Daily Management Review

M&A integration: How to successfully integrate strategic acquisitions


05/20/2020


Mergers and acquisitions are vital to the growth of many businesses, yet roughly half of all M&As fail to create value or wealth for shareholders of the acquirers (Gaughan, 2017; Whitaker, 2012). One major reason is that firms tend to treat post-merger integration as a mechanical process that occurs after the transaction is closed.



In practice, post acquisition integration is a dynamic process through which the acquirer and acquired firm coordinate their organizations and combine their resources to create value (Lu, 2018; Gomes and al, 2013). M & A integration has been recognized as a key part of the success of M & A and value creation (Angwin, Meadows, 2015). The importance of post-acquisition integration is all the stronger since the objective of M&A is to carry out strategic innovation. In a rapidly changing environment, when acquiring firm has a strategic objective to create value through innovation, post-acquisition integration can be very complex and at high risk. Strategic innovation is a future-oriented concept that contains a creative discovery, which can contradict a too precise post-acquisition integration plan.

Because Mergers and Acquisitions involve insertion of the acquired company in a vaster structure, the issue of the relationship between the process of strategic decision‐making and post acquisition management and contextual factors cannot be eluded. With a concern for guiding managers, Haspeslagh and Jemison (1991) develop an acquisition integration approach model, based on two main criteria : the need for ensuring the “autonomy” of the entities concerned to preserve their cultural and organizational specificities and their ability to create value, and the need for strengthening the “interdependence” between entities (resource sharing, functional skills transfer, general management skill transfer, scale benefits) to take advantage of existing synergies. The “organizational autonomy” factor refers to the level of autonomy the managers of the acquired company should keep or give away to the governance of the acquirer. The “strategic interdependence” factor refers to the level of relationships necessary to create value.

The “absorption approach” is the appropriate choice when the value-creation potential of the acquisition comes from high strategic interdependence between the firms (through better exploitation of existing resources) and there is less concern about maintaining the cultural and operational autonomy of the entities (rationalization policy). All absorption acquisitions represent the dissolution of the acquired firm’s original identity. The absorption policy is designed to pool the resources of the acquiring firm and acquired companies with a significant degree of change in the target firm. Economies of scale, elimination of duplication and rationalization of resources are the advantages usually proclaimed (resource-sharing benefits). Although the acquiring firm often has the upper hand for uniformization of practices and reduction of duplications, the previous tasks are based on the view that the organizations should be more similar. Even if the "absorption approach" requires a preparation phase and an adequate internal communication plan, companies must act quickly (rapid execution). As a result, post-acquisition integration is often carried out without a smooth transition. Hewlett Packard and Compaq is an example of an absorption approach. It is motivated primarily by the need to lower its cost structure and improve market position. The objective of the acquisition is to increase the bargaining power of the new group.

The “preservation approach” is designed to preserve the operational identity and management autonomy of the acquired company. This insertion mode is appropriate when there is a low need of strategic interdependence between the two companies (continued boundary protection). In this configuration, acquiring company must use resources and general management skills to help the acquired firm develop better and faster than it otherwise would have (nurturing the acquired firm). An important source of value creation is to accumulate learning in terms of making further acquisitions in the newly explored area and in terms of supporting its existing core business. When this is not simply a transitory measure, “preservation” is a privileged approach in diversification operations and in exploration strategies when the firm wants to invest in new markets and technologies. The acquired firm is considered the spearhead of a new activity. The acquiring firm’s role is then to give it the incentive to develop and supply it with the required funding. This was for example the case of the acquisition of Havas Voyages France by Marietton Développement, with the preservation of the teams of the target company.

The “symbiosis approach” involves management of contradictory requirements. The aim is to create strategic interdependencies (major strategic changes in both companies), while limiting value-destroying initiatives (Meier et Schier, 2019). This integration process requires both firms to undergo some degree of transformation as efforts are made to create a combined identity that reflects the strategic capabilities and leading practices of both previous entities. (amalgamating the organizations). The “symbiosis approach” may be analysed in terms of opportunities for a given organisation to revolutionise attitudes, structures and processes in order to develop new abilities based on a combination of existing resources and thereby meet changes in the environment, and on occasion create such changes. A strategic perspective on innovation leads the organizations to look at the whole system beyond the product and the process in order to create value In an approach emphasizing strategic innovation, cultural diversity is a valuable resource and preservation of the specific features of the acquired entity is a necessity (Meier, 2002). Whereas the preservation and absorption approaches are aimed at satisfying a clearly defined requirement (cultural autonomy or strategic interdependence), the symbiosis approach is more complicated since these two requirements have equal importance. The acquired firm retains its core assumptions, cultural elements, organizational practices and systems which make it unique, but at the same time works with the acquiring company in a reciprocal and mutually trusting way to create a new identity (Koenig, Meier, 2001). Contrary to the logics of absorption and preservation, neither firm dominates the integration process. “Symbiotic approach” needs simultaneous boundary preservation and boundary permeability. To succeed in truly amalgamating the organizations symbiotically, each firm must take on the original qualities of the other.

In this type of operation, a certain amount of creativity may therefore be necessary to establish combinations of new resources, sources of competitive advantages. Firms faced with a complex and uncertain future and operating in such areas as information technology, multimedia and communications need to find new orientations (strategic vision) in order to grow and compete in a highly competitive environment. They need to initiate a profound transformation of the basic framework used in the past including current strategies, structure, culture, competencies and business processes. Symbiotic integration is the redesigning capacity of both firms in a way to create new values for customers and to generate new wealth for all stakeholders. This notably involves collective learning and the ability of organizations to reconfigure internal and external skills to anticipate the needs of customers and users (adoption of a new business model), in line with the "resource approach" theorized by management research. Let us first mention the acquisition of Kinema Systems by the robotics manufacturer Boston Dynamics (Softbank Group). The acquired company is a Silicon Valley start-up specialized in vision sensors, which develops software for deep learning to help robots manipulate boxes. This operation is indicative of these new forms of acquisitions. It responds to a need to create new robotic systems in the logistics and manufacturing sectors within the new group, paving the way for warehouse automation. This combination of resources enhances the 3D vision of the company's robots with the help of machine learning (machine learning). The “symbiosis approach” gives the opportunity to learn from each other, and to improve firms’ business performance (strategic innovation) by adopting the ‘best practices’ of each organization.

Olivier Meier
Full Professor
University of Paris Est (LIPHA)