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Saturday, 20th April 2024 |
| Post-acquisition integration process makes or breaks high-growth companies |
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| Current news coverage of mergers in the technology sector is dominated by the probable merger of HP and Compaq. However, mergers and acquisitions don't always go according to plan and the easy part is closing the deal. Finance talks to Maurice Healy, managing director of Calyx Ltd, about proactive measures for surviving restructurings. |
In line with global economic slowdown and terrorist activity merger and acquisition transactions in Europe slumped considerably in 2001. However, apparently the deal-making boom of the mid to late ‘90s is far from over with analysts predicting rapid financial recovery and many companies looking to restructure and sell off unwanted or misaligned assets acquired during the dot-com feeding frenzy.
Following the significant decrease in M&A activity during 2001, media coverage of mergers in this industry has been dominated by the potential merger of HP and Compaq. When this merger is completed, it will create a company second only to IBM in terms of revenue and will replace Dell as the number one provider of personal computers.
However, the challenges facing the new management teams when they finally come to grips with the cultural integration issues are the factors which will make or break the new combined tech giant.
Baptism of fire
Maurice Healy, group managing director of Calyx, the voice and data company, is more familiar than most with the headaches commonly associated with post-merger integration. Until earlier this year, when he bought out the group’s voice and data companies, Healy was group MD of Alphyra PLC. During his tenure, he oversaw the sixteen acquisitions that morphed Alphyra from a tiny third-party telephone maintenance company to an entrepreneurial, multinational electronic transaction group.
‘We made four of the acquisitions the same year that we floated’ says Healy. ‘That might seem modest when you consider the likes of GEC which made 41 acquisitions in 2001. But for a small Irish company with big ambitions, that amount of extra-curricular activity stretched our management ability almost to its limits. However, this baptism of fire accelerated the development of our managers in ways that no amount of education or training could every have done. The most valuable lesson that we learned from such a concerted exercise is that no two acquisitions are ever the same and that each integration exercise presents unique challenges and almost inevitably some surprises as well.’
Writing on the wall
Research undertaken in the merger and acquisition waves in both the ‘80s and ‘90s reveals a phenomenally high rate of failure of combined new organisations to deliver the synergies and added value, which were cited as primary objectives at the outset. The statistics make for sobering reading. Findings relate that in the typical merger, only 30 percent of synergies are realised, while 55 percent of the potential value is ignored or forgotten. Fewer than 20 percent of companies consider the steps necessary to integrate the acquired company into their own organisation. 80 percent of executives cite differences in style and practices and culture as the major problems. When no co-ordinated retention actions are taken, 47 percent of all senior managers in an acquired firm leave within the first year of the acquisition, 72 percent within the first three years.
‘It is bizarre’ says Healy ‘that comparison of the failure rates from the last M&A wave in the ‘70s and ‘80s to the current wave which started in the mid-’90s reveals that numbers of unsuccessful mergers are not decreasing, when you consider that the reasons most often given for failure have remained constant. The writing is on the wall for all to see and companies have to get to grips with the danger zones to maximise their chances of success’.
Get your acquisition strategy right
‘The imperative in the M&A maze, from compiling your shopping list to integrating the newly acquired company, is to get your acquisition strategy right. Everything hinges on a clearly defined, unshakeable rationale. Your credibility depends on it. It’s the make or break factor for analysts and investors, management and employees that you can excite them with your story. You have to be crystal clear on the why of what you are doing. All your due-diligence and all you post acquisition decisions must be taken in this context.
Indeed, the final adjudication on whether your acquisition has been successful will not hinge solely on your profit levels or share price but on the preservation or exploitation of the tangible or intangible assets secured by the strategy. These include anything from new technologies and patents to partnerships or customer relationships, diversification or geographical extension.’
‘Assuming a sound rationale’, says Healy, ‘the next critical element of the process to get right is your communications. This can be a horribly complex area particularly if you are a quoted company subject to stock-exchange regulations where your timing may be subject to external influence. In Alphyra’s case, because we were listed on both the Dublin and London exchanges, we had two sets of advisers and a growing staff - we doubled our size on at least three occasions.
You quickly get to a stage that when you want to say something you have to ask yourself who needs to know? How much do they need to know? When do they need to be told? How should they be told? Who should tell them? How do we know they’ve understood? In these circumstances, it’s very tempting to abdicate communications to your PR firm or to use mass media.’
Roll up your sleeves and circulate
The current trend in marketing is relationship marketing rather than mass advertising. Healy’s view is that the same should apply to PR. ‘There is no substitute for informal face-to-face interaction with stakeholders of all types. You will learn an awful lot more if you roll up your own sleeves and circulate. Begin at the due diligence stage if at all possible and talk to the management and staff being acquired. One of our acquisitions had an exceptionally long due diligence. By the time we got in front of staff in November, the CVs were out and the exodus had already begun. The empty tables at the Christmas party that year reflected the poor morale of the remaining staff. Had we been able to access the employees earlier we could have outlined our plans and reassured them that we were not corporate ogres’ he says.
HP and Compaq will find it difficult to smoothly merge such large companies. Predators such as Dell, IBM and Sun will be waiting on the sidelines to pick over any business lost from problems arising from the integration. ‘Acquisitions take time and you have to give management and employees the slack they need to realign their processes and procedures’ Healy insists. ‘Fiorina and her management team already had a team of 600 employees addressing issues from branding to enterprise systems long before they even got shareholder approval for the deal.’
Congruence is critical
‘You need to map out your integration plans and cover all bases. Most acquisitions will involve a degree of realignment and again your acquisition rationale should be the pivot for any changes. You need to do a complete review of your organisation to make sure that your structure, management, skill-base, information systems and all the other things that make companies work are congruent. The amount of work involved in this is enormous’ says Healy. ‘In Alphyra we were able to involve the same team each time and exploit the accumulated experience. That was a huge advantage’.
Behind every acquisition, every merger, every company downsizing exercise, there is a human side that needs to be considered. Employees left behind often suffer as much as the colleagues and friends who are not around anymore. ‘It would be naive to believe that layoffs do not happen during M&As to achieve cost efficiencies’ says Healy. ‘It is important that you get any rationalisation out of the way quickly. Doing this in waves instead of making cuts at one time indicates that management doesn’t have an effective plan and is insensitive to workers. The remaining employees need a chance to express how they are feeling. Resistance is a natural part of the change process and ignoring employees will not help matters and will leave people more entrenched. Corporate managers must guide workers through the integration process’ he says.
Be proactive and take the initiative
Healy’s last acquisition saw him take sole ownership of Alphyra’s voice and data companies, which include computer, computer training and telecomm businesses. According to Healy consolidation throughout these sectors is a question of when and how rather than if. ‘All of our businesses are in the top five of their industries’, he says, ‘the leaders are the ones which are proactive and take the initiative’. The continuing drive for efficiency and shareholder value throughout Europe is going to be a battlefield and many analysts seem to think that this is where all the fun is going to be. Ireland will see its own share of this action’ he says, ‘and we would certainly expect to be active participants in the restructuring of the technology playing field’. |
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| Article appeared in the April 2002 issue.
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