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Sept. 5, 2013

TWENTY QUESTIONS FOR EVERY M&A:

IMPROVING POSTMERGER INTEGRATION PERFORMANCE

It is clear from the numbers that mergers and acquisitions (M&A) are difficult. By one
estimate, about one-half fail to create shareholder value and around one-quarter actually destroy
it.1 Yet despite this dismal track record, a 2011 McKinsey survey of senior executives noted that
a majority of respondents still believe M&A remains necessary for growth. Much of the
difficulty around acquisitions surely arises from the fact that every M&A is different, and most
require a tailored, rigorous integration process to be successful. To price a deal right and
successfully integrate the acquired business requires understanding what factors will make a
given acquisition difficult and what resources the acquirer will need to tackle them. As the
results show, many companies fail to do this successfully.

Unfortunately, many of the firms that are considering M&A appear unprepared or
inexperienced. In fact, a majority of the survey respondents noted that they do less than one
acquisition a year, while just about one-half do not believe they have the required people or
organizational resources to meet their M&A aspirations and only about one-third have dedicated
integration teams.2 Thus it is not surprising that, since these integrations can require complex
resource allocation decisions around how many employees, which specific employees, and what
resources should be dedicated to the integration process, many fail to create value.

But while the customization necessary for each M&A makes it difficult, if not
impossible, to provide a step-by-step script for a successful integration, “across most industries,
companies with the right capabilities can succeed with a pattern of smaller deals.”3 That is, there

1
Jeanie Duck, Jean-Michel Caye, Dan Jansen, Joe Manget, and Peter Strüven, “Powering Up For PMI: Making
the Right Strategic Choices,” bcg.perspectives, June 6, 2007, http://www.bcg.co.jp/documents/file15021.pdf
(accessed June 3, 2013).
2
Jean-Francois Martin, “Organizing for M&A,” McKinsey Global Survey Results, December 2011,
http://www.mckinsey.com/insights/corporate_finance/organizing_for_m_and_a_mckinsey_global_survey_results
(accessed August 21, 2013).
3
Werner Rehm, Robert Uhlaner, and Andy West, “Taking a Longer-Term Look at M&A Value Creation,”
McKinsey Quarterly (2012): 2.

This technical note was prepared by Allen Harvey (MBA ’12) and Professor L. J. Bourgeois III. Copyright  2013
by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies,
send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a
retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of the Darden School Foundation.

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are capabilities that companies can develop to succeed more regularly at M&A. To help
companies develop those necessary capabilities, we have created a guide that enables managers
to prepare for integration challenges and allocate integration resources more efficiently. The
guide is based on 20 years of personal experience with more than 30 acquisitions, as well the
collective experiences of and surveys by major consulting firms, such as Bain & Company, the
Boston Consulting Group (BCG), and McKinsey & Company.

The M&A Triangle and Twenty Questions

At first, discovering the critical factors for any acquisition can appear to be a daunting
task. An excerpt from one of Northrup Grumman’s checklists for integrating a payroll system
contains more than 50 items.4 Furthermore, missing an important detail, such as an
incompatibility in the back office infrastructure of two firms, could result in integration delays
that push out crucial merger benefits, such as product cross-selling by the new sales team.
Fortunately, the size and complexity of the task is simplified with Bourgeois’s M&A triangle
(Figure 1), a framework one of the authors developed for planning or analyzing any merger
integration.

Figure 1. The M&A triangle.

The M&A triangle breaks acquisitions down into the four elements that must be covered
in every integration: strategy, architecture, plumbing and wiring, and culture. While each
element can be initially considered in isolation, understanding the interplay among the elements
is necessary to build a complete picture of the merger. For example, a flat organizational
structure, covered in architecture, may reflect the underlying culture of collaboration, covered in
the culture element, while both may be critical to the firms’ capability to produce technically
advanced products, covered in strategy. In general, strategy provides the overall strategic intent
of the merger, culture reveals the underlying behavioral considerations critical to each firm, the

4
L .J. Bourgeois, “Post-Merger Integration at Northrop Grumman Information Technology,” UVA-BP-0472
(Charlottesville, VA: Darden Business Publishing, 2003).

