The Other AI: Acquisition Integration
December 13, 2017
Robert Nardelli, a frequent commentator and speaker on leadership issues, is the former chairman and CEO of Chrysler and The Home Depot. He is also founder and managing partner of XLR-8 LLC, an investment and advisory company.
Heading into the New Year, the status of tax policy, healthcare, trade, and other issues critical to corporate welfare are in flux. The only business certainty, it seems, is that the pace of digital disruption will continue to quicken. For senior leaders, that means the race is on to make AI a core competency—and by AI, I don’t mean artificial intelligence. Rather, I mean acquisition integration.
It’s clear that legacy and disruptor organizations alike are of the mind-set that buying instead of building is a more efficient way to compete in today’s rapidly shifting landscape and gives you a first-mover advantage. Examples include Amazon buying Whole Foods and CVS’s pending takeover of Aetna, and that’s just a small slice. Last month marked the second highest on record for deals in 22 years, with about $200 billion in completed or pending transactions, and all signs point to an even more active 2018.
There’s just one problem: The data suggests that between 70% and 90% of deals fail to increase shareholder value. Having personally been involved in hundreds of deals as a buyer, seller, or advisor throughout my career, I have seen firsthand how the inability to properly integrate an acquisition—and jump onto the competitive advantage it can create—can destroy its entire financial rationale. Organizations spend countless hours and millions of dollars identifying buyout targets, conducting due diligence, negotiating terms, and more in the pursuit of a deal. Seldom do they pay even half as much attention to an asset after the deal closes as they do before it is announced.
This is a huge mistake. Once a deal closes, the real work begins. The longer the integration process drags on, the worse it is for employees, customers, and the organization. In fact, senior leaders should conduct the integration process with the same urgency as they do the acquisition process. Private equity firms, for instance, typically draw up a 100-day post-acquisition strategic plan for companies they are buying and manage accountability.
The underlying rationale for any deal is to improve an organization’s performance. Too often, however, senior leaders take that to mean cost synergies or increased pricing power or a reorganization of the executive team. While these moves may indeed enhance performance, and should be undertaken, they are ephemeral. Conversely, the real drivers of growth—such as innovation, speed to market, improved customer experience and better workforce collaboration—rarely get the appropriate attention. Often, companies also don’t see quickly enough how they can bring products from an acquired company into their network to price and use them better, and vice versa.
Melding disparate cultures, to use another example, is critical to the success of any acquisition. Yet this vitally important acquisition integration task is often overlooked, if not outright dismissed. No better example exists than the failure of the AOL Time Warner merger to prove this point. With cross-border deals increasing as a result of globalization, getting the integration of cultures right will factor even more heavily into the success of any acquisition. Two firms that did get it right were KFC and Starbucks, which, in their forays into China, made a point of fine-tuning their products to be sensitive to the local culture, instead just duplicating the US versions.
As new and emerging technologies, from automation to virtual reality to the Internet of Things, alter entire business models, organizations are looking to make transformative rather than transactional deals. Put another way, organizations aren’t pursuing acquisitions to increase market share or extend their core business. They are seeking to buy a wholly new, digital-first way of doing business that they can use to supplant their legacy model. With that bold ambition, however, comes a very difficult integration tightrope to navigate. While the intention is for these kinds of purchases to change the culture of the acquirer, the result is often the opposite, with legacy hierarchies and silos proving too difficult to overcome.
An acquisition doesn’t fail or succeed on its face. It’s the integration process that typically determines whether the deal is ultimately successful or not. And while many senior leaders are focused on that other AI, a strong acquisition integration competency is it own competitive advantage.