Leading Integration: Six Steps to Preserve Acquisition Value

Between 2018 and 2019, with global economic uncertainty at its highest level since 1997,[1] the pharmaceutical sector saw a spate of major acquisitions. These included three mega-deals[2] totaling nearly $200 billion. The same period saw energetic M&A activity as major drug producers acquired promising programmes from smaller bio-technology companies and further consolidation of existing business activities. An example of the latter is Pfizer/Upjohn and Mylan’s all stock merger to create a global off-patent and generics business. Another, the agreement between GSK and Novartis to buyout Novartis’ stake in their consumer healthcare joint venture and subsequently to combine GSK and Pfizer’s consumer health businesses in a joint venture. 

2018-2019 has been memorable in terms of significant deals and some commentators predict continued strong M&A activity beyond 2019.[3] Far from discouraging large scale M&A activity, global economic uncertainty and the prospect of a downturn on the horizon may well be providing stimulus.

Successful integration: the challenge of delivering value

Recent McKinsey & Co research[4] highlights that programmatic approaches to M&A generate the most value in deal-making whilst infrequent large deals (defined as greater than 30% of the acquirer’s market capitalisation) tend to be the least successful. Reasons include the capability and organizational health of the acquirer and the significant challenge of successfully driving value from large integration programs.  

Published research by McKinsey and Deloitte[5]supports our own observations that large acquisitions are challenging to integrate, and a significant number fall short of their intended benefits. During late 2019 and early 2020 the multibillion-dollar pharma deals will close. What lessons can companies planning major integrations learn from the successes and failure of the past?

Corporate history is littered with failed or under-achieving M&A. Whilst deals tend to be presented to look rational in theory, successful integration is one of the toughest challenges senior executives face in the corporate world; grand strategic ideas are not always matched by the realities of execution!

Integrations are considered to have “failed” when they don’t deliver additional value (the combined company is no greater than the sum of its parts) or they miss synergy targets. Failure to match the integration strategy to the motive for acquisition is a significant cause of failure, and one in four companies do not get this right according to Deloitte.[6] With appropriate decisions about the level of integration, an organisation increases its chances of success. The next potential downfalls are poorly executed integration strategy and the collateral effects of integration processes diverting energy and focus from core business.

Observations from post M&A integrations 

We have worked with organizations that managed multiple integrations successfully, some with no obvious rationale behind their integration strategy, and others that started with a plan but under-resourced or applied it inconsistently. 

There are several inter-related reasons why integrations fail to deliver benefits:

• weak leadership

• lack of readiness to integrate resulting in glacial progress

• unforeseen challenges implementing complex integrations

• failure to communicate integration plans effectively

• low ‘change adoption’ within the acquired organisation and

• significant cultural differences between enterprises.

Lessons from experience: getting integration right

Many integration problems start long before deal announcement. McKinsey’s July 2019 Quarterly highlights healthy companies make a better job of integrating acquisitions and achieving transformational outcomes. The authors proposed: “leaders considering a large acquisition should first assess their organization’s own health to better gauge whether or not to take the merger plunge.”[7]

Healthy companies with coherent integration strategies will benefit from applying six lessons to ensure successful integration:

1.    Engage the company you seek to integrate

Acquirers often believe they have the magic formula to create value from a transaction. As a result, they don’t always listen carefully to understand how the acquired company delivers value. These conversations need to take place as early as possible and before integration plans are made. We suggest questions like:

• What makes your organization unique?

• What do you most want to preserve and why?

• What’s really important to you post acquisition/integration?

2.    Have a clear integration plan

Problems are likely to arise where the acquisition takes insufficient account of the business model, strategic and cultural match. Integration plans are never “one size fits all” and must take account of the original reason for acquisition to preserve and create value. What this means in practice is to look after talented people and select them to lead integration:

Talented people leave or become distracted if you fail to address people and culture issues early enough. We’ve seen examples where extended and detailed processes for talent review became more important than the outcome. Reaching out early, to the senior and mid-level of organizations, discussing career aspirations and expectations, is key to retain talented people. Successful integration requires an ambitious timetable because difficult decisions don’t get any easier over time.