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architecture element covers the new and old organizational structures and personnel allocations,
and plumbing and wiring examines the systems that enable smooth operations and strategy
execution.

Within each element, we provide five key questions as a starting point and sequence by
which to examine the merger (Exhibit 1). Each question is structured so that a yes answer means
that managers should be less concerned with the topics covered by it. On the other hand, a no
means a team of managers should spend more time on those topics and drill down for more
information so that, if necessary, they can prioritize and allocate resources appropriately to tackle
any merger-related issues before they threaten the value of the deal. It may be difficult to answer
these questions with an absolute yes or no, but even qualified answers, when viewed as a whole,
reveal which elements of an acquisition require more attention from senior leaders.

Strategy: Creating New Value

Regardless of the ultimate goal of an acquisition, sound strategic thinking has a profound
impact on its success. While it is difficult to measure the returns of specific acquisition
strategies, experience has taught practitioners that “the most successful deals have specific well-
articulated value creation ideas going in. For less successful deals, the strategic rationales…tend
to be vague.”5 Thus managers should first examine a proposed merger from the perspective of
the deal’s strategic intent.

1. Are senior leaders in agreement on the strategic goals of the acquisition?

Despite the importance of understanding the strategic goals of an acquisition, executives

may disagree on where the value lies and the right way to extract it. This disagreement can cause
issues when it comes time to allocate integration resources. Without proper senior-leader
support, integration goals can be understaffed, underresourced, or both. These tensions can
disrupt employees trying to execute the integration plan, if an integration plan can be agreed
upon, delay key staffing decisions around the new organizational structure, and hamper
necessary integrations if parts of the business fall under executives who have separate goals.

Problems can begin even before the deal, because it may be hard to form a robust
negotiating strategy or even the ultimate price to pay, if the executive team is not in agreement
on the strategic goals. In addition, different goals can require different integration speeds. For
example, practitioners from BCG note that if the strategic goal of the merger is to consolidate
businesses, then “as a rule of thumb, if the lion’s share of the cost synergies is not delivered in 12
to 24 months…the merger is unlikely to be successful. To meet this deadline, acquirers need to

5
Marc Goedhart, Tim Koller, and David Wessels, “The Five Types of Successful Acquisitions,” McKinsey on
Finance, 36 (2010): 1.

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approach the merger in the spirit of a takeover.”6 On the other hand, “growth mergers require a
more gradual, arm’s-length approach, with the target treated much more as an equal. The top
priority is ‘do no harm.’” Strategic objectives may also need to be set differently if the
acquisition is cross-border because “there is a higher likelihood that different parts of the
organization will be integrated at different speeds than in a domestic merger.”7 Ultimately, if
senior leaders are not in agreement, the resulting tension can destroy value.

2. Have we identified and prioritized the sources of value?

It is important to identify the sources of value not only because the deal team must know
how to estimate the acquisition price, and the integration team must know how to integrate the
firms to achieve the desired benefits, but also because the specific type of benefit that is to be
derived from the interplay of the new and existing assets can make a deal more or less likely to
succeed. That is, in addition to senior leaders having a clear vision of where the value will come
from, the type of value that the acquisition is supposed to create can have a large impact on how
difficult it may be to create that value.

The literature from consultants and other practitioners (see references) tends to break
acquisitions into two categories, usually determined by how the companies will combine their
resources to create new value. For example, dual categorizations include scale versus scope,8
consolidation versus growth,9 and leverage my business model (LBM) versus reinvent my
business model (RBM).10 In most cases, the categories differentiate between resources
acquisitions and capabilities acquisitions. Furthermore, most consultants note that buying a
business for its resources, such as facilities, customers, products, or technology, tends to be
easier than buying a company for its capabilities, such as R&D know-how or the ability to
acquire supplies cheaply.

