Lesson Learned: Stabilize-Integrate-Optimize
By Jack Prouty, President, M&A Leadership Council
The following is a true story, based on my experiences with a client that I worked with over a decade ago. The lesson here highlights the phrase we often reiterate in “The Art of M&A Integration” workshop: Stabilize-Integrate-Optimize.
Stage setting: this was a company which was a leader in what became a fast-growth industry. The founder started this business, and over a 20 year period successfully grew it to a little under $1 billion in revenues. To accelerate growth and build critical mass in the industry he took on the acquisition of a larger company in the same business. Lacking in-house M&A experience the founder brought in me and my team to assist in the acquisition planning and integration effort. I spent over six months working with this wonderful company and its management team. When the deal was announced the stock was at $14 a share. When the deal closed several months later the stock was at $42 a share and stayed there for the next two years. Fast-forward five years: they had become a failed business and went into bankruptcy with the pieces sold off to others.
So, what happened?
First, let’s talk about the acquisition and integration… Very successful in the first two elements mentioned above -- stabilize and then integrate:
- Senior management was dedicated to the success of the acquisition preparation and integration planning & integration effort. They did not just talk-the-talk, but they walked-the-talk in setting the strategic context for the integration, ensuring alignment of executives and team, installing the structure and disciplines for success, and effectively addressing the people and culture issues.
- They utilized their best people in the integration effort and then complemented this by retaining qualified M&A expertise to assist them (i.e., me as the interim Integration Director with my team running the daily integration management office (IMO)). In our role we were responsible for running the daily integration activities, bringing in the structure, process, tools and templates to drive the effort, and training their people just-in-time on what to do, when and how. Furthermore, they also made me part of their Executive Management Team during the six-plus months I was working in the trenches with them. Additionally, the various executives also pulled on me individually to provide some executive coaching.
- They did the best job of any company I have worked with in M&As in the area of culture and engagement of the best people and practices across two organizations. The president and COO of the company invested in weekly joint training sessions with key management of the two companies, introducing key players, sharing information on how they operated and the “special sauce” that made them different. This executive ensured that all key management felt they were valued and listened to. These sessions covered all key functional and operational management and were conducted over a 4-6 week period.
- They did a great job of communicating, conducting joint planning sessions and ensuring that even the people who were transitioned out after closing were treated fairly, with attractive severance or retention packages, provided outplacement support, etc.
- Joint teams worked together to facilitate effective development of integration plans and incorporate the business knowledge and expertise across the two organizations. They jointly addressed important strategic and marketing issues such as branding, go-to-market strategies, customer value propositions, and corporate name/logos.
- Early in the planning process they identified critical success factors (CSFs) to monitor and track for successful integration as well as key performance indicators (KPIs) to ensure value preservation in the short term and value realization in the longer term. Six months and then again 12 months after close they did post mortem reviews on the CSFs and KPIs with some 60 key managers involved in the objective review process. I also provided an independent third party review. In several cases corrective action was identified, responsibility assigned and steps launched to address problems.
... and the list goes on with things they did for effective stabilization and integration.
So what went wrong? Stabilization and Integration focus is essential for near-term value preservation and medium-term value realization, but for long-term sustainable value creation you need to optimize. This was their failure! They failed to transform and upgrade their senior executives with people experienced in running a $2 billion publicly traded company. At the same time, they dramatically changed their business model, which significantly eroded their operating margins, revenue streams, and cost structure.
- They grew successfully despite having no senior executives experienced in running a large, complex multi-billion dollar business. To illustrate, the CFO of a $20 million operation is built differently from the CFO for a $200 million operation, who in turn has different skill sets and experiences than those of a CFO in a $2 billion company. In this particular situation, the CIO had previously been an IT project manager for the company they bought…. Totally unqualified, inexperienced, and overwhelmed with the requirements of running a large, professional IT organization. The IT systems, capabilities, and budgets were totally inadequate for the “newco.” The CFO had previously been a senior manager for a Big 4 Accounting firm and subsequently financial and regulatory issues could be tied back to this person’s lack of requisite knowledge, experience, internal credibility, and leadership strength. The president was a lawyer, excellent at the type of legal expertise important to their business, but totally lacking in line operations expertise. Additionally, he had delegated most of the operations to his COO, who had grown up in the business, was a tremendous leader and a committed executive -- but she had no mentor and only knew what she knew, with a lack of knowledge on best practices in other large businesses.
- Coupled with these major issues cited above (whose impact cannot be understated), the company changed the prior business model that had created their success. They brought onto their board a powerful and influential senior executive who pushed for them to dramatically change their business model. Without disclosing too much information on this particular company, he convinced them to change from a full service business that had end-to-end solutions providing opportunities for multiple sources for revenue to a much more narrow business revenue and service model. Following this board member’s advice, the company sold some revenue generating assets, closed down some profitable business operations and became simply a services management company with very tight constraints on operating margins. It smoothed out their revenue streams by eliminating some significant capital gains they had realized in the past, but also significantly changed their operating model to a low cost operator versus a high value, high margin operator.
Of all the companies I have worked with on M&As this one stands out as the great example of how to effectively acquire and integrate a business, but also a sad example of ”snatching defeat out of the jaws of victory” as they transitioned from integration to the new, combined state of operations! The new management team simply failed to effectively take the combined business to the next level of excellence by transforming the business and creating a sustainable business model for longer term value creation for its stakeholders.
To learn more about real-world M&A best practices, lessons and tools, please join us for our Art of M&A executive training courses. At these unique workshop-style events, the M&A Leadership Council brings together industry experts to share their insights, case studies and much more.