Integration key to M&A success.

Mergers and acquisitions have the potential to enhance shareholder value by creating cost, revenue, market power or intangible synergies, or a combination of these. Unfortunately, many corporations are not prepared to execute these incredibly complex transactions or to handle the problems that can occur almost anywhere during the prolonged M&A process.

In addition, mergers are by nature interventions in organizations that, if not properly managed, can create disruptions that may destroy a firm's intrinsic value. To achieve the anticipated value creation and to preserve this intrinsic value, the integration stage must be aggressively managed and management needs to be attentive to the achievement of each source of value.

It is at the integration stage where synergies are realized, and where earnings and cash flow come together to create value. Up to this stage, M&A focuses on theoretical forecasting exercises. During integration, executives must rebuild teams and develop capable, motivated people who are willing to drive the integration and the combined organization.

The process requires managing the assimilation of multiple cultures, innovating, building new teams and, in general, managing a complex change process. Integration-stage objectives include completing analytical activities not completed prior to the closing, acting to physically integrate the target and rebuilding the organization into a stronger, more competitive entity.

Integration-stage activities are complex and challenging, and to complicate matters more, each merger or acquisition is unique. However, there are activities that are common to most M&A integrations: demonstrating a committed and open-minded leadership; building teams and work units; focusing on financial and strategic objectives; remaining flexible; providing for capable and motivated people; assimilating new people and achieving cultural integration. Common integration challenges include: getting employees to embrace change; sharing information and effecting corporate understanding; effecting teamwork and cooperation; setting priorities; combining corporate functions and internal processes; and measuring results.

Organizations can mitigate these challenges and achieve value creation by using a best-in-class approach to M&A integration that includes the practice of project management, performance measurement and continuous improvement methodologies.

Project Management

A clearly defined project management approach facilitates faster decision-making and organizes the entire integration effort. To ensure the integration project team's success, companies should provide senior management support, select a highly respected integration manager and choose dedicated, capable people for the core and extended integration project teams.

Senior managers should articulate clear visions, values, goals and strategies for integration activities. They should also make decisions involving large capital expenditures, and act when an impasse has been reached at lower levels of the integration decision-making process. And they should be visible: the best change-management tool is the face-to-face meeting of senior managers with middle managers and employees.

The integration project team--which includes the integration manager, core team and extended integration project teams provides the infrastructure and resources needed to successfully complete integration-stage activities. This team also provides strategic direction, establishes boundaries for the effort and for the extended integration project teams, and resolves impasses, makes go/no-go decisions and provides oversight to the core integration team.

The core team assumes primary day-to-day responsibility for coordinating the extended integration project teams and the overall process. Additional full-time resources are necessary so that the core team can provide a nucleus for networking, problem-solving and communicating with the organization. Other resources for the core team may include an assistant project manager and representatives from legal, human resources and the extended integration project teams for cultural integration and communication.

Project plans help ensure that the activities necessary to integrate organizations and capture synergies are successfully managed. The project plan should include clear deliverables, due dates, milestones, resources, assigned roles and responsibilities, as well as a list of contingencies--with corresponding contingency plans and information flows--to ensure that the team is working on the same schedule and producing consistent deliverables. The integration project plan should include all the analyses and activities that must be conducted prior to and after the closing.

Performance Measurement

A formal performance measurement system provides a convenient, expedient method for summarizing and reporting all the critical integration measures. A good performance measurement system should include integration, operational, cultural and financial measures.

Integration Measures

Integration measures assess specific integration activities and techniques to determine whether the overall integration project is on track. Examples of such measures include brief surveys of integration project team members and employee focus groups or feedback received via a confidential hotline.

Answers to the following questions would provide a rich source of integration measures: Are the integration events and mechanics effectively supporting the change? How is the integration affecting key business performance indicators? Are the synergies projected during the valuation being realized? Are the activities and milestones developed in the integration plan on target? What key issues are emerging that must be dealt with? What has been learned that can improve subsequent merger or acquisition integration?