In a resource acquisition, the general strategy is to acquire assets and then leverage the
company’s current business capabilities to operate those assets more effectively (and ultimately
either increase prices or reduce costs). Unfortunately, while this strategy is seductively simple, it
may fail to produce the required value because the “obvious” integration benefits, such as
consolidating corporate human resources and finance functions, often fail to deliver enough

6
Duck et al., 2.
7
Peter Strüven, Christopher Barrett, Niamh Dawson, Daniel Friedman, and Peter Goldsbrough, “Cross-Border
PMI: Understanding and Overcoming the Challenges,” bcg.perspectives, May 20, 2010,
http://www.bcg.co.jp/documents/file48163.pdf (accessed August 21, 2013).
8
Ted Rouse and Tory Frame, “The 10 Steps to Successful M&A Integration,” Insights, November 4, 2009,
http://www.bain.com/publications/articles/the-10-steps-to-successful-m-a-integration-newsletter.aspx (accessed
August 21, 2013).
9
Duck et al., 2.
10
Clayton M. Christensen, Richard Alton, Curtis Rising, and Andrew Waldec, “The Big Idea: The New M&A
Playbook,” Harvard Business Review, September 16, 2011.

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value. Fortunately, there are specific circumstances that make a resource acquisition more likely
to succeed:11

 Commanding premium prices by combining components, technologies, or products to

create greater customer value than each does individually
 Delivering lower costs and improved operating margins through increasing use of high
fixed-costs assets
 Increasing sales by cross-selling products that customers need to purchase at the same
time
 Accelerating market access for products
 Reducing excess capacity and price competition when the numbers of competitors can be
reduced to three or four and new entrants can be kept out

Thus if the intent of the merger is a resource acquisition and is not similar to one of these
listed, senior leaders should take a hard look at the projected merger benefits and make sure they
can actually deliver the proposed value. Roll-up deals, for example, are often seductive, but
“they are hard to disguise, so they invite copycats,”12 and as others imitate similar acquisitions,
target prices can be bid up to levels that make them uneconomic.

When acquiring capabilities, those more likely to succeed include those that enable firms
to:

 get the capability to produce disruptive products that are cheaper and simpler than current
products and then moving them upmarket
 decommoditize by moving to where the money will be in the value chain by, for
example, acquiring a firm early in the life cycle of a new product or industry.

Capabilities acquisitions tend to be more difficult than resource acquisitions because they
can require a fundamental change to the business’s operating model and likely its culture. In
addition, the new capabilities purchased are often made up of more than just the sum of their
parts. Anyone can purchase smart scientists and state-of-the-art labs, but without the right culture
that makes these assets produce, no new capability is delivered. Unfortunately, acquisitions
entail disruption, so preserving this culture and thus the new capability can be difficult.

Of course, in reality, “most acquisitions are a complex hybrid of the two.”13 For example,
one part of the acquirer’s business may be looking to transform its business model with new

11
Christensen et al.; Goedhart et al., 4.
12
Goedhart et al., 5.
13
Duck et al., 3.

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capabilities, while another is looking to push new products into markets where the acquirer has a
stronger sales force. In this case, having all senior leaders in agreement on the acquisition’s
strategic intent and having identified the sources of value are critically important, because while
the latter area should move quickly to get existing products into the hands of the new sales force,
the integration of the new capabilities should be done carefully to make sure the culture that
enables this new capability is not lost.

For any type of proposed merger benefits, external factors may also negatively affect
their values. For instance, regulatory approval, especially in the case of cross-border acquisitions,
may take longer than expected.14 Also, if the firm operates in a high-growth industry, it may
become too internally focused during a complex M&A and lose sight of a critical upgrade cycle,
ultimately making the acquisition value dilutive.15 Managers have also historically struggled with
turnarounds because of the added complexity this situation adds to an already difficult
undertaking.16 (Of course, even in the best-case scenario, the acquisition will not create value if
the acquirer overpays.)

