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A Practi Practical cal Appr Approach oach to Post-Me ost-Merger rger Integration Integration
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A Practi Practical cal Appr Approach oach to Post-Me ost-Merger rger Integration Integration By Kris Denton, Micha Michael el Vo Voss & Matt Dauphinais Dauphinais
Post-merger Post-me rger integration (PMI) is rarely rarely straightforward, straightforward, but the approaches approaches most businesses businesses take take have have made it slower, slower, less effective, and more expensive expensive than it needs to be.This be. This may help explain explain why, why, in study after study, study, so many deals fail to deliver their expected value. The irony is that massive investments of money and time go
textbooks textb ooks do. But such an expla explanatio nation n seems like the
into most most deals. deals. Why Why,, then then,, do they they so often often fall fall flat? flat? In our our
pronouncements of armchair quarterbacks who've never
experience it's because it is much easier to develop the
reallyy managed reall managed a PMI PMI team. team. Unce Uncerr tain tainty ty is absolut absolutely ely
investment investm ent thesis justifying a deal than to create a workable plan
relevant, relevan t, but it is also surmountable surmountable if you you understand its
to transform two companies into one. Even the most well
dynamics: dynamic s: it is not a matter of knowin knowingg enough, enough, but rather a
reasoned strategy, strategy, thoroughly vetted target, and comprehensive comprehensive
matter of timing.
financial model are of little value if you cannot integrate quickly and effectively.
As soon as as a deal is announced, announced, external stakeholders stakeholders react. Markets immediately pronounce their judgments through
The good news is there there is a solution. We have seen seen that
share-pri shar e-price ce movemen movements. ts. Cust Custome omers rs and trading partners
structuring decisions up front about how the newly combined
wonder about possible near-term disruptions and the longer-
businesses will operate makes it much likelier that an M&A deal
term implications of the deal. Competitors begin to whisper in
will deliver the envisione envisioned d shareholder value.
the ears of both firms’ key customers, hoping to poach a few in the wake of disruption.
The Certainty of Uncertainty
Meanwhil Mean while, e, inte internally rnally,, and at at the worst possi possible ble momen moment, t, the
It would be easy to attribute the failure of past deals to the
deal becomes a source of gossip gossip and distraction. Precisely when
natural natu ral uncertainty uncertainty that that accompa accompanies nies M&A, as many many
the rest of the market needs reassurance, employe employees es have a
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strong urge to look inward. They wonder about new bosses, bosses,
understand, but in and of of themselves themselves they do not not help you
new budg budgets, ets, new polic policies, ies, job securit securityy, and a host of other other
actually do anything.
important issues. We believe it is this misalignment of focus at the most most inopportune moment moment that that often causes M&A value value to dissipate, even more than than a lack of good strategy or thorough thorough due diligence.
Decision-Centric PMI Rather than cataloguing the complexity complexity of today, today, what is really needed is a clearer understanding how things will run
The Siren Song of "Discovernance" Many,, if not most, Many most, companies tr tr y to overcome overcome uncertainty uncertainty with
tomorrow.. This would serve the dual purpose of resolving tomorrow employee uncertainty and improving signals to outside stakeholders.
process, proce ss, mone moneyy, and effo efforr t. They emplo employy exhau exhaustiv stive e process process discovery and elaborate program management governance—a governance—a
In order to do this, integration planning and and execution should should
one-two punch we have termed "discovernance."
be driven by how the newly combined company will operate. Therefore, There fore, the paramoun paramountt activity activity must must be to make make the
Employees Employ ees descend descend into the uncertainty uncertainty and, despite good good
foundational decisions that will define this future operating
intentio inte ntions, ns, often magnify magnify the drama. Curren Current-st t-state ate capabilitie capabilitiess
model. Everything else—especially else—especially process and governance— governance—
are exhaustively mapped.Cross-company mapped. Cross-company integration teams and
exists to enable this goal.
supervisory supe rvisory comm committ ittees ees prolifera proliferate. te. Sen Senior ior manageme management nt delegates important decisions to these teams, teams, which hesitate to
The fundamental operating decisions that comprise the future
make ma ke th the e wrong wrong call. call. Ac Accou counta ntabil bility ity wea weake kens ns the the more more
operating model ultimately boil down to four basic options.
distributed it becomes.
