yourself may not have been challenging enough in the first place.
Roger explains: “Listed businesses tend to be relatively conservative about stating their ambitions for an acquisition. The danger is, you achieve that relatively conservative goal and think you’ve finished, but there’s often a lot more potential.”
He relates a recent merger between two large healthcare businesses. “They’d declared victory after achieving their stated target and had gone back into ‘business as usual’ mode. They had left very substantial revenue and commercial synergies on the table, as well as significant further cost savings. These would have been difficult to spot in the diligence phase but were pretty clear now the business had been owned for 18 months.”
The business had completed the more obvious structural changes around geographical coverage and serving its customers but hadn’t gone to the next level and asked questions like: ‘How does our combined portfolio match up against a market that is moving?’ and ‘Where have we got smaller or emerging products and services that we could rapidly commercialise to address the combined market and customer base?’ “It took a second wave of effort to go back and unlock this potential,” Roger says.
Ultimately, you need to have a clear plan and timetable for an integration upfront. But it’s just as crucial to revisit it once you’ve built up a better picture of how the business operates and identified any hidden opportunities.
Emma Carroll, Senior Editor, Criticaleye
Next week’s Community Update will explore the value of mentoring with some real-life examples.