… by MedSudsers Gary Dion and Susan Follett, Co-Principals, SugarCubed, Inc., specializing in large-scale change management to achieve product delivery performance. Services include due diligence, merger integration, accelerating operational performance, and project recovery. Contact the authors at 503.579.4735 or either Gary.Dion@SugarC.com or Susan.Follett@SugarC.com.

M&A is a central element of growth strategies for today’s companies who seek market leadership. Despite the importance of M&A:

·    70 to 80% of companies that make acquisitions are not satisfied with their outcomes.

·    Approximately 50% of all acquisitions actually damage the original company.

·    Many turnarounds become necessary when M&A goes bad. Frequently, these fail as well.

What accounts for this dismal success rate? There are a variety of possible contributing factors, including lack of leadership, ineffective due diligence, lack of a plan for merger integration, and failures of execution. To look at any one of these alone, though, is to look at the problem much as the blind men who describe an elephant from their various perspectives.

Just as each of the blind men is correct in his description of part of the elephant, each of these contributing factors is part of the answer. Also, just as the blind men individually fail to understand the elephant, achieving sane and successful mergers and acquisitions requires a big-picture approach.

An article in the McKinsey Quarterly, 2001, issue 4, asserts that “A failure to focus on revenue may explain why so many mergers don’t succeed.” Revenue is the essential ingredient for growth, and growth is the overarching goal of most acquisitions.

What does a revenue focus mean?

Any focus on revenue, whether in times of acquisition or not, must have at its core a focus on product operations – the functional organizations that deliver the products on which the company’s revenue is based. These organizations typically include: product management, marketing, engineering/development, engineering services, and customer services and support.

Despite the criticality of product operations, the focus of M&A is frequently skewed to financial and legal considerations of the deal itself. The assumption is often made that organization, process, technology, and culture integration can wait until the transaction is complete. However, when due diligence and negotiation are not based on a thorough understanding of product operations, results can be disastrous.

Furthermore, merger integration is often limited to corporate systems and processes where cost efficiencies are anticipated. Neglect of product operations at this stage is counter-intuitive, considering that the vast majority of acquisitions are initiated to achieve growth – by accelerating expansion of the product portfolio, entering new markets, or increasing share and revenue from existing markets.

What tools are required to support a revenue focus?

Revenue-focused mergers and acquisitions – those that achieve corporate growth – require two things that organizations such as Intel Capital are beginning to understand and adopt:

·    A well-managed M&A life cycle process

·    A methodology that ensures proper attention to product operations – the revenue-producing engine of the company

Experience has taught such companies two key lessons:

1. The time required to attain the desired operational capability and ROI is as, if not more, important than how long it takes to complete the deal.
2. Failure to invest in M&A process and methodology ultimately costs more – in expensive corrective action efforts and diminished ROI.

Those companies who have yet to understand the importance of a well-managed M&A life cycle process grounded in a methodology that ensures thorough inspection of product operational capability will likely suffer repeated dissatisfaction with acquisition outcomes.

As John Dryden, seventeenth-century English poet and dramatist, so eloquently put it, “Insanity is doing the same thing over and over again and expecting different results.” Dryden’s view applies no less to M&A.

Still not convinced?

Still skeptical? Do any of these describe your company’s M&A experience?

·    This isn’t our first acquisition. But each time one comes up, we find ourselves scrambling to pull together a due diligence team. And we never seem to catch up.

·    After the deal, the “secrets” come out. That’s when we discover the real issues.

·    The acquired company’s chief architect, who seemed like such a nice guy, is now stymieing the effort to produce an integrated product portfolio.

·    Our cultures and processes are so different. It’s been 18 months, and we still can’t work together.

·    The product architectures are incompatible, and we can’t agree on an approach to fix this.

·    On first examination, the company we acquired looked really good. But they can’t deliver to plan, and customer issues keep derailing us.

·    We keep shifting our key people to the new organization. Now we’re putting our own delivery and market commitments at risk.

What does a well-managed M&A life cycle process include?

An efficient and repeatable M&A life cycle process ensures requirements-based action and criteria-based decision-making at key stages that should include: strategic planning, candidate development, due diligence, integration planning, negotiation, and integration.

