Four-point framework sets strategy for smoother business acquisition


The Denver Post | BUSINESS

Gary Miller


By Gary Miller GEM Strategy Management

Posted: 01/18/2015 12:01:00 AM MST

Last month I explained why so many mergers and acquisitions fail after the deal is closed. This month, we’ll discuss how an acquiring company can create a framework for smoothing the integration of a business.

The framework is built on four distinct elements: before-sale prep, action after the letter of intent is signed, intermediate profit-improvement programs and strategic positioning.

  • Prepare before the purchase closes. You’ve identified an acquisition candidate, and a letter of intent is drawn up. This is when you need to select an integration executive to form and lead the acquisition team.

This is also a good time to develop an “opportunity statement,” which will serve as the foundation for communicating between the executive ranks of the acquiring company and the business that is being purchased. It helps define why the acquisition is valuable.

It also is important to determine what is critical to assure the acquired company’s success over the next few years. This includes identifying key managers, technologies and customers — all important assets to maintain after the deal is done.

Define industry norms, including executive compensation, labor contracts, marketing and sales practices, margins and industry practices. Develop a detailed communications plan for all stakeholders — employees, customers, distributors, suppliers and bankers — that will be used after the letter of intent is signed.

Decide who will visit the company that is to be acquired, and set a deadline for completing a due-diligence review.

  • Actions for immediate ownership. The steps that have to be completed in this phase are few, but critical.

The first is an examination of the acquisition in detail — particularly financial assets, operating practices, key employees and customers. Questions that must be answered during this stage include: What are the key sources of profits? Why do the acquired company’s customers prefer them over competitors? Are there looming cash or capital needs not previously anticipated?

The second — and most important — step is to keep personnel. Management needs to feel it is part of the acquisition process and that the purchasing company will be open and honest with them. It may require dinners and individual meetings, circulating memos and documents about the acquisitions to senior and middle managers and continuous communication with front-line staff.

  • Intermediate profit improvement programs. Extensive evaluations are made so realistic profit improvement programs can be developed.

First, the integration executive’s team must determine if the management of the acquired company knows how to manage its profitability. What is the impact of substantially increased volume? Can quality requirements be maintained? Do bottlenecks exist? Can effective cash management make a difference? Do the internal controls and management information systems reflect an accurate picture of cost and revenue changes? These assessments become the basis of the decision about how much freedom the acquired management will have or should the management be replaced.

The second step is to establish the priority for profit-improvement. A list of possible programs can be generated either by the acquired’s or the purchaser’s management. With in-depth evaluations of the alternatives and priorities, a realistic implementation strategy can be designed.

  • Strategic positioning, execution and implementation. The last phase of the integration process begins when the purchaser shares its preliminary assessment and jointly developed integration plans with the senior executives of the acquired company.

The assessment and plan identify the long-term needs of the business so these resources can be built or acquired. They may include training, hiring, new technology and capital expenditures, and may contemplate new products and services or rebranding, adjusting distribution systems and pricing, to name a few.

Getting buy-in from the acquired company’s senior management is, again, critical, and it requires making sure that they are a significant part of the integration process. Once the plan is agreed to by both companies, execution becomes a joint effort and responsibility.

The framework for integration will not prevent all disasters. But by following the steps, the chances of success should be increased significantly. Although the task is demanding, it will be rewarding.

Gary Miller is founder and CEO of GEM Strategy Management Inc., an M&A management consulting firm focusing on strategic planning, raising growth capital, value creation, exit strategies, preparing companies for sale and post-integration processes for middle-market companies. 970.390.4441


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