3. Do we know who is going to lead the integration efforts and who is responsible for the
results?

Consistent throughout the advice consulting firms lay out is a recommendation to move
quickly, set and stick to ambitious integration targets, and assign a rising star or strong senior
leader to focus almost all of their efforts on the integration.

One tool that can help firms move quickly is a predeal clean team. As practitioners from
BCG note, “a clean team is [postmerger integration’s] secret weapon for unlocking synergies as
rapidly as possible.”17 These teams operate in a separate location, a clean room, which is legally
isolated from both the acquirer and the target. Because of this isolation, the team has access to
sensitive competitive information from both firms. With this information, the team can work
through many complicated integration issues before the deal closes and have a plan in place to
hit the ground running once it does close. While not every deal should have a clean team, and
there are risks,18 this activity saves precious time that would be lost analyzing data and forming
these initial plans.

By assigning specific ambitious goals to an integration timeline, the integration can

maintain the momentum that started with the predeal clean team. Knowing what decisions need
to be made and when can help ensure that these decisions are made by the right people with the
best knowledge available at the time. In addition, whether the goals of the merger are embedded
14
Struven et al., 2.
15
Rehm et al., 3.
16
Philippe C. Haspeslagh and David B. Jemison, Managing Acquisitions (New York, NY: Free Press, 1991):
150.
17
Duck et al., 4.
18
Duck et al., 5.

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in the operating success measures for each business unit or assigned to the integration team, it is
also important that each anticipated benefit have an owner responsible for the progress toward
integration goals.19

With the key decision points in hand, a communication plan can begin to be crafted. Such
a plan is essential, because even though the strategic rationale may have been effectively
communicated, employees of both firms may still not be on board because “an integration is
quintessentially about change, and change is an intensely personal and emotional experience. Not
surprisingly, three of the most common feelings at the start of any PMI are anxiety, uncertainty,
and vulnerability.”20

Even if the clean team is effective and an ambitious roadmap with detailed ownership is
laid out, a strong leader in charge of a dedicated integration team backed by senior executive
sponsorship is highly recommended because “most companies underestimate the complexity of
[postmerger integration].”21 This mistake leads companies to delegate responsibility too far down
the organization and burden managers trying to run the existing business with integration, a task
that few have likely done before. Instead, form an integration team and put a strong leader in
charge. Ideally, “the individual chosen should be strong on strategy and content, as well as
process—in other words, one for your rising stars.”22 In addition, this person should expect to
spend almost all of their time on the integration to make sure that key decisions are made
quickly, the integration timeline is on track, and critical merger benefits are being created.

4. Do we have the resources to maintain the momentum of the base business during the
integration?

Since merger benefits are derived from the combination of the resources and capabilities
of the two companies, it is critical that the base business not lose momentum. To enable this, part
of the integration plan must include communicating with the acquirer’s own employees about the
purpose of the acquisition. As soon as the deal is announced, employees of both firms will ask:
“What’s in it for me?” and even if most of the acquirer’s employees are left unaffected, they
cannot know for sure unless this information is communicated. Without timely communications,
rumors and misinformation can quickly spread.23

The same uncertainty and fear that can strike employees can also affect a firm’s
customers. And “despite their low expectations of merged companies, the harsh reality is that
customers demand consistent and seamless services across both merged companies from the

19
Duck et al., 6.
20
Duck et al., 8.
21
Duck et al., 5.
22
Rouse et al., 4.
23
Duck et al., 8–9.

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start.”24 At a minimum, make sure to embed customer-specific metrics in the merger integration
plans. But even better is to allocate both people and resources to evaluate integration decisions
through the eyes of the customer and make sure the firm is delivering the same or even improved
value to them. In fact, it may be possible to use the firm’s customers to help during the
integration by conducting interviews and listening to customer feedback to improve new
products and services. Indeed, during one integration “customers consistently and spontaneously
reported that they valued having their opinions taken into account.”25

A dedicated integration team also helps because it clearly defines who should focus on
what tasks. Because “if management allows itself and the organization to get distracted, the base
business of both companies will suffer. If everybody’s trying to manage both the ongoing
business and the integration, nobody will do either job well.”26 To make sure it is possible to
maintain the momentum of the base business, the acquirer must ensure it has enough of the right
resources and leadership talent to dedicate to both activities.