1. Strategic Planning

Strategic planning yields an acquisition strategy that includes business objectives, requirements, and value drivers for an acquisition.

This stage allows for acquisition strategies to be developed within the context of the company’s overall business planning process. The acquisition strategy should support business vision and objectives and the growth and market strategy. Along with strategies for internal product development and alliances/partnerships, the acquisition strategy should be an integral component of the corporation’s investment strategy.

2. Candidate Development

Driven by the acquisition strategy, the candidate development stage identifies one or more acquisitions to be pursued.

Target selection requires comparison of candidates in terms of expected ROI; anticipated obstacles, complexities, issues, and risks; intangibles; and an initial understanding of merger integration requirements. In this stage, preliminary due diligence examines broad business, market, financial, and legal considerations. For agreed upon targets, preliminary deal communications and negotiations are conducted.

3. Due Diligence

Due diligence seeks specific, comprehensive knowledge of the candidate’s business, systems, people, processes and tools, products and technology, culture, markets, customers, suppliers, and overall performance capability, for use in guiding negotiation and integration.

The focus of due diligence should be uncovering issues, determining whether or not they are deal killers, and, if not, developing a plan to address them during negotiations and after deal completion. To assist, a gap analysis is performed to assess “what is” against “what is needed.” Recommendations for deal decision-making, terms, and corrective actions are provided to stakeholders and the negotiation team.

A methodology for ensuring a thorough inspection of product operational capability is an essential tool in the due diligence assessment process. (See “What does an operational assessment and integration methodology offer?”)

4. Integration Planning

Guided by the findings of due diligence, the integration planning stage yields a roadmap for achieving the required post-integration business model and associated ROI.

The integration plan addresses all key performance areas, identifying corrective or risk mitigation actions for each gap discovered during due diligence. A core integration team is chartered to develop the plan and lead the integration. The plan may be phased, based on business strategy and priorities, and should include measures of progress, completion, and value. Buy-in from executive management and major stakeholders is essential.

5. Negotiation

The negotiation stage is based on information from strategic planning and due diligence.

Terms of the deal must be defined so as to ensure that business and acquisition objectives, requirements, and value drivers can be achieved. In doing so, priority must be placed on the operational considerations (including people, organization, process, tools, and culture) that are essential for successful integration and ROI.

6. Integration

The integration stage is managed by the core integration team chartered during integration planning.

As the integration plan is executed, regular and consistent measurement of progress, management of issues and risks, and information flow to executive management and stakeholders are essential. Along the way, shifts in business, market, product, or technological strategies may necessitate changes to the plan and must be managed. A post-project review assesses success and identifies process improvement recommendations.

What does an operational assessment and integration methodology offer?

Although problems are not entirely avoidable, the key is uncovering issues early and developing a plan to address them. Therefore, the most successful mergers and acquisitions are guided by a methodology that ensures a comprehensive and thorough inspection of product operational capability.

In our work with companies such as Intel, we use a methodology that:

·    Prescribes a process for preparing for and conducting due diligence and managing findings during negotiation and integration

·    Includes a generic set of performance indicators that can be tailored based on the nature of the deal at hand

The generic performance indicators cover these high-level categories of product operations:

·    Business purpose and market strategy

·    Product and technology

·    Management, leadership, and culture

·    Business operation and organization structure

·    Personnel, expertise, and functional capability

·    Product planning, development, delivery, and support processes and practices

The tailored set of performance indicators is used to generate criteria that define exactly what aspects of the candidate’s operation must be in place for a successful integration and return on investment. These criteria drive interviewing, investigation, and gap analysis during due diligence.

What’s the bottom line?

The most successful mergers and acquisitions are guided – from initial planning through merger integration – by a well-managed life cycle process and a methodology that ensure:

·    Comprehensive and thorough inspection of all aspects of the product technology and operation to be acquired and integrated

·    Decision-making and execution based on an integration plan that directly supports business strategy, objectives, and priorities

·    Early discovery and management of operational and technological issues and risks

In M&A, the “invest now, or pay much more later on” principle is especially true. A sound investment in life cycle and methodology ensures the least disruption to product delivery and sales operations following the transaction. This attention to revenue affords the greatest likelihood of efficiently and expeditiously achieving desired ROI from acquisitions. It’s a formula for sanity and success in M&A.