Successful integration requires the best talent available from both companies involving those with a stake in the future. You will have to balance core business and integration needs but need to ensure top performers from both companies are released to plan and execute integration from the outset, free from operational responsibility. People selected to lead integration workstreams should see this as a career-enhancing opportunity rather than a burden to be managed alongside their operational role.

3.    Communicate, communicate, communicate

The check list of how to improve organization effectiveness would be incomplete without communication.  Where do we start?  The most important aspect is effective early communication to both parties describing the intent of the acquisition (not the detail) for integration. Implementation will have greater urgency and purpose when people have something to be excited about, so the combined company vision should be clear to everybody as soon as possible. In one company we’ve worked with recently a vacuum of effective communication from the acquirer has been readily filled with negativity about post-integration opportunities. This is unhelpful as it makes successful integration harder; you cannot over-communicate.

4.    Don’t drag it out

There are advantages and disadvantages to providing early information. Integration has many forms and each case is different. We urge acquirers to make clear decisions, early and communicate their intent. Integrations that work well typically have small integration teams with the power to act decisively and communicate without filters. Dragging things out has two distinct effects: people become complacent that nothing will change or, alternatively, they know something will change but no-one can tell them what. This creates avoidable anxieties with collateral impact on morale. In one pharma company we know an over-extended integration programme caught up with R&D teams already disengaged and unhappy 18 months after they perceived themselves to be “at risk.” We observed that valuable staff who were “saved” tended to be much more critical and unhappy than those the company decided to let go.

5.    Apply the 80/20 rule to avoid “boiling the ocean”

It’s inevitable large integrations need to homogenise many systems, sites, processes, structures, ways of working and culture. Get the critical areas sorted quickly, but you risk failure by imposing too much change too quickly. People can only absorb so much before panic and fatigue sets in. Our work on change indicates that a stepped approach rather than “big bang” is more effective, provided the intent is mapped out in advance, well understood and the process starts early.

6.    Focus on cultural similarities

Integrating businesses with different histories, relationships, habits and culture is a significant challenge.  It’s not for us to say whether a single culture or preservation of the status quo will be the best solution. Perhaps more companies should ask themselves whether homogeneous culture (and the effort to create it) is likely to drive more value than the potential strengths of more cultural diversity. Rather than focus on cultural difference, remain sensitive to the difficulties of cultural integration. Lessons from others suggest establishing the right behaviours, suitable for local interpretation, will be more tangible in the short-term. This helps keep the process positive, creates a common bond and helps people to “let go.” It provides both parties with an even stake in the outcome and results in better change adoption.  Questions cultural workstreams might ask include:

• What unites us (avoid focus on cultural ‘differences’)?

• What value driven behaviors do we share?  

• What behaviors are important as we combine?

Conclusion

A large amount of M&A activity has taken place recently. The next few years will see major integration programs resulting from M&A transactions conducted in 2018-2019 and M&A activity likely to continue into the mid-2020s. The history of integration suggests not all will be successful or deliver their potential value. 

In our experience many organizations don’t pay enough attention to integration planning. Companies seeking to create value from integration would do well to be aware of typical integration challenges and plan positive integration programmes designed to make early decisions and engage talent from both companies in a constructive dialogue. 

The six practical lessons outlined will help deliver successful integration. Involving strategy execution specialists can also help organizations define goals, gather facts, evaluate the situation, then plan and facilitate integration activities.  It can be difficult to do this objectively with limited internal resources available and dedicated to integration planning and execution.

Always remember, people, power, relationships and culture come first; whilst you may acquire one large company, you still have thousands of individual integrations to deliver.

Mark Bouch is Managing Director of Leading Change, a UK-based consultancy business focused on strategy execution.  

[1]Daily Telegraph article by Tom Rees 2 October 2019: Global uncertainty has surged to a record high and it is killing growth.

[2]Shire by Takeda ($59 billion), Celgene by BMS ($74 billion) and Allergan by AbbVie ($63 billion).

[3]Thepharmaletter 3 March 2019: Consolidation in the pharmaceutical industry – an outlook for 2019.

[4]July 2019 McKinsey Quarterly: The secret ingredient of successful big deals: Organizational health.

[5]Deloitte Integration Report 2015: Putting the pieces together.

[6]ibid.

[7]July 2019 McKinsey Quarterly: The secret ingredient of successful big deals: Organizational health.