On May 23 Chris Nuttall of the FT highlighted HP’s 27,000 job cuts. One of the casualties, Mike Lynch, founder of Autonomy, who had joined HP 8 months ago after selling his company for the tidy sum of $10.3bn. I did say at the time that it was a awfully large sum for a one man band and a huge multiple of sales. By comparison it should be noted IBM and Google have an excellent track record of retaining their acquired entrepreneurs. Google in particular claimed last year that over their 13 year history of acquisitions approximately two thirds have stayed.
Many journalists and academics love to opine about post acquisition integration and 99% have never bought a company in their lives! So here is a fundamental back to basics checklist for small or large deals to help avoid those post acquisition blues.
Landscape big picture points
- Almost all research done by PWC points to around 85% of acquisitions being a failure in the eyes of the acquirer.
- Research conducted by Cass Business School, covering 12,339 deals including 2917 acquisitions of distressed companies from 1984 to 2008 concluded that price was not the determining factor for success but that post acquisition integration was the key.
- In fact specific research done on experienced acquirers revealed that only those that invested in postmortems after the deal got better at doing deals. Which of course we all know, it’s not so much how much we do of something, it’s how we much learn from each time we do it.
- Diversification can be a bad idea accelerated by the technique of acquisitions. Laidlaw, the largest school-bus operator in North America bought heavily into the ambulance business in the 1990s. Ambulances are not transport businesses they are medical businesses. Big mistake.
- Remember acquisitions are not a strategy they are a tactical technique to achieve a well thought through strategy. First define your unique market and then use various techniques to dominate.
- Buy what you want to buy not what is up for sale.
- The most expensive acquisition you may ever make is the $1 price tag purchased out of Chapter 11 because the post acquisition costs to fix it run into the millions of dollars.
- Be prepared to train yourself to become an acquirer. Buy in or recruit key people to execute alongside your team.
- Specifically to the HP point regarding Mike Lynch – The acquisition of special people can sometimes only be achieved by an acquisition. The acquisition of Groove by Microsoft could be argued was actually the acquisition of Ray Ozzie.
- Now to keep great people post acquisition, needs careful planning and the creation of an entrepreneurial culture. Google’s acquisition of Applied Semantics helped them develop the text advertising network called AdSense which is now a multibillion dollar revenue generator.
Post Acquisition Integration Checklist
Leadership Meeting – Chair a meeting of the integration team and create a master to-do list broken down into themes including key items that arose in due diligence. Allocate a manager, for each theme. Be realistic with timetables. Break items down into actions within 30, 60 and 90 days. Below are some ideas to get you started:
- Get control of the bank accounts, including check signatories and authorization limits. Ensure all accounts are receiving the best group interest rate now that the target is part of a larger entity.
- Establish operating budgets including capex with authorization guidelines.
- Establish a new management information pack timetable. In the early stages of integration – metrics will be key.
- Review balance sheets for adequacy of provisions.
- Drive through planned cost savings quickly and effectively with clear communication. Demonstrate leadership.
- Establish a reporting structure to ensure continuing trading is seamless.
- Review reward structures to ensure continuity of management especially if an earn-out excludes some key people.
- Anomalies between acquirer and target sales commissions will require urgent action as sales teams talk.
- Do a quick and dirty review of problem employment contracts and put resolutions in place to minimize exposure.
- Organize immediate training related to closing sales and keeping customers happy.
- Establish a key meetings schedule to allow free and timely flow of information.
- Establish a clear understanding of the authority levels of the target’s leadership team.
- Deal with exposures revealed by due diligence, prioritizing those related to keeping the trains running!
- Articulate an operational plan for merging disparate systems or at least to allow them to “talk” to each other.
- Lock down the security around customer databases to ensure recent departed staff can’t access vital information.
Sales & Customers
- Ensure live deals under negotiation are not disrupted by the acquisition.
- Cleanse all sales forecasts ASAP and integrate the revised version into the group cash forecasting system.
- Review cross selling opportunities between key customers of buyer and seller.
- Communicate often and clearly with staff and key stakeholders externally, especially key customers.
- Visit key customers to articulate the strategy of the merged group and why it’s good news for that customer. (hopefully a “Lite” version of this would have been done during due diligence.)
- The sellers will have signed off on the joint press release on the deal. This is a great opportunity to motivate staff and impress existing customers with the correct tone of message.
- Set a timetable for all web site changes and allocate a webmaster to drive the project.
- Collateral may need to change to reflect the new products of the merged entity.
- Don’t miss the opportunity to articulate the enhanced business result that will be achieved for your customers due to the increased resources of the merged group.
- Draw up a detailed checklist of leases, obligations, trade contracts, employment contracts, IPR, change of control provisions and articulate any commercial issues that require decisions by the leadership team.
- Note if an earn-out formed part of the deal, there may be quite onerous conditions regarding managing the newly acquired company. These will need to be factored into the integration plan.
- Insurance and risk exposure reviews should be conducted as a high priority.
