When the deal is done: making the acquisition work

• By Sabrina Barker
• Oct 01, 2000

Acquisition-based strategies in the environmental business have unfortunately often failed. Such failures have usually been a result of two key factors. First, many acquirers haven't had an actual strategy in the first place. "Get bigger and get better," is not a real strategy -- although it often seems to be the only apparent objective of many acquisition-hungry companies. Second, and more common, is the situation where a company does have a logical, well-crafted strategy, but insufficient management attention and emphasis is given to the critical issues of post-deal integration and stakeholder communication.

The first three articles in this series have dealt with the strategic basis for acquisition-based growth plans and the challenges and opportunities of identifying, evaluating and consummating mergers and acquisitions in the environmental services industry. However, identifying, evaluating and consummating a deal represents only the first part of the job in terms of actually implementing successful acquisitions. After the deal is done, the real work of integration and operational implementation begins. Without a successful integration plan and a strong commitment to make the two organizations fit together, the whole exercise will probably not succeed.

American business has long subscribed to the theories that bigger is better, continuous growth is essential for success and an absence of growth is tantamount to failure. For decades, leading business schools and top strategy consultants have preached the importance of growth and market share in order to increase profitability. This single-minded focus on growth has translated into an acquisition-oriented and merger-happy business environment. Acquisition growth strategies become more attractive when corporate valuations are very low, as they generally are now in the environmental industry. It has become cheaper to grow by buying than by building.

Despite the fascination with growth and the seemingly universal interest in acquisitions, American business generally has a poor track record in terms of successfully implementing acquisition-based growth plans. A recent review by management consultant McKinsey suggested that as many as 70 percent of acquisitions are eventually judged to be failures. Many environmental companies have jumped into the acquisition game, and although it may be too early to gauge the success of many programs, it is clear that acquisition-based strategies are far from uniformly successful in achieving strategic objectives in this industry. In addition, there is little evidence that profitability is well correlated with absolute size or market share. Some small companies are profitable, and some large companies are profitable, but there is no clear relationship.

It is logical to wonder then, given this focus on acquisitions and absolute growth, why so many acquisition plans fail. Acquisition-based growth strategies in the environmental industry fail for one of two key reasons. First, in many cases, a real strategy may not exist. If a simplistic and purely opportunistic approach such as bigger is better is the only strategic guideline of a growth plan, then the plan is not likely to work. More common, however, is the situation where a company does have a logical and well thought-out strategy, but where the strategy is never exploited or fully realized because of insufficient management attention and emphasis on the critical aspects of post-deal integration planning, assimilation and communication.

Upper management's job is developing a strategic vision and growth plan, but it takes a whole company to make an acquisition work successfully.

There is a big difference between the strategic Many acquisitions begin to fail from the outset because top management moves on to the next deal rather than spending quality time overseeing the cultural and operational integration issues and getting to know its new baby.

vision of growth developed at the executive management level, and the challenges of translating that vision into a workable operating plan in the trenches on a day-to-day basis. The situation is akin to viewing the landscape from inside an airplane cruising at 35,000 feet versus negotiating the actual terrain on foot. From the 35,000-foot executive perspective, the terrain may seem pretty flat and simple; for those "on the ground" charged with actually implementing the plan, however, there are invariably difficult mountains and valleys to negotiat e in the achievement of the goal. Low acquisition success rates point out the importance of having not only a clear vision but also a post-transaction plan for recognizing the specific operational, marketing and strategic benefits of merging.

Before two organizations are thrust together, there must be a strong integration plan if there is to be any hope of achieving elusive synergy -- frequently cited but rarely accomplished. An effective integration process checklist can be divided into a few key factors.

Integration significance. It is important to recognize the critical significance of integration planning and to create a specific corporate function for managing it. Most acquisitions are not simply one-time events. Companies that make acquisitions tend to continue acquiring more. Hence, top management must realize that acquisition integration should be treated as an on-going and important job within the company. The task of managing acquisitions should not be something that a few people do part-time and then go back to their real jobs -- it is a critical and on-going function in acquisition-oriented companies.

Integration planning. A well thought-out plan for the integration process is also essential. As a potential deal starts to seem likely, the firm should begin to put in place a thorough strategic plan for the integration process. Preferably, a lot of this work should be prepared as the due diligence process plays out and before the deal reaches its conclusion. Those who wait to start the integration process until after the deal is closed inevitably run into problems. Companies that have been successful in rolling together numerous acquisitions generally plan the integration process to occur over as short a period as possible. Many use a 100-day plan and some companies are a lot more successful in this regard than others.

Up-front work includes activities such as beginning the cultural and personnel assessment of the company to be acquired. It can include a thorough review of the potential for cost-savings (identifying where the synergies will specifically come from). One of the key drivers and cost reduction techniques cited in intra-industry mergers is the ability to combine sales, general and administrative capabilities and reduce percentage overhead costs -- a lot of these opportunities or challenges can be identified and readied prior to closing. In sum, the integration process can be conducted much more effectively if people start thinking about it and planning for it earlier.

