Empirical studies show that successful acquirers integrate swiftly. There are two major reasons to act fast.
I have no intention of running the details of financial modeling by you (and honestly believe there are others much better suited to do so), but any manager should at least understand the core principles behind a financial evaluation. Financial models used to gauge planned monetary benefits of an acquisition can be very complex indeed, but largely depend on only three factors. In summary, these determine the return on investment (ROI)*:
- The investment amount (a.k.a. purchase price);
- The sum of anticipated future net financial income/cash flows;
- And time.
Actually, time is relevant in two aspects, namely the point at which the purchase price is paid (cash out), and obviously at which points in future the anticipated positive cash flows are going to be generated (cash in).
In many investment cases, future income and cash flow are supposed to improve over historic performance under previous ownership. A major driver for such planned improvement are synergies (compare my previous article on the subject). If synergies are generated later than originally anticipated in the financial model, the ROI is going to react negatively. Since the purchase price is a fixed determinant in our mathematical equation, the only other driver to balance a negative time impact with is the amount of synergies generated: While late payment will diminish ROI, increased amounts of future payments will improve it. (However, in my experience I have never seen synergies exceeding the original plan high enough to compensate for their late delivery.)
The other – non-arithmetical – reason to integrate fast is the human factor: People like clarity. The faster a new organization takes grip, the faster new processes are being implemented, the easier employees can be kept engaged. Dragging out change over an unnecessarily extended period in time is counterproductive. The momentum built with acquisition and integration start slows dramatically after the first 100 days. Hence my
Rule #7: Procrastination does not add value.
Integration should follow an ambitious timeline: Benefits from synergies flow faster, growing an earlier base for future development and growth. In addition, people are more likely to stay with the program if initial changes bear visible fruit swiftly.
Determination of the right pace, though, is the tricky part: If the timeline is too aggressive, employees view objectives as not attainable, which leads to frustration. If it is not aggressive enough, there is no progress, and people lose focus.
A healthy mix of fast-paced change and longer-term objectives is the proven answer: Integration of backoffice functions like Finance/Accounting and HR is often sought to be completed within the first six months after closure, and more complex integrations of core functions should be completed within a year. The “need for speed” is one of the reasons why the integration team should be on board as of Day 1.
The next part of my series on post-merger integration will cover cultural integration. Stay tuned.
*There are other factors, too, but the three listed ones should suffice to illustrate what I am trying to show in the context of PMI.
In case you have missed the previous article in the series “Inside Post-merger Integration”, it can be found here.
Diethard Engel is an independent consultant and interim manager, focused on Business Transformation, Post-merger Integration / Carve-out and Executive Finance. He has run multiple post-merger integration/carve-out projects for international businesses.