A New Focus for Post-Deal Integration: Extracting the Potential Revenues from Mergers and Acquisitions

Article excerpt

In most mergers and acquisitions, the focus is on internal issues, particularly on aligning the organizations. These authors, however, suggest that managers should also look outward and focus on external issues like market fluctuations, changes in customer business cases and competitive threats. For, like organizational synergies, market synergies will drive value to the customer and to the organization.

On the face of it, growth by acquisition seems to be the easiest and fastest way for companies to expand their revenues. Most companies acquire other companies with the goal of advancing their position in the marketplace, by:

* pre-empting the competition * expanding their product line * moving into new markets * increasing market share.

While it is also true that acquisitions offer costbased synergies and economies of various kinds, in the months following the acquisition, companies often face depressed revenues. Studies by McKinsey and Co. show that companies experiencing a one-per-cent shortfall in revenue growth after a merger have to achieve a 25- per-cent increase in planned cost savings in order to stay on track. This is a key issue for companies in their efforts to extract value from acquisitions.

This article explores solutions to four common problems associated with acquisitions and mergers. In cases where the amount of money paid for an acquisition has crippled future earnings, or the strategic fit of the two entities was extremely poor, management's options may be limited. However, where revenue or value creation was not the priority in the months following the deal, top line-focused remedies can recoup lost or stranded value.

Background and challenges

Statistical research underlines our practical experience that revenue-producing issues are not treated as rigorously as cost-reduction issues in the months following a merger. There are a number of reasons:

* Processes and metrics are easier to devise for cost reduction than for revenue production.

* Customer-facing personnel and channels-tomarket are harder to align than internal processes.

* The acquirers, or the acquired, are often overly optimistic in their expectation that customers will automatically see the value of the new company. As a result, the new partners may not do the necessary hard work of communicating and positioning the exact benefits to each customer or customer group.

* The human-resource focus on aligning salary and benefits, or on identifying poor performers and overlapping skills, often takes precedence over understanding the impact of different cultures on customer relations and the work at hand.

There is indeed a significant challenge in achieving market synergies, balancing the demands of economic results, and dealing with HR issues in the hectic months after an acquisition or merger. While acknowledging that "the street" demands consolidation and efficiency, many seasoned acquisitions executives believe that these objectives can be allowed to lag as long as the management team knows where the savings will be realized. The primary goal is to ensure that customers and customer-facing personnel are secure in the benefits of the acquisition, and then to enact the processes that will deliver the promised benefits.

The focus: Internal systems or external returns?

The president of a fast-growing information technology services company with four recent

acquisitions undertook a staged restructuring program. The company's main goal in making the acquisitions was to use to increase its range of capabilities to win larger and more complex jobs, and in turn, maintain and increase its revenue.

As a first step in aligning the disparate groups, the company installed high-end internal systems. During the course of this work, the president noted that anomalies in the project pricing and sales pitches of the different acquisitions were causing confusion among customers and having a negative impact on margins. …