Consider the following high-level example:
In the absence of clear decision-making authority and
Operating Decision
Example
accountability,, many integration teams accountability teams focus instead on strict strict adherence to the PMI process as provided to them by their advisors. advi sors. Unfo Unfortunatel rtunatelyy, this is a poor repla replaceme cement nt for for the
The way the acquirer operates
The target’s operations are wholly absorbed into its new parent.
The way the target operates
The target is run as an autonomous subsidiary that consolidates only financial reporting with the parent.
A selectiv selectivee hybrid hybrid of the two
The target becomes a captive supplier,, retaining par supplier parts ts of its original structure but adopting the marketfacing functions of the parent.
A new fou fourth rth way way to operate
Major parts of the operating model of both original companies are changed.
decision-making decision-maki ng that actually actually fuels integration. integration. All it does is aggregate the complexity of how things operate today. We typi typically cally ask clien clients ts the followi following ng quest question: ion: "What decisions will you be making during the integration team’s kick-off meeting?" meeting?" Usually, Usually, the answer sounds something something like this: thi s: "Un "Under der sta standi nding ng the PMI pro proces cesss tax taxonom onomyy and methodology methodolo gy,, ensuring fully-representative fully-representative team compositi composition, on, establishing the template to be used for reporting the team’s activities, activitie s, and mapping all all possible stakehol stakeholders ders from whom the team will need to seek input." All are impor tant things to
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BUSINESS BUSI NESS EXAM EXAMPLE PLE The Value Chain Gang: Structured decision-making in a large deal A high-tech manufacturing manufacturing client had successfully successfully completed numerous numerous small acquisitions acquisitions but was struggling with a recent large deal. Unlike smaller companies, companies, the larger target could not simply be swallowed swallowed into the client’s existing business business model. Integration teams quickly found themselves in the weeds trying to solve for numerous complexities simultaneously. Using a value-chain structure, the decision-centric approach approach disaggregated the client's acquisition into its operational piece parts. Each part contained a decision decision tree for senior leaders leaders to complete: Value Chain
Operating Decision Use Acquirer's Operating Model
Use Target's Operating Model
Use Combined Operating Model
Use New Operating Model
Brand
Rebrand target’s products with acquirer's brand
Rebrand acquirer's products to target’s brand
Co-brand all products
Rebrand all products to a new brand
Sales Force
Use acquirer's existing sales force to sell target’s products
Use target’s sales force to sell target’s products
Combine and reconcile sales forces
Use target’s sales force as advisors to acquirer's sales force
Channels
Push target’s products through acquirer's channel partners
Continue to use target’s targ et’s channel partners
Use acquirer's partners in US,channel target’s target ’s partners in ROW
Go through new channels as bundled product
Combine and optimize R&D teams in new lab facility
N/A
R&D
Develop target’s product in Develop all products in acquirer's labs target’s labs
Sourcing
Use existin existingg suppliers suppliers to source target’s products
Manufacturing
Fold target’s factories into acquirer's network
Logistics Store Operations
Combine and reconcile Retain target’s suppliers for suppliers for volu suppliers volume me target’s products discounts Maintain target's manufacturing network
Push target’s products Push target’s products through acquirer's delivery through target’s delivery network network Close target’s stores and sell target’s product only in acquirer's stores
Keep target’s stores for target’s products only
Pursue new suppliers
Use target’s factories as captive suppliers to client’s factories
Outsource all manufacturing
Use target’s reverse logistics and acquirer's forward logistics
Pursue new logistics partners
Combine and rationalize store footprint
Close both store footprints and sell online only
Completed decisions were highly highly effective for for detecting underlying integration risks. Where the target’s operating practices were preferred, new capabilities capabilities had to be developed developed and and milestones milestones extended. extended. Where leaders leaders designated two two strategies, as they did for two geographi geographicc markets, inte integratio gration n teams were were able to request request additional additional resources resources.. It also highlight highlighted ed delays delays due to decisions that had not yet been made. In the course of one afternoon, a group of Senior Managers were able to make "80%-right" decisions that framed the rest of the integration. The decision-centric decision-centric approach reached beyond beyond just this integration. integration. Many operating operating decisions decisions led to a richer understanding of the capabilities capabilities and weaknesses weaknesses of their operating model, model, and shaped future integration integration that could be standardized for future use.The client was able to achieve repeatability repeatability, scalability scalability,, and time-to-market reduction in future planning.