Integration team. Management must put in place an integration team, with people from both sides of the deal, and charge this team with managing the integration process. As mentioned, integration planning and implementation is not something a few people do for a few weeks when the deal is over. Executive management should put together an integration team with people from both sides, as well as perhaps external advisors, who are charged with evaluating the combined operations and implementing the most cost-effective and compatible operational fit for the entities going forward. Typically, this should be comprised largely of the people doing the due diligence -- they are likely to know more about the critical issues and the challenges of rolling the companies together than anyone else.

The leader of this team needs to be someone highly regarded and who has the authority to make and implement, what can often be, very difficult and sensitive decisions. Typically, this person will be drawn from the acquiring company. Management from the acquired company will typically know much more about the internal workings of their own companies and where the real opportunities and challenges may lie. This team should regularly assess its progress, schedule against the strategic implementation plan developed at the outset and move to finish key elements of the plan as quickly as possible. Uncertainty and time delays are the worst enemy of the integration process and can have an immediate negative effect on the morale level of both companies. Finally, this team should not be disbanded once it is felt that the integration is complete -- issues will continue to arise, and there may well be further acquisitions. As the team develops a framework for implementing acquisitions, it should get better and better at the process. Integration activities may rise and ebb, but the need for a consistent and experienced management team will continue.

Integration details. It is essential to pay close attention to cultural and personnel issues. Though this should go without saying, many firms fail to properly understand obvious cultural problems and fail to keep their employees properly informed about organizational plans and potential personnel changes. Indeed, many acquisitions begin to fail from the outset because top management moves on to the next deal rather than spending quality time overseeing the cultural and operational integration issues and getting to know its new baby.

Merger and acquisition situations can be highly threatening to many people on both sides of the transaction. Incidentally, these sorts of anxieties and worries can actually cause many, otherwise attractive, acquisitions to quickly metamorphose into failures. Change can cause uncertainty or fear in any aspect of life. Where there is uncertainty regarding one's compensation and livelihood, fear can quickly become all consuming, especially if it is not being directly addressed by top management.

A recent review by management consultant McKinsey suggested that as many as 70 percent of acquisitionsare eventually judged to be failures.

If employees aren't informed, they become worried, less effective and eventually begin to leave. Often, it is the most capable and talented people who have the most ready opportunities to leave. The ultimate strength of any company lies with the talents and capabilities of its people, yet many companies shoot themselves in the fo ot by failing to remember that they need to be aware and responsive to the needs and concerns of those people.

Open communication. Maintaining a strong focus on timely and honest communications at all times is vital. For months, during the due diligence and closing, top management has been talking about what a great deal this is and how much sense it makes to both sides. Now is the time for management to turn talk into action and to show everyone, particularly the employees, what they meant. Experience has shown it is the uncertainty surrounding mergers and acquisitions that people have the most difficulty living with. Most people can adjust to change if they are at least aware of what is happening. It is often the uncertainty and feeling of remoteness that drives key employees to leave. This simply re-emphasizes the critical importance of strong, well-planned and honest communication during the integration process. The more your employees know about what is going on, the more quickly they will be able to accept change, overcome their differences and move on into the future.

Management should make and announce difficult or sensitive decisions quickly, even when they are not particularly popular. Employees will gain more respect for a management team that addresses the difficult issues head-on, rather than one that waffles or sticks its head in the sand and tries to avoid the difficult but obvious personnel decisions. Management double-talk that ignores or attempts to draw attention away from obvious problems such as redundant operations or duplicate staffs only adds to the uncertainty and makes the situation worse. In addition, it detracts from the

Integration planning and implementation is not just something a few people do for a few weeks after the deal is over.

management team's future credibility with all employees. It pays to be straightforward, even when the news is bad. The quicker the tough decisions can be made, the more quickly the future team of employees can actually start working productively together to make the deal successful.

In summary, post-deal integration issues may not have the "thrill of the chase" -- the glamour and allure that finding and putting together the deal has for many executives. However, it is every bit as important in the overall scheme of an acquisition-based growth strategy. Almost every company in the environmental services business today is looking at the acquisition process from one vantage point or another, and no company is going to sustain an acquisition-based plan for very long if it does not also master the integration process. Successful acquirers treat the integration process as a critical and on-going function of management, they learn from their mistakes, and they strive to perfect a process that will make future integration processes unfold more quickly and smoothly. Most important, the same top management team that designs and implements the acquisition strategy must also put their money where their mouth is and be communicative, highly involved and visible in championing the post-deal integra tion.

This article appeared in Environmental Protection, Volume 11, Number 10, October 2000, Page 84.

This article originally appeared in the 10/01/2000 issue of Environmental Protection.