Back in the mists of time before the challenges of the pandemic, a post-Brexit world and a cost of living crisis descended on us (2019 actually!) I published an article in Pharmaceutical Executive providing a brief analysis of acquisition activity in the pharmaceutical sector and my observations on what organizations should do to preserve acquisition value.
I have re-published the article with a summary of the 2024 PwC outlook on M&A activity and my conclusions. The bulk of the article and my six steps to preserve acquisition value remain as published.
Leading Integration in 2024. Six Steps to Preserve Acquisition Value.
Global M&A Outlook
PwC’s Brian Levy recently penned an article titled “The M&A starting bell has run. Are you ready?”
The article predicted an upswing in M&A activity after an extended period of macro-economic and geopolitical challenges. PwC expects an increase in M&A activity as 2024 progresses. Three main factors underpin PwC optimism: first, the recent improvement in financial markets, spurred by decelerating inflation and expected reductions in interest rates; second, the pent-up demand for (and supply of) deals; and third, the pressing strategic need for many companies to adapt and transform their business models.
But their prognosis was qualified. The dealmaking is expected to be more ‘measured’. Financing is more expensive, and there will be a greater pressure on creating more value than before. Successful dealmakers will be able to assess risks in an uncertain environment, plan for different scenarios and take good decisions rather than wait for clarity to arrive.
With deal returns under more pressure, the ability to decide and execute an effective integration strategy to deliver return on investment through synergies will be key. Above all else, acquirers must take deliberate steps to preserve acquisition value, which is easily lost with poorly thought-out integration strategies.
Successful integration: the challenge of delivering value
Recent McKinsey & Co research highlights that programmatic approaches to M&A generate the most value in deal-making whilst infrequent large deals (defined as greater than 30% of the acquirer’s market capitalisation) tend to be the least successful. Reasons include the capability and organisational health of the acquirer and the significant challenge of successfully driving value from large integration programmes.
Published research by McKinsey and Deloitte supports our own observations that large acquisitions are challenging to integrate, and a significant number fall short of their intended benefits. What lessons can companies planning major integrations learn from the successes and failure of the past?
Corporate history is littered with failed or under-achieving M&A. Whilst deals tend to be presented to look rational in theory, successful integration is one of the toughest challenges senior executives face in the corporate world; grand strategic ideas are not always matched by the realities of execution!
Integrations are considered to have ‘failed’ when they don’t deliver additional value (the combined company is no greater than the sum of its parts) or they miss synergy targets. Failure to match the integration strategy to the motive for acquisition is a significant cause of failure, and one in four companies do not get this right according to Deloitte. With appropriate decisions about the level of integration, an organisation increases its chances of success. The next potential downfalls are poorly executed integration strategy and the collateral effects of integration processes diverting energy and focus from core business.
Observations from post M&A integrations
We have worked with organisations that managed multiple integrations successfully, some with no obvious rationale behind their integration strategy, and others that started with a plan but under-resourced or applied it inconsistently.
We identify several inter-related reasons why integrations fail to deliver benefits:
- Weak leadership
- Lack of readiness to integrate resulting in glacial progress
- Unforeseen challenges implementing complex integrations
- Failure to communicate integration plans effectively
- Low ‘change adoption’ within the acquired organisation and
- Significant cultural differences between enterprises.
Lessons from experience: getting integration right
Many integration problems start long before the deal announcement. McKinsey’s July 2019 Quarterly highlights healthy companies make a better job of integrating acquisitions and achieving transformational outcomes. The authors proposed: “leaders considering a large acquisition should first assess their organization’s own health to better gauge whether or not to take the merger plunge”.
Healthy companies with coherent integration strategies will benefit from applying 6 lessons to ensure successful integration:
Engage the company you seek to integrate.
Acquirers often believe they have the magic formula to create value from a transaction. As a result, they don’t always listen carefully to understand how the acquired company delivers value. These conversations need to take place as early as possible and before integration plans are made. We suggest questions like:
- What makes your organisation unique?
- What do you most want to preserve and why?
- What’s really important to you post-acquisition/integration?
Have a clear integration plan.
Problems are likely to arise where the acquisition takes insufficient account of the business model, strategic and cultural match. Integration plans are never ‘one size fits all’ and must take account of the original reason for acquisition to preserve and create value. What this means in practice is to look after talented people and select them to lead integration:
- Talented people leave or become distracted if you fail to address people and culture issues early enough. We’ve seen examples where extended and detailed processes for talent review became more important than the outcome. Reaching out early, to the senior and mid-level of organisations, discussing career aspirations and expectations, is key to retain talented people. Successful integration requires an ambitious timetable because difficult decisions don’t get any easier over time.
- Successful integration requires the best talent available from both companies involving those with a stake in the future. You will have to balance core business and integration needs but need to ensure top performers from both companies are released to plan and execute integration from the outset, free from operational responsibility. People selected to lead integration workstreams should see this as a career-enhancing opportunity rather than a burden to be managed alongside their operational role.