In non-textbook integrations, managers face many smaller smaller,, more
to identify the optimal solution. But unlike the "discove "discovernance" rnance"
complicated variations of the same choices.We advise clients to
approach, in which such analyses analyses are not clearly tied back to a
start by structuring these these decisions decisions in an end-to-end, end-to-end, value
specific purpose, the decision-centric decision-centric approach approach harnesses the
chain view as soon as possible. (see sidebar, sidebar, The Value Chain
intellectual horsepower of integration teams to drive toward
Gang ). ). This allows them to cluster cluster decisions appropriately appropriately,
choosing the future operating model that best delivers value.
facilitating comparisons between similar functions at both companies, even if the target’s business business model is vastly different.
In the many instances where preliminary decisions have been
Each value chain step represents a tree of operating
made, the path is clear and integration integration can begin.Where doubts
decisions—starting
remain or bottlenecks exist, governance committees committees now have have
broadly
and
becoming
increasingly
specific—that must be made for the new company.
a purpose purpose:: to oversee oversee and resol resolve ve the compl complexity exity dela delaying ying integra int egratio tion. n. Perh erhaps aps most most importantl importantlyy, cle cleare arerr goals goals allow allow
We W e find this early decision making exercise is most productive when it involves only a handful of pivotal client managers.
managers to make more accurate financial and resource projections well in advance of the need.
Optimal Opti mally ly,, the theyy are seaso seasoned, ned, uppe upperr-mi -mid-le d-level vel operat operating ing managers—the people who know the most about how things
To be sure, sure, post post-merg -merger er integrat integration ion will will never never be trivial. trivial. But
actually actu ally get done. done. We have have facili facilitated tated such kno knowled wledgeab geable le
we beli believe eve our our approach approach can increas increase e your chance chancess of
groups tackle as much as 80 percent of key decisions in a single
success. By emphasizing emphasizing top-dow top-down n accountability accountability for key key
afternoon. As they begin working working their way through decisions, decisions,
business operating decisions decisions early in the process, process, you can
the group quickly finds that what may have have appeared at first to
reduce uncertainty and focus integration teams on the work
be a tall challen challenge ge reduces reduces itself itself to a series of discrete discrete choices choices
that really matters matters:: getting the combined com bined company back ba ck at full
about a finite list of topics, many of which they have have considered
stride, competing in the marketplace.
before in different contexts. Participants should see up-front decision making as an opportunity to map out a preliminary integration path, path, defining it by the many many decision decisionss that could could add friction friction to the the process—over process—ov er time, in both companies, and within within and across functional areas. areas. Decision sessions should should focus on identifying identifying potential bottlenecks where integration is likely to take longer, cost more, more, drive higher higher risks, or stumble stumble over over legacy busines businesss
Kris Denton is Manag Managing ing Partner, Partner, Busine Business ss Transfo Transformation rmation,, America Americas, s, at Wipro Wipro
processes in need of reengineering. r eengineering.
Consulting Consul ting Services. Services. He is based in Chicago Chicago and may be contacted contacted at kris.denton@w kris.de nton@wipro ipro.com. .com. Micha Michael el Vos Vos is a Partner, Busin Business ess Transfo Transformation rmation
Together ogether,, these early decisions form form a straw man operating modell that actually mode actually prov provides ides direction direction.. Mana Managers gers can now tap their staffs to generate targeted analyses that inform specific
Practice, at Wipro Consulting Services He is based in Orange County and may be contacted at
[email protected]. Matt Dauphinais is Associate Partner, Partner, Business Transformation Practice, at Wipro Consulting Services. He is based in Minneapolis and may be reached at
[email protected].
decisions. decis ions. Of course, course, there will be some some gen genuine uinely ly thorny thorny decisions that require complex problem solving and iterations
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