More focus on merger than on acquisition required

Why is it that when it comes to evaluating the success of a ‘Merger & Acquisition’ (M&A), most attention is directed at the ‘acquisition’ and very little at the ‘merger’? Yet the sustainable benefit of any acquisition usually depends on what happens after the financial deal is signed.

That’s according to Rogan Davies, head of Financial Services at The IQ Business Group who says integration of the acquired entity is required in order to try and extract real value from the deal.

Davies acknowledges that there is room for what he terms a “federal’ approach to acquisitions – where the holding company purchases profitable businesses and continues to allow them to operate as before.

“To my mind, however, the measure of a successful acquisition is when the value of merged entity is greater then the sum of its parts. And that can only be attained when the two entities are successfully integrated, duplicated costs are eliminated and economies are scale are exploited,” he says.

“That requires smart integration. Properly done, it can unlock tremendous value; poorly implemented, it can be a disaster from which recovery can be extremely difficult. Unfortunately, Effective Merging is not taught at any university or business school and there is no blueprint available to ensure a successful undertaking. Each acquisition is different and the entities involved in the deal are different – as will be the outcome when they are merged.”

However, Davies believes there are some basic steps management can and should take to make the path towards value-unlocking integration as smooth as possible.

• Brand rationalisation unless a federated model is being adopted. Maintaining multiple brands is expensive. Decide which brand to keep, which to lose or whether to create an entirely new brand. Be rigorous in researching which route to take, and then be ruthless. Once a brand is eliminated, a whole lot of marketing and operational costs will disappear: one marketing team instead of two; one layer of high-level, highly paid executives instead of two; one supply chain, one back office. And once a brand is gone, it’s gone. One year later, people forget what was.

• Operational integration: strip out all duplicated costs. Look at how quickly the organisation can become leaner and meaner from an operating perspective. It’s not just a case of, for example, taking out duplicate HR people, but totally integrating the HR departments. This could require the reengineering of all back-office processes. Then look at supply chains, remove duplications and leverage economies of scale.

• Systems integration or IT rationalisation. Many M&As avoid this because of the upfront costs involved – and 10 years down the line they are still trying to maintain two incompatible systems and even two separate mail servers. – which helps perpetuate the division of cultures, the ‘us and them’ polarity.

• Accounting rationalisation: a single business needs to run off a single accounting system with the same accounting rules and protocols. Accounting integration is needed to get accurate reporting from which management can run new the business

• Cultural issues: often the most difficult aspect of any merger but one that has to be addressed. It’s often more advisable to create an entirely new culture than to expect a large group of people to buy into an existing culture – particularly one that ‘belongs’ to a previous competitor. However, cultural integration can be significantly smoothed by effective brand, operational and systems integration.

“Much of this can take time. So companies should deal with quick wins first. For example, payslips need to be in the new entity’s business name at the end of the first month. This helps to set the direction and make everyone aware that the acquisition is a done deal and there’s no going back,” Davies concludes.