Operational Measures

These measures are needed to track potential merger-related impact on the organization's continuing, clay-to-day business; especially important are statistics indicating an increase in productivity- or quality-related issues. Day-to-day metrics, collected throughout the integration stage, provide an excellent source of operational measures; these could include customer satisfaction, customer retention, market share, sales, safety and quality metrics.

Cultural Measures

Cultural measures are necessary to determine the status of merger-driven efforts to redesign elements of the organizational culture and to determine whether new management processes are being effectively redesigned and implemented. Examples of such measures include specific surveys of the internal customers of a given process, to spot bottlenecks or new disruptions resulting from to the merger, as well as measures of employee performance, reactions and absenteeism.

Financial Measures

These track and report on whether the organization is achieving the deal's expected sources of value. Examples of such measures include summaries of the economic value resulting from the transaction; earnings and cash flows are the primary financial outcomes that need to be tracked, since valuation models are built on them. Particular attention should be given to such components as revenues, costs, investments and net working capital.

Continuous Improvement

Applying a continuous improvement process to integration stage activities results in both short-term and long-term benefits. In the short term, learning and improvement take place, and deviations from the plan and problems are identified and corrected when they happen.

In the long term, a continuous improvement process enables corporations to develop competency at realizing shareholder value through M&A. Lessons learned are collected, documented and incorporated into a roadmap or process manual for integration.

Examples of information to collect include details of the integration project, things that were done well or that need to be improved, and recommendations for improvement. The roadmap should include: steps, activities, tasks, tools and templates, time frames, samples of deliverables, and various parties involved along the way and their roles.

Corporations can deliver shareholder value through best-in-class M&A integration practices--and it is at the integration stage where synergies are realized and earnings and cash flow come together to create value. Best-practices integration incorporates project management, performance measurement and continuous improvement methodologies in ways that the organization can use successfully in future mergers.

Case Study: Agilent Acquires OSI 

In January 2001, Agilent Technologies completed the strategic acquisition of Objective Systems Integrators (OSI for approximately 685 million in cash. Agilent acquired OSI primarily to build its expertise and to meet the needs of service providers deploying 3G (third-generation wireless, optical, broadband Internet Protocol and voice-over packet network: and services.

OSI was headquartered in Folsom, Calif., with more than 400 employees worldwide and an installed base of over 120 customers. After the acquisition was made public, management of both companies set out to rebuild the organizations into stronger, more cam competitive entity. The first order of business was to ensure that customers and employees saw the potential value of combining the Agilent and OSl organizations. Maintaining customer satisfaction and meeting sales quota commitments were to priorities.

During the integration stage, management ensured that employees received regular communication regarding the status of the integration. The respective company employees showed commendable teamwork--employees from OSI received training on Agilent systems and policies, and vice versa. Agilent measured the performance of integration activities using metrics specific to the various audiences within the company.

All integration activities at Agilent follow a standard blueprint, with tasks assigned to pre-sign, pre-close, close, "day one," and post-day one schedules. A detailed project plan is prepared for each acquisition. The project team responsible for integrating OSl into Agilent's accounting systems cam completed detailed assessments for all accounting processes, such as revenue accounting, general ledger, accounts receivable, accounts payable, intercompany and related-party accounting, records and information management and information technology.

The blueprint provided the structure and the assessments provided the detailed information necessary to complete the accounting system integration project plan. While top companies typically strive to cam complete integration in 90 days, because the OSI integration involved globally disbursed subsidiaries, integration activities extended beyond 90 days.

--Renita Wolf

Renita Wolf ([e-mail]) is a financial executive with 19 years of accounting and financial management experience with public and private technology companies. She has led global integration project teams and has successfully completed the integration of 13 companies comprised of 34 subsidiaries located in numerous countries around the world. An FEI member, she is a director of the Rocky Mountain Chapter.