Acquisition Competence: The Three Critical Elements

Perhaps one of the strongest indicators that the economy has turned the corner is the significant increase in acquisition activity across a number of industries. Time will tell whether this new wave of acquisitions breaks with tradition and yields positive, rather than negative shareholder returns. Our experience with a broad portfolio of clients, and numerous studies on the topic, suggests that tradition will probably prevail except for those acquirers that are able to generate an actual acquisition integration capability through experience and devote significant management attention to getting it right. Of course, companies that are considering a major acquisition or a series of smaller acquisitions as a part of their overall corporate growth strategy are faced with having to generate this capability quickly – learning through experience can be very expensive.

The obvious place for a company to begin to develop an effective acquisition capability is to examine best practices in the area. These acquisition best practices separate into two categories: pre-deal due-diligence and post-merger integration planning, and the actual post-merger integration process. Attached to each of these categories is a long list of things the acquirer needs to get right in order to achieve success, ranging from assessing the “strategic fit” of the acquisition candidate in the due diligence process, to overcoming “culture clash” issues in the post-merger integration process. Unfortunately, despite the best efforts of many companies to implement these best practices, they still run into difficulties.

In this light, what distinguishes the experienced, successful acquirers is their ability to take a holistic approach to the entire acquisition process that covers the traditional critical success factors but is also customized to meet the needs of their unique circumstances.

Three Critical Elements

There are three elements to the holistic approach:

Acquisition Logic

Mergers & acquisitions come in many different forms, where each form is driven by different acquisition logic. Bower (2001)1 provides a comprehensive description of different types of mergers: overcapacity, geographic roll-up, product or market extension, R&D driven, industry convergence. Which category the acquisition falls into will have a significant impact on the optimal integration process. However, whatever the particular type is, there should be a clear logic behind how value will be created.

This acquisition logic is driven by the overall strategy of the company, which should have clarity around three critical questions:

1. Strategic Objectives: What are we trying to achieve in the market place?

2. Critical Capabilities: What are the critical organizational capabilities required to achieve these objectives?

3. Critical Resources: What is the human and organizational capital required to generate the critical capabilities?

Armed with a clear understanding of the overall corporate strategy, the potential acquirer is able to answer the following fundamental question: to meet our strategic objectives, can we develop and deploy our existing resources and capabilities, or do we need to acquire additional resources and capabilities through acquisition? If acquisition is the answer, then it’s understood clearly and logically to be based on an explicit need to buy missing resources and capabilities that are required to achieve the company’s strategic objectives.

The ability to craft comprehensive acquisition logic has several direct benefits. First, it provides the basis for strategic risk analysis that allows the acquirer to assess whether it will be able to generate a sustainable competitive advantage in the marketplace with the combined resources and capabilities of the two organizations. Second, it focuses attention on acquiring resources and capabilities to support and drive long-term growth rather than just immediate product and service additions to the corporate portfolio. Finally, it provides the basis for identifying the prospective operating model, which we discuss next.

Prospective Operating Model

Broadly defined, a company’s operating model is a combination of how it organizes its core business processes and manages the resources (including people) to support those processes. In other words, the operating model is the way in which the company’s resources are deployed to its core business processes to create its critical capabilities. While it is neither necessary nor feasible to have developed the complete post acquisition operating model before completing the deal, it is critical that the acquirer be able to answer the following questions:

1. Critical Operating Activities: What are the operating activities that will have the greatest impact on realizing the value underlying the acquisition logic?
2. Integration Intensity: What degree of integration is required for the high impact operating activities to achieve their required level of performance?
3. Leadership Changes:  What are the leadership implications and required changes to implement the prospective operating model?

The prospective operating model outlines the organizational changes required to support the acquisition logic. These changes come in two forms - changes in core business processes and changes in allocation of decision rights of managers that oversee and deploy resources to these processes.

Recognizing the major organizational changes enables the alignment of expectations between the leadership of the two organizations. In most transactions, changes in leadership roles are a fundamental part of the deal process, and in many circumstances, are a bigger stumbling block than price. One of the most common mistakes (perhaps unavoidable in some circumstances) is for the acquirer to create the expectations required to generate buy-in from the leadership of the target company, but later is forced to disappoint those expectations once it is determined what the post-deal organizational form will need to be to realize the acquisition logic. The way to avoid this mistake is to generate shared understanding of the prospective operating model and subsequent leadership roles required to support that operating model.

Change Management

Armed with a prospective operating model required to realize the acquisition logic, the combined leadership of the two organizations is prepared to design and launch the activities required for successful post merger integration (PMI). An overview of these activities is provided in exhibit 1. From the perspective of developing an acquisition competence, there are two critical success factors above and beyond these traditional PMI steps. First, the PMI must be managed as a focused change management process that is provided with visible, on-going direction and support at the senior executive level. Left to their own discretion, the management ranks of both organizations will resist many of the changes required to make the acquisition successful. If senior leadership does not lead these changes through constant involvement in the process, then the actual integration that ensues will ultimately follow a path of least resistance. The ultimate outcome will bear little resemblance to the changes required to realize the acquisition logic.

Second, critical to the successful change management process is making tough integration decisions quickly. The entire organization is waiting to see what the new organization is going to look like and the impact that will have on their well-being. In this context, being 80% right about tough organizational and talent decisions is good enough. Also, one of the biggest mistakes acquirers can make is attempting to achieve consensus on tough decisions in the interest of creating cooperative relationships across the two formally separate organizations. While the points of view of relevant parties in both organizations should be taken into consideration,  first and foremost, critical decisions should get made as quickly as possible. Clear and constant attention to the acquisition logic needs to neutralize the political forces that inherently come into play in the highly charged environment of post-merger integration.

Summary

We have outlined three critical elements of realizing acquisition competence - acquisition logic, prospective operating model, and change management. These three elements are each important separately. However, understanding the interdependence between the three elements is where the holistic view will have its greatest impact on acquisition success. First, the acquisition logic not only defines the key feature of the prospective operating model, it must also set the objectives for the post-merger integration process. A clear understanding of the prospective operating model not only provides the framework for the post-merger change management process; it also aligns expectations of senior leadership on both sides of the acquisition. If such alignment is not feasible, the acquisition is almost certain to run into significant difficulty.

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