Mergers and acquisitions (M&A) are a popular way of achieving rapid growth and market entry. However, the performance of acquisitions is mixed. Half of acquisitions fail to meet acquirer expectations. Yet, acquisitions remain a central element of corporate strategy. How then can firms improve the post-acquisition integration performance of acquired firms?
First, let us see if undertaking an acquisition is a tactic worth following. Studies suggest the post-acquisition performance of acquired public companies is mixed.
- 43% of international acquisitions fail to produce financial returns that exceed the acquirer’s cost of capital
- 45 to 55% of acquirers are highly dissatisfied or neutral with the performance of their acquisitions
- Acquired public companies gain 30% in market value while shareholders of acquiring companies lose 5%.
- 50% of individual acquisitions show positive returns
- if acquirers hold acquisition for an average of seven years, 40% the acquisitions are sold at a price that exceeds its acquisition costs
Three factors account for the disparity in acquisition performance.
- the effectiveness of the post-acquisition integration;
- employee resistance to the acquisition; and
- the value the acquisition creates.
Let us have a closer look at how the post-acquisition integration may affect results. An acquisition may have opportunity for value creation. However; it does not guarantee acquisition success. Substantial organizational change may result from the realization of operational synergies, elimination of redundancy, integration of financial reporting and control systems, and the relocation of knowledge employees. To be successful, these changes must be implemented in a manner to create value. It must be accomplished without destroying the inherent value within the individual businesses. It also should not impose new demands on the acquired firm. Moreover, it should maintain the motivation of the retained employees.
The challenge is in deciding the degree to which organizations should be integrated following an acquisition. A lack of integration may hinder the transfer of strategic capabilities necessary for value creation while over integration may cause unnecessary organizational conflict adding to the implementation cost. Consider:
- What value do you seek that is driving the acquisition? How much interdependence needs to be established between the two companies to achieve the desired value? For example, if there is a need to share resources and engage in knowledge transfer, then a high to moderate strategic interdependence is required. By contrast, if there is less of a need for operational value creation and restructuring, this suggests a lower requirement for interdependence.
- Is it necessary to preserve the organizational autonomy of the acquired firm in order to preserve its distinctive capabilities? For example, if the firm is being acquired for its innovation capabilities it may be important post-acquisition to preserve a culture, which supports innovation.
Carefully consider your answers to the above questions, as it will lead you to favour one of the four integration approaches outlined below.
You would undertake absorption if you have a high need for strategic interdependence and a low need for organizational autonomy of the acquired company. The goal is to absorb the new entity into your operation. Your aim is to consolidate the operations, the structures, and cultures of both organizations, and dissolve the boundaries between the firms. This approach emphasizes cost reduction and resource sharing. It will result in executive departures.
The goal is to preserve the acquired firm as acquired. It is a stand-alone subsidiary with a high degree of autonomy. This approach assumes a low need for strategic interdependence between the combined businesses. The acquired firm retains its organizational environment and its embedded capabilities.
In this approach to integration, firms are connected with and dependent on each other to the advantage of both. The goal of the acquiring firm is to achieve a balance between preserving the organizational autonomy of the acquired firm while transferring strategic capabilities between the two businesses.
In symbiotic situations, there is a high degree of strategic interdependence between the two businesses. However, the acquired firm needs to retain its autonomy as its capabilities are embedded in an organizational environment different from that of the acquiring firm. Typically, the acquired firm’s CEO is retained. This serves to protect the original organizational environment and capability.
In this approach, the acquired firm needs to undergo a business turnaround. The acquired company’s underperformance suggests there is little requirement to preserve the existing organizational environment. Generally, a wholesale culture change is required to affect a turnaround. The dominant value creation mechanism is restructuring. A low level of strategic interdependence is required. Thus, the acquired firm is stripped of its autonomy. In such cases, there is little need for strategic interdependence beyond general management knowledge transfer and the implementation of tight financial controls.
The four integration approaches are a general description of the choices to a post-acquisition strategy. Complex acquisitions may contain business units or sets of capabilities that vary. Thus, there may be a need for trade-offs between strategic interdependence and organizational autonomy. There may be a need to use more than one integration approach. Reality may dictate a need to alter the approach. However, at the end of the day the trade-offs are essentially between strategic and organizational needs. These are the key determinants as to the choice of one integration approach over another.
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