Best tactic; intervention, integration?

Taking on a business could be viewed as buying modular furniture. You can rearrange the seating configuration until you are comfortable. TOM McKASKILL

By Tom McKaskill

Taking on a business could be viewed as buying modular furniture. You can rearrange the seating configuration until you are comfortable.

If you have read much of the literature in the merger and acquisition space, you will have noticed that it is very much “one size fits all”. There is an overwhelming attention to mega-mergers and to putting together giant global corporations with a focus on culture and systems integration.

What about the hundreds of thousands of smaller acquisitions that are purchased by new owner-managers, or those that have little or no integration?

If you take a broader view of acquisitions, what you see is a wide range of types ranging from pure investment, turn-arounds, roll-ups, consolidations and, finally fully integrated operations. The degree to which the acquisition is changed and integrated varies greatly, depending on what the objectives of the acquisition are.

In some cases the desire is to leave the acquired business as a separate entity. In others, the intention is only to remove some head office functions but leave the operational side of the business as it was. Instead of a focus on integration, we need to look to both intervention and integration as paths to improvement.

Intervention occurs when the operations of the acquired business are proactively changed by the buyer to improve the firm’s performance. This could involve any number of activities including new management, new systems and processes, new funding or new investment as well as the use of the buyer’s economies of scale in procurement or the use of the buyer’s trademarks, patents, brands and so on.

The aim of intervention is to fix any deficiencies in the business as well as to put it into a better trading position. Many acquirers seek out target businesses where they can make such changes knowing that they have a high probability of achieving a premium return on their investment.

Integration occurs where all or parts of the acquired business are merged with those of the acquirer. Often this is done to eliminate duplicate activities or otherwise redundant operations.

However, the level of integration can vary widely. A consolidation play might just take over head office functions. A company with excess manufacturing capacity might only move manufacturing activity, but leave the rest of the business operating as a separate entity.

Where the acquirer has an excellent distribution channel, it might close down the sales activity of the acquired firm and take on that task itself. At the extreme, the whole operation might be merged, including relocating all the employees to a common facility.

Many acquirers make the mistake of thinking that everything has to work the same way and look the same. Instead of focusing on where changes need to be made to make improvements, they plan to integrate everything.

In doing so, they often destroy the value they acquired. People leave both companies due to uncertainty, operations are disrupted and the changes take longer than anticipated.

The basic rules of acquisitions should be to take on only what you can manage, don’t fix anything which isn’t broken, and concentrate on where the big gains are.