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How the best acquirers excel at integration

How the bestHere is a brief excerpt from an article written by Rebecca Doherty, Oliver Engert, and Andy West for the McKinsey Quarterly, published by McKinsey & Company. They note that the same handful of integration challenges vex companies year after year. However, new survey data suggest how high performers stay on top.

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Integrating merging companies requires a daunting degree of effort and coordination from across the newly combined organization. As the last step in an M&A process that has already been through many months of strategic planning, analysis, screening, and negotiation, integration is affected both by errors made in earlier stages and by the organizational, operational, finance, cultural-alignment, and change-management skills of executives from both companies. Those that do integration well, in our experience, deliver as much as 6 to 12 percentage points higher total returns to shareholders (TRS) than those that don’t.

The skills and capabilities that companies need to improve most when they integrate are persistent and, for many, familiar. Grounding an integration in the objectives of the deal, bringing together disparate cultures, setting the right performance goals, and attracting the best talent are frequently among the top challenges that bedevil even experienced active acquirers. They’re also the ones that, according to our experience and survey research, differentiate strong performers from weaker ones.3

Ground integration in the objectives of the deal

The integration of an acquired business should be explicitly tailored to support the objectives and sources of value that warranted the deal in the first place. It sounds intuitive, but we frequently encounter companies that, in their haste, turn to off-the-shelf plans and generic best practices that tend to overemphasize process and ignore the unique aspects of the deal.

Since the deal rationale is specific to each acquisition, so is the integration approach, and it’s important to think through the implications of the deal rationale and the sources of value for the focus, sequence, and pace of the integration. Consider, for example, the experience of two companies where R&D was a primary source of value for an acquisition. After prefacing their integration plans with a close review of their respective objectives, they each took a different approach to integration.

For the first, a technology company, the objectives of its deal were to build on the acquired company’s R&D capabilities and launch a new sales channel in an adjacent market. Extrapolating from those objectives, the integration managers designed the integration around three core teams for R&D, sales, and back-office consolidation. By prioritizing these areas and structuring groups to tackle each one, the company ensured the proper allocation of talent, time, and management attention. Specifically, steering-committee time was regularly dedicated to these issues and ensured a proper focus on the areas likely to create the most value. As a result, the team quickly launched cross-selling opportunities to similar customers of the acquired company and deployed resources to accelerate ongoing development and merge R&D road maps.

The deal objectives also shaped the sequence and pace of the integration. On a function-by-function basis, managers determined where to accelerate, stage, or delay integration activities, by considering which created the most value while sustaining the momentum of the integration. Hence the company prioritized must-have functional areas to ensure compliance and business continuity—for example, ensuring that the finance group was ready to support month-end close procedures—and accelerated value-creating activities in sales and R&D. Year-on-year revenues were up well over 10 percent as of the last quarter for which figures were available.

In the second company, a key player in the pharmaceutical industry, R&D again was a primary source of value. But because the acquired biopharmaceutical business was in an emerging area that required different capabilities and entrepreneurial thinking, the acquiring company’s managers decided that the acquisition’s culture and processes would be a critical aspect of its value. While they would reevaluate whether to integrate more fully once products cleared development and were ready for market, they decided that it would be best in the short term to integrate only select back-office functions to take advantage of the combined company’s scale. They would ensure the proper linkages with legal, regulatory, and financial-compliance activities, but to protect the target’s business momentum, the acquiring company’s managers allowed the target’s managers to retain their local decision rights. The acquirer also provided resources, such as capital, to help the business grow—and rotated managers into the business to learn more about it and its market.

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High-performing acquirers understand the complexity and importance of getting all aspects of integration right. Companies that apply best practices tailored to deal objectives have the best chance of delivering on the full potential of the deal.

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Here is a direct link to the complete article.

Rebecca Doherty is a principal in McKinsey’s San Francisco office, Oliver Engert is a director in the New York office, and Andy West is a director in the Boston office.

The authors wish to thank Brian Dinneen and Kameron Kordestani for their contributions to this article.

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