Integrating Your Target Company’s Secret Sauce for the Perfect Blend
By Mark Herndon, Chairman of the M&A Leadership Council and John Bender, President of M&A Partners
One of the most important principles for acquiring executives to apply was penned by Clayton Christensen in The Big Idea: The New M&A Playbook. “Failing to understand where the value resides in what’s been bought, and therefore integrating incorrectly, has caused some of the biggest disasters in acquisitions history.” Case in point - the pervasive difficulty of integrating a target company’s (TargetCo) “secret sauce.”
Our first post in this series points out a good working definition of secret sauce. “A unique combination of talent, processes, systems, finely-tuned expertise or “know-how” and culture, perfected over time to create a distinctive organizational capability or competitive advantage.” (Ed. Note: for reference, please see “Don’t Spoil Your Acquired Company’s Secret Sauce – Part 1”). The second blog highlights the essential need to embed the concept of secret sauce throughout your organization’s M&A lifecycle process and capability. (Ed. Note: for reference, please see “Don’t Spoil Your Acquired Company’s Secret Sauce – Part 2”). Without this step, you will almost invariably miss the TargetCo’s secret sauce and fall into the blunder pointed out by Christensen.
We are often asked, “Is it even possible to preserve and leverage a TargetCo’s secret sauce.” We will be the first to admit that most acquirers have learned the hard way, by unintentionally blowing up one or more highly unique TargetCo’s. Yet, with strategic insight, effective leadership and a mature internal M&A process, acquirers can master this vital capability.
Principles for Integrating Secret Sauce
Preserving and leveraging TargetCo’s secret sauce gets at the concept of when, where and on what decision points an acquirer should apply reverse integration to an acquired company. Simply stated, reverse integration is where the TargetCo has a superior or unique product, technology, process, solution, proprietary know-how, etc., that the Buyer wisely chooses to adopt, sustain, or import that attribute into the Buyer’s legacy operations or processes. There is rarely, if ever, a single reverse integration decision that applies universally to every TargetCo system, process, or capability. Just as there is no such thing as a “merger of equals,” practically speaking, there is also no such thing as a completely independent, “stand-alone subsidiary.” Even with financial buyers (e.g., think of a private equity firm or investment fund acquiring portfolio companies as a diversification strategy), there will most likely be some degree of alignment with and decision authorities shifting to the ParentCo entity, even if only budget and performance accountability for the senior leadership team. More often, the deal thesis and financial model will ultimately drive an increasing level of integration over time, if not immediately, thereby increasing the risk of spoiling distinctive TargetCo secret sauce.
Without a doubt, The Concept of Integration is the single best tool we have ever used to enable acquiring executives to “get integration right. The Concept of Integration is an important part of a comprehensive Integration Strategy Framework, both of which are described in a related post, “Do This Before Launching Your Next Integration.” Summarized quickly, that approach enables executives to establish an overall blueprint or outline of integration decisions as key strategic guidance for launching integration in a way that stays true to the deal’s most important strategic, operational and financial outcome objectives.
There are three essential principles to help executives vigilantly preserve and leverage a TargetCo’s secret sauce. These principles are distilled from a study in the technology and software industry led by M&A Partners and the M&A Leadership Council a few years ago, summarized here, “Six Essential Strategies for Integrating “New and Different” Deal-Type Acquisitions.” Since that time, the 10 fundamental principles highlighted in that study have been adapted and applied successfully in industries as diverse as financial services, industrial manufacturing, healthcare, and professional services. Regarding secret sauce, these three principles are paramount.
- Clearly understand and focus all integration decisions/actions on preserving and leveraging the target’s value drivers. In the case of a TargetCo’s truly distinctive secret sauce, the CEO and key executives on both the Buyer and Seller sides have a shared responsibility to consistently advocate for and about the secret sauce. Their direct leadership is essential to preserve and leverage the secret sauce and test all critical integration decisions against potential positive or negative impacts.
- Don’t “break up the band.” In other words, retain the TargetCo’s distinctive secret sauce elements as independent and intact for a longer period than traditional acquisitions that are more customary or similar to the acquirer’s core. Also, there should be a defined period of benchmarking, study, analysis and learning to enable the Buyer to fully comprehend the secret sauce and determine how best to scale and enhance it. During this period, the information exchange, coordination, collaboration, and linkages to and with the Buyer should become a key initiative, with dedicated events, actions, accountability and even rewards and recognition for successful adaptations and accelerated uses of the TargetCo’s secret sauce.
- Let the pace of integration vary in proportion to the overall deal and integration strategy. This most likely does not mean “forever.” So, care should be taken to carefully define the “interim state” and a time frame for when the “to-be” state will be determined and ultimately expected to be completed. The more you can set this expectation from the outset, the more effective the process and change management you can architect. Without a carefully crafted Integration Strategy Framework and related end-state plan for how the TargetCo’s distinctive capabilities, will be scaled, appropriately applied to the Buyer’s operating model, and a milestone plan for completion, the Buyer runs the risk of destroying value, losing crucial momentum, or miscommunicating an essential strategic intent of the deal.
Additional Best Practices to Consider
Skillful executives will “pull out the stops” to fully exploit their TargetCo’s secret sauce as an essential forcing function to accelerate positive change and achieve demonstrable business results. Here is a few additional tried and true tactics to help in your quest to beat the M&A odds.
- Invest quickly to leverage, scale, and accelerate your TargetCo’s compelling advantages. Here is your chance to prove your conviction. When you “put your money where your mouth is” the message is unequivocal – this is important, this is the way to improve or optimize our legacy approach to this attribute.”
- Relentlessly hunt for and adopt best practices – wherever they are found. A recent client bought a fierce competitor in a COVID-19 induced distressed sale. Wisely, at the Joint Integration Virtual Team Kickoff, the BuyCo CEO charged the Joint Integration Team to find and import TargetCo best practices. The CEO stated, “We are no longer competitors. We are on the same team.” The CEO personally reviewed the Integration Strategy Framework’s key elements to ensure no adverse impacts to secret sauce. An incentive was created for the business unit or function which identified and adopted the most TargetCo best practices.
- Walk the Talk on Talent and Selection. As executives, we are all fond of saying, “the best player plays” and similar comments about the importance of talent. The best acquirers take a robust and disciplined approach to search out key TargetCo talent and get them into meaningful roles where they can extend and expand on the TargetCo strengths.
- Learn like your life depends on it. Create a variety of initiatives to ensure formal and informal exchange of ideas, insights and learning among and between both BuyCo and TargetCo teams. Even virtual buddy programs and chat sessions are better than none. Post-COVID, when travel is safe once again, exploit the desire and legitimate need to get the right groups of people together for learning and best practice exchanges. For example, one client has already started a program for implementation Post-COVID that provides unique training, professional development and challenge assignments or job rotations to key members of a recently acquired TargetCo staff as solid assurance that the TargetCo skill set, process and capability is unique, important, and highly valued for the future.
About the Authors:
Mark Herndon is Chairman of the M&A Leadership Council. He is co-author of The Complete Guide to M&A Integration: Process Tools to Support M&A Integration at Every Level, now in its third edition (Jossey-Bass, 2014); and a frequent presenter at the M&A Leadership Council executive training programs.
John Bender is President of M&A Partners and has led or supported nearly 50 acquisitions, mergers and divestitures spanning every aspect of the M&A lifecycle with industries including: software and technology, bio-tech/clean-tech, energy, transportation and environmental services, among others. He is widely recognized for his key role as Executive Director of Merger Integration in Hewlett-Packard’s $19.5B acquisition of Compaq Computer.