Building In-House M&A Competencies
By Jack Prouty, President M&A Leadership Council
M&A training in our public conferences has focused on priorities, activities and best practices involved from strategy through post-close integration of an acquisition or merger. Themes center around preserving the value of the assets of the two organizations prior to close and then realizing the value of the transaction after close. Today’s article focuses on the next stage, maximizing the value of the combined companies post-integration.
Our point of view is that once the combined business has been migrated to a steady-state of one company with common management, systems and processes; the operations have begun for assimilating the staffs of the two organizations; and implementation of the end-state vision of the integrated organization is well underway, it is now time to re-vector and begin optimizing the assets of the combined organization to truly create full value. To quote a statement attributed to Jack Welch, ex-CEO of GE, “Once the battle is won, it is time to start the next revolution.”
We recommend that 6-12 months after legal close, the process begin internally and externally to launch the new company. As with our view of launching the diligence effort and the integration planning through an executive alignment and mobilization workshop, the post-integration value creation phase should also begin with a senior executive strategy session including the “new” management team. The central theme should be how to operationalize the full potential of the new company. The focus should center on the key actions and priorities to effectively leverage the assets and capabilities of the new enterprise to create greater competitive differentiation, improved operating performance, and a culture/environment of professional staff excellence. Now that sounds like a bunch of impractical “consulting speak,” so let me pull from personal experience.
Twenty years ago (as a much younger man) I was recruited to join the new executive team charged with turning around a Midwest-based retail department store chain (i.e., “stop the bleeding”). We were experienced professionals who were recruited because we had individually been where the new owners wanted to take this underperforming company. The first year we turned the company around, but we realized that to really fast-grow the business and become a more viable industry player, we had to take on acquisitions (i.e., “build the base for growth”).
I am sure this “urge to merge” is a business imperative that many readers have faced. We took on our first acquisition about 18 months after the initial turnaround effort. Approximately 9-12 months after closing the transaction and starting the integration, we felt we could begin migrating to a steady state and focus on the “business of the business.” Now was the time, under the direction of our dynamic CEO, to really begin the business transformation: we had our management team in place, comprised of executives from each organization; we had upgraded our staff talent through the combination and had a more effective organization structure in place. We also incorporated a number of best practices from the acquired company; had installed new IT systems and capabilities (given that neither IT operations could support the combined business); and most importantly we now had some operating capital to invest in new ways of doing business.
We understood that while bigger, we were still a David competing against some industry Goliaths. The only way to succeed was to change our way of operating and become a more customer-focused organization. Multiple actions were taken over the next two years, none of which were contemplated in the original purchase economics or subsequent integration plans:
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Changed the compensation of sales associates
Instead of paying them an hourly salary for guarding the cash registers, we paid them based on their customer sales. In the prior 20 years we had never lost a cash register, but we had lost lots of potential sales. The change in compensation changed behaviors. It also meant a 20% turnover in staff, i.e. those who wanted to guard the cash registers rather than sell to the customers opted to leave and were replaced by those who bought into our program.
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Changed our business systems and processes to better support a customer-focused organization
For example, we installed a Customer Accommodation Office (CAO). Previously we could tell what did not sell by looking at the markdown racks. However, we could not tell what might have sold if we’d had it in stock. Now, if a customer came in, and the desired item was not in stock, and they had a store credit card, they would pick up the red phone at the register and be connected with the Customer Accommodation Office. The CAO would locate the item(s) and ship it for free to the customer’s home within the next two days. No need to walk a customer due to an out-of-stock item!
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Created mentoring and training programs to upgrade the capabilities of functional staff
In the stores this meant various programs, rewards and incentives including recognition of top sales associates, but also meant similar programs in the back office. For example, IT staff were trained on “Retail 101” and given professional development courses in additional to technical training.
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Flipped our organization chart upside down with customers at the top, associates next and executives at the bottom
Then we followed this up with actions to support this new dynamic. For example, all directors and officers at Corporate spent a day working in the stores every six months in order to bring them closer to the customer and to better understand what goes on in the stores, where the real money was made.
The list goes on and on regarding the multiple actions we took to change the organization, vision and values, the way of operating and the quality and performance of staff. None of this could effectively occur prior to the acquisition and integration of the acquired company. However, without taking this further step post-integration to transform the business and bring it to the next stage of excellence, we would never have achieved the full value of the deal.
One measure of success: we significantly grew top-line sales and bottom-line profits; we were ranked by Stores magazine two years after the acquisition as having the highest gross margin operating profit of any mid-size retailer. From a personal level, it was also one of the most enjoyable and rewarding phases of my long business career.
So, if everything stops at integration and doesn’t move to the next level of optimization, it is unlikely the planned value of the M&A will be met or exceeded. However, in our research and experiences, few companies move to this next level and, as Jack Welch would say, “….start the next revolution.”
Please note that in addition to public M&A training conferences the M&A Leadership Council provides a number of custom-designed in-house training programs, including an Executive Training workshop on Transforming the Business: Maximizing the Value of the Combination. Contact Jack Prouty ([email protected]) or Jim Jeffries ([email protected]) if you would like more information or visit our web site at http://macouncil.org/in-house-ma-training-program/ma-team-readiness.
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