5. Do we know the key risks and who is responsible for making decisions quickly to mitigate
them?

Acquisitions have a lot of moving parts. Because of this complexity, there are many
opportunities to miss key details or for even the best efforts to go awry. Plus, while the firm is
focused inwardly on integrating the two businesses, it could miss a product-upgrade cycle,
overlook signs that a competitor is shifting strategy, miss early warning signs of customer
defections, lose key employees, or drop the ball on important regulatory approvals.

One tool for dealing with unforeseen risks is to involve temporary teams that focus only
on addressing critical short-term problems. The purpose of these special teams “is not to get to
the perfect answer but to develop options quickly and then move on.”27 Once the problem has
been solved, the team is then dissolved. Whatever the key risks are for the integration and the
base business, know them and know who is responsible for taking charge should one emerge.

24
Laura Miles and Ted Rouse, “Keeping Customers First in Merger Integration,” Insights, November 3, 2011,
http://www.bain.com/publications/articles/keeping-customers-first-in-merger-integration.aspx (accessed August 21,
2013).
25
Peter Strüven, Lionel Aré, Christopher Barrett, Marcus Bokkering, Jacques Chapuis, Niamh Dawson, Daniel
Friedman, Peter Goldsbrough, Barry Jones, Matt Krentz, Mark Lubkeman, Hubertus Meinecke, and Stefan Rasch,
“Real-World PMI: Learning from Company Experiences,” bcg.perspectives, June 9, 2009,
https://www.bcgperspectives.com/content/articles/postmerger_integration_real_world_pmi_learning_from_compan
y_experiences/ (accessed August 22, 2013).
26
Rouse et al., 6.
27
Duck et al., 6.

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Architecture: Building the New Firm

To achieve the merger benefits identified during the strategy discussions requires putting
the organization together so that the parts of the business that need to work together can, while
those that should remain separate do so as well. With a clear understanding of where the merger
benefits come from, getting the organizational design right follows. Of course, laying out the
best structure to maximize benefits is only half the battle. Choosing the right people to fill these
positions must be done quickly, and excellence should take precedence over fairness.

1. Do we know which divisions must be tightly integrated and which must remain
autonomous?

To realize the merger benefits, it is necessary to determine the degree of integration

between the two firms. In regard to the degree of integration, mergers do not have to be all-or-
nothing; some pieces of the business may need to be more tightly integrated than other pieces.
One method to determine the right level of integration is to identify how much the expected
merger benefits rely upon collaboration between the two organizations (low versus high) versus
how much autonomy is required (low versus high).

This information yields a two-by-two matrix of possible levels of integration (Figure 2):
Hold, where the acquired firm is a separate business unit; preserve, where autonomy is necessary
but where there are also other necessary benefits, such as from culture transfer, that must be
realized to justify the premium paid; absorb, where the resources of the target are fully integrated
into the acquirer; and meld, where it is necessary to create a whole new firm to realize the
strategic benefits. While these structures are ideal types, they “represent useful metaphors to
guide the integration task…the degree of [autonomy or collaboration] depends on the choices
managers make about how they perceive those respective needs.”28

28
Haspeslagh et al., 145.

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Figure 2: Degree of Integration

High
Need for Autonomy Hold Preserve

Low Meld Absorb

Low High
Need for Collaboration
Source: Adapted by authors from Haspeslagh et al.

In general, as the target requires more autonomy, the integration becomes more difficult.
This difficulty arises because, as mentioned earlier, mergers create much uncertainty for the
target firm (and some for the acquirer) and can disrupt business as usual. Autonomy is usually
seen as necessary to preserve capabilities that are brought about by the unique combination of
culture and resources of a given firm. These capabilities can be quickly lost if any element, such
as key personnel or the firm’s culture, is disrupted because the merger is mismanaged. In sharp
contrast, resources such as plants and equipment can be tightly integrated with significantly less
fear of value destruction.