Communicate, communicate, communicate.
The check list of how to improve organisation effectiveness would be incomplete without communication! Where do we start? The most important aspect is effective early communication to both parties describing the intent of the acquisition (not the detail) for integration. Implementation will have greater urgency and purpose when people have something to be excited about, so the combined company vision should be clear to everybody as soon as possible. In one company we’ve worked with recently a vacuum of effective communication from the acquirer has been readily filled with negativity about post-integration opportunities. This is unhelpful as it makes successful integration harder; you cannot over-communicate.
Don’t drag it out.
There are advantages and disadvantages to providing early information. Integration has many forms and each case is different. We urge acquirers to make clear decisions, early and communicate their intent. Integrations that work well typically have small integration teams with the power to act decisively and communicate without filters. Dragging things out has two distinct effects: people become complacent that nothing will change or, alternatively, they know something will change but no-one can tell them what. This creates avoidable anxieties with collateral impact on morale. In one pharma company we know an over-extended integration programme caught up with R&D teams already disengaged and unhappy 18 months after they perceived themselves to be ‘at risk’. We observed that valuable staff who were ‘saved’ tended to be much more critical and unhappy than those the company decided to let go.
Apply the 80/20 rule to avoid ‘boiling the ocean’.
It’s inevitable large integrations need to homogenise many systems, sites, processes, structures, ways of working and culture. Get the critical areas sorted quickly, but you risk failure by imposing too much change too quickly. People can only absorb so much before panic and fatigue sets in. Our extensive work on change indicates that a stepped approach rather than ‘big bang’ is more effective, provided the intent is mapped out in advance, well understood and the process starts early.
Focus on cultural similarities.
Integrating businesses with different histories, relationships, habits and culture is a significant challenge. It’s not for us to say whether a single culture or preservation of the status quo will be the best solution. Perhaps more companies should ask themselves whether homogeneous culture (and the effort to create it) is likely to drive more value than the potential strengths of more cultural diversity. Rather than focus on cultural difference, remain sensitive to the difficulties of cultural integration. Lessons from others suggest establishing the right behaviours, suitable for local interpretation, will be more tangible in the short-term. This helps keep the process positive, creates a common bond and helps people to ‘let go’. It provides both parties with an even stake in the outcome and results in better change adoption. Questions cultural workstreams might ask include:
- What unites us (avoid focus on cultural ‘differences’)?
- What value driven behaviours do we share?
- What behaviours are important as we combine?
Whilst the early months of 2024 give cause for optimism that an M&A rebound has started, conditions are different to the peak of dealmaking in 2020 and 2021. Sectors are recovering at different rates, and this will impact M&A, even though PWC research indicated that 60% of CEOs plan to make an acquisition in the next three years and 70% of business leaders expect to use M&A to use M&A to accelerate adoption of technology and technology related processes
Integration programmes resulting from M&A transactions have a long tail compared to the momentum associated with dealmaking. In today’s business environment, and the expectations to deliver value from integration, we recommend a tight focus on integration strategy. History records that not all integrations will be successful or deliver their potential value.
In our experience many organisations don’t pay enough attention to integration planning. Companies seeking to create value from integration would do well to be aware of typical integration challenges and plan positive integration programmes designed to make early decisions and engage talent from both companies in a constructive dialogue.
The six practical lessons we’ve outlined will help deliver successful integration. Involving strategy execution specialists can also help organisations define goals, gather facts, evaluate the situation, then plan and facilitate integration activities. It can be difficult to do this objectively with limited internal resources available and dedicated to integration planning and execution.
Always remember, people, power, relationships and culture come first; whilst you may acquire one large company, you still have thousands of individual integrations to deliver.
About the author
Mark Bouch is Managing Director of Leading Change, a UK based consultancy business focused on strategy execution. The company works with high-value clients across a range of industry sectors including technology, pharmaceutical and support services to help clients make important things happen.
Leading Change do this by identifying specific procedural and behavioural challenges making strategy execution tough, then design and implement solutions to fix or avoid them.
Leading Change has an enviable track record of helping clients implement positive changes with a long-term impact on their business results.
Leading Change clients include UK and international businesses and third sector organisations. Bouch has a great record in getting things done in high-profile businesses including: Pfizer, Celgene, The Francis Crick Institute, London 2012 Transport, AstraZeneca, Autotrader, Compass Group UK & Ireland and a leading Formula One motor-racing team.
 PwC Insight January 23, 2024: The M&A starting bell has rung. Are you ready? Brian Levy. Global Deals Industries Partner PwC.
 July 2019 McKinsey Quarterly: The secret ingredient of successful big deals: Organizational health.
 Deloitte Integration Report 2015: Putting the pieces together.
 July 2019 McKinsey Quarterly: The secret ingredient of successful big deals: Organizational health.
 PwC’s 27th Annual Global CEO Survey.
 PwC UK’s Value Creation Transformation Survey.