- Tax and accounting matters related to regulatory compliance may require urgent action.
Overall, the key message is to be prepared and to execute the integration with confidence. The worst thing you can do is to procrastinate. Make your acquisitions a success and remember nothing succeeds as planned but failing to plan is planning to fail.
Further reading on How To Do Acquisitions can be found here:
Assessment of Value & Investment Paper
Negotiation & Structure of the Deal
I forward you posting to the members of CEO Roundtable. One of the members sent me this response:
I’m a long way away from any ‘acquisitions’ with my company, but being a part of the airline industry has taught me a few things about such activity. I would add the following comments to your article:
To simply state ‘Buy what you want, not what’s for sale,’ is both restrictive and simplistic. Unexpected opportunities can arise that may make excellent sense. On the other hand, it seems like companies like Microsoft are consistently acquiring businesses that they ‘want,’ but paying a huge premium (and perhaps making a bad deal in the process) because what they ‘want,’ is publicly known (though good for us smaller organizations that might be the beneficiary). My opinion is that a company must assess the value of the acquisition, accounting for expected synergies as well as what I call ‘inverse synergies’ (all the many costs of acquisition, such as training, management time, closing of various offices, etc.). Forget about ‘locking down customer databases.’ If there’s a big loser in the acquisition, and they have a way of hurting the company, the company will probably end up taking these losses before they can react.
All of this must be measured against the explicit acquisition price. It is the assessment of synergies and inverse synergies (essentially, a cost-benefit analysis) that is KEY. Does 2+1 really equal 4? (with no significant ‘minuses’ to sour the deal?) This is the computation that is deterministic but that is so often bastardized. The personal agendas of players directly involved with this assessment are guaranteed to bias the results. Decision makers must attempt to filter out the bias of those who would be big winners or losers under acquisition. One question that is not asked enough – Why is OUR company (as opposed to a competitor) making this bid? If it’s such a smart move, why are we the sole suitor? Ultimately, synergy (or lack thereof) should determine the answer.
The other big picture question concerns people, vis-à-vis contrasting corporate cultures and systems. The article below assumes (as many management teams seem to do as well) that employees are widgets that will simply respond to new stimuli with no pre-merger recollection. Nothing can be further from the truth. Individuals respond with individual assessments based upon individual considerations. In a large organization, chaos theory is probably the best predictor of employee response to what can (sometimes, to certain individuals) be considered a catastrophic organizational change. Humans can often be expected to be non-rational and unpredictable in our responses to complex changes in stimuli. The only real insulation against such uncertainty is to work towards early buy-in of any significant changes (but this shouldn’t be considered a cure-all).
Regarding PR/Marketing, communication of ‘benefits’ is certainly important, but often customers assume liabilities associated with acquisitions. Leadership should not simply assume that everything is rosy and should look to identify and then mitigate adverse effects to customers. Systems should be in place well into the integration process to identify and fix these problems.
Of course, lacking in the discussion is the inherent bias of company CEOs toward acquisitions due to distortions of reward/compensation systems. Stockholder boards have been known to blindly reward acquisition activity with the rationale that such activity is blindly rewarded in a company stock price. In general, the market is better at valuations of acquisitions, but stockholder boards are inherently biased towards favorable CEO compensation due to incestual board membership. So our existing system of capitalism is, in general, biased toward poor acquisition decisions. Fortunately, an acquisition generally eliminates a competitor, offering a systemic positive inherent bias which works to negate the loss associated with ill-conceived acquisitions.
Acquisitions are one of the most difficult accomplishments to successfully execute, next to perhaps, a wholesale change in company culture. The statistics of poorly executed acquisitions should give any CEO pause before expending their companies valuable resources on such activity. At least in this guy’s opinion.
Firstly many thanks for taking the time to put down such a detailed response.
I would merely respond by clarifying my position on your points:
Acquirer’s need to consider acquisitions that fit their strategic goals – Buy what you want to buy. – Too many acquirers are buying what’s up for sale whether it fits their strategic goal, it will end in tears.
This doesn’t prevent an acquirer purchasing an unexpected company but it needs to fit the strategic goals. Surprisingly the research I quote doesn’t bear out the over pay worry most people think leads to bad deals.
The ROI of an acquisition was outside the scope of this post. I would only state the ROI really shouldn’t change whether its a sweetheart deal or whether you are in an auction.
Your next point on cultures and people is a strong one. The blog post did say, here are some ideas to get you started. I would argue the assessment of culture and potential post acquisition scenarios should have been done in depth with the various waves of due diligence but I agree it is done badly. From my experience open and straight communication early with the target’s staff can add some predictability to their behavior.
The onboarding of customers especially key customers is definitely a vital part of the success of any acquisition.
Your points on CEO rewards were outside the scope of my blog post but certainly with respect to public company acquirers, the stock market does seem to reward growth and doesn’t seem to care whether it is organic or by acquisition.
The reasons for the poor success rate as evidenced by the research is clearly a lack of preparation and specifically weak post integration planning and execution.