In a hold integration, the integration efforts may include some management changes, but
they are usually minimal, and the target company remains fully autonomous. As such these are
the least difficult. Absorption “implies a full consolidation, over time, of the operations,
organization and culture of both organizations.”29 While it may take a long time for two
companies to fully merge, the key issue “becomes a question of timing rather than how much
integration should take place.”30 A significant difficulty in these types of integration lies in
having the courage to move quickly enough or go far enough in integration efforts, even in the
face of difficult cultural issues.

Somewhat similar in difficulty are preservation integrations, where the primary focus is
to keep the target’s capabilities intact. Here the source of difficulty lies in understanding how to
create sufficient benefits to offset the acquisition premium, since the new assets may need to be
managed at arm’s length. Successful acquirers created value in these cases by “positive changes
in the ambition, risk-taking and professionalism of the acquired company’s management

29
Haspeslagh et al., 147.
30
Haspeslagh et al., 147.

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capabilities.”31 Finally, the most difficult integrations are meld integrations where there exists a
strong need for both collaboration and autonomy. Thus both firms need to take on qualities of
each other over time while still preserving many of their original capabilities. To do so can be
very challenging.32

Of course, even if one approach clearly suits the needs of the integration, it may not be
practical to implement because of lack of experience, talent, or resources. Furthermore, if the
integration calls for merging two business units that were previously autonomous or have
different cultures, it becomes more difficult to get the integration right.

2. Can we identify and move quickly to choose individuals for top positions?

Even after the strategic intent of the deal has been agreed on, an integration plan put in
place, and the new firm structure determined, senior leaders must quickly determine who the
managers will be in the new company. In a small acquisition, this can be a straightforward task,
but in larger mergers of similar-sized firms, there may be many positions to fill. While the
preferred approach is to pick the best of both companies,33 internal politics can make this process
harder.

To alleviate some of the difficulty, PMI teams should set themselves “an ambitious
deadline for filling the top levels and stick to it—tough people decisions only get harder with
time. Moreover, until you announce the appointments, your best customers and your best
employees will be actively poached by your competitors.”34 The sooner the senior managers are
identified, the faster those below them can be put in place. During this process, they should also
keep in mind that “deciding who the managers of the newly formed company will be delivers
one of the first and most important messages…[and] can send powerful signals about the future
roles and responsibilities of individuals down the chain.”35

3. Can we identify and retain key talent?

Before any key appointments are made, PMI managers should identify top talent and
devise a plan to keep them on board because, as soon as the merger is announced, headhunters
will likely start calling on these individuals. PMI managers should also act quickly because
“delay only leads to endless corridor debate about who is going to stay or go and…[to] time
spent answering headhunter calls,”36 time that could have been focused on getting the maximum
value out of the deal.

31
Haspeslagh et al., 148–49.
32
Haspeslagh et al., 149.
33
Duck et al., 10; Bourgeois.
34
Rouse et al., 3.
35
Duck et al., 10.
36
Rouse et al., 3.

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In fact, a well-run integration process may be one of the biggest assets to retaining top
talent. In the 2001 acquisition of Immunex by Amgen, it was top priority for Amgen not to lose
talent in one of the company’s core value drivers: its R&D organization. By listening to
Immunex’s input before the deal closed, acting swiftly but sensibly on merger decisions,
communicating in advance with the target, and keeping the valuable R&D division largely intact,
the company lost few top R&D employees.37

Another method for retaining top talent is to immediately construct an employee value
proposition (EVP) that lays out the reasons why an employee would want to work for the new
company. This proposition should communicate a sense of purpose for employees, an
understanding of the opportunity for personal growth, and a compelling compensation package.
Finally, the “release of the new EVP to employees needs to be carefully timed to coincide with
the period when they are most vulnerable (usually from the time of the announcement to a few
months after close).”38

4. Can we place excellence over fairness and internal politics?

Whether determining the new organizational structure, appointing senior leaders, or

retaining key talent, excellence must take precedence over fairness and the pressures of internal
politics.39 While it may be seen as more fair to pick an equal number of leaders from both
merged organizations or to spread resources evenly across departments, doing so at the expense
of excellence will cost the firm value. As noted above, management-placement decisions send
signals to those working below. When decisions get tough, such as picking what to keep when
two firms both have a strong sales and marketing presence in several complex, overlapping sales
areas, an expectation that the firm will keep the best sales teams will reinforce a culture of
excellence and help the firm achieve the planned merger benefits.

Thus the goal must be to fairly choose the best people to fill the new positions, and it can
take a strong leader to overcome internal politics while taking into account the firm’s culture to
create such a process. “At a minimum, the top executive team should systematically interview all
potential candidates for senior management positions.”40 Furthermore, keep in mind that to select
the best people from both organizations will likely require input from people from both the
acquirer and the target. Be sure to sequence the appointments appropriately so that the right
people can be involved at the right time.

37
Struven et al., 7.
38
“Journey: People Issues,” McKinsey & Company, Postmerger Management Series (2001, 26.
39
“Journey: Merger Principles,” 9.
40
Duck et al., 10.

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5. Do either of the firms have the talent to run a business organized with the new structure?

Once the structure has been set, the employees must know how to operate the business
effectively to extract the benefits. For instance, while a matrix structure may make sense for the
new business, these structures usually require additional project-leadership talent that is capable
of working very well cross-functionally. Without this talent, the business may lose critical time
figuring out how to navigate the new structure instead of operating.

In addition, PMI managers should make sure the positions of individuals within the
structure and their titles reflect the same amount of technical knowledge and decision-making
capability across the organization. For example, problems arose in one integration when “the
[parent] sent over lower-level people to work with me on different product ideas. Because they
were larger and organized differently, the people they sent had the technical knowledge but
weren’t at a high enough level to either have the big picture or be able to commit the parent firm.
Not much got done until they sent somebody at ‘my level.’”41

Plumbing and Wiring: Making the Merger Benefits Possible

Plumbing and wiring covers the technology and operations that makes many merger
benefits possible. With strong operations and a well-integrated IT department, the new firm’s top
talent can provide the right customer service and get their jobs done effectively. In fact, some
practitioners have found that “50% to 60% of the initiatives intended to capture synergies are
strongly related to IT.”42 Unfortunately, their experience also shows that “IT issues are not fully
addressed during due diligence or the early stages of postmerger planning.”43 Fortunately, the
case for building excellence in operations and IT integration is compelling because successful IT
integrations usually deliver 10% to 15% cost savings.44

1. Is our systems architecture well suited to integration and our back office in order?

Before attempting to integrate the disparate systems of a new firm into the company’s
current architecture, leading companies get their own IT operations in order. Whether it’s
consolidating fragmented systems, developing models that consider not only their current
information but how data from other companies might fit into the structure, or implementing
advanced modular architectures, such as service-oriented architecture (SOA), these companies
have “exercised the internal muscles they must have to lead a successful integration.”45 In
addition, if the back office is in order, the acquiring company can more easily add in new
41
Haspeslagh et al., 131.
42
Hugo Sarrazin, and Andy West, “Understanding the Strategic Value of IT in M&A,” McKinsey Quarterly
(2011): 1.
43
Sarrazin et al., 1.
44
Sarrazin et al., 2.
45
Sarrazin et al., 2.

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employees to ensure that simple-but-crucial functionality such as basic connectivity and security
are in place from day one.46

2. Have both firms invested each firm’s industry average in IT?

The best of both worlds would be to have both firms’ back offices built around up-to-date
architectures that are compatible with one another. On the other hand, if either firm has neglected
its IT system, the resulting merged business may have to rely on outdated systems and
architecture, making it much more difficult, if not impossible, to achieve the desired benefits.
Looking at the firm’s back-office investment can be an early warning sign that back-office
integration could take longer or be more expensive than estimated.

3. Can senior IT leaders sit at the table and provide technical expertise as necessary?

With their own houses in order, IT leaders can then sit at the table during due diligence
and integration instead of continually fighting fires in their own operations. Having a place for
these leaders means that decisions around which IT systems from the target will be kept, the
proper order for integration, and the timeline can be made more rapidly and with better
information. In addition, having a dedicated technology team as part of the due-diligence process
helps uncover obstacles to proposed merger benefits, including steps that may require extra time,
the personnel and resources necessary, as well as the cost to complete certain merger steps.47

4. Do we know which back office systems enable competitive advantages and are necessary
to realize the merger benefits?

If technical teams are strongly involved in due diligence, they can help identify the
critical systems that enable competitive advantages. For example, while the strategic intent of a
merger may be to rapidly expand current products into new geographies using the target
company’s sales force, this expansion may rely on the regional sales and marketing teams to be
able to see detailed information on new products and customers. Without the new product
information quickly in place in the target company’s systems, these merger benefits may not be
realized soon enough to create value.

Furthermore, by identifying the systems on which each merger benefit relies, the
technical teams can also identify the key technology personnel supporting these systems.
Especially if the systems are different, it is crucial to retain key technical people so that, at a
minimum, this critical functionality can remain up and running. Once the deal is closed, these
experts will become crucial to realizing merger benefits and, “the failure to identify gaps in talent
46
Christophe Duthoit, Joerg Matthiessen, Ivan Bascle, Robert Tevelson, Simon Goodall, Peter Strüven,
“Thinking Laterally in PMI: Optimizing Functional Synergies,” bcg.perspectives, January 2008,
http://www.bcg.com/expertise_impact/Capabilities/Postmerger_Integration/PublicationDetails.aspx?id=tcm:12-
15158 (accessed August 22, 2013).
47
Sarrazin et al., 4.

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can delay integration or force a company to bring in expensive vendor resources. Both have a
negative effect on deal synergies.”48 Yet if one company’s systems are being used largely at the
expense of another’s, be wary of cultural issues or sparking an us-versus-them mentality.49

Finally, integration managers should not neglect to review key vendor relationships and
contracts for each firm and decide which can help enable the desired merger benefits.50 For
example, if the firm is sourcing from many small vendors, it may be possible to save money by
consolidating to a single vendor under a larger contract.

5. Can we identify systems that must be integrated now versus those that can wait?

If the target’s back-office systems can be quickly cataloged and prioritized, the technical
staff can focus their limited resources on those that matter, while simply maintaining and
eventually shutting down those that are less important. In addition, by knowing which systems
must be integrated in advance, technical teams can move fast to carry out the implementation. As
one practitioner notes, “Companies must seize the momentum of a PMI early and start to
integrate the IT systems within the first few months…Otherwise they are likely to find
themselves…with a fragmented and redundant system landscape. The corporate ‘will to change’
is short-lived.”51

Culture: Making the Place Hum

What is culture, exactly? By one definition, it is the “set of norms, values, and
assumptions that govern how people act and interact every day”;52 by another, the “development
of learned patterns of behavior” and “the way we do things around here.”53 Regardless of the
definition, what is certain is that culture touches every firm because it pervades the one thing
they all have in common: people. The words people use, the way people dress, the frequency
with which people hold meetings, the hours people work, the titles people have, and the way
people treat managers, subordinates, and peers, are all dictated by the culture. Furthermore,
culture can have a profound effect on which strategies can be carried out, which architectures
will be most effective, and which technologies can be adopted within a firm. It affects team
performance, morale, the effectiveness of the firm as a whole, and how two firms can be merged.
As one practitioner article puts it, “Cultural differences between the two companies invariably
add to the emotional cauldron, sometimes with explosive effect.”54 Finally, cultural

48
Sarrazin et al., 5.
49
Duthoit et al., 4.
50
Duthoit et al., 3.
51
Duthoit et al., 4.
52
Rouse et al., 4.
53
Conrad M. Arensberg and Arthur H. Niehoff, Introducing Social Change (Chicago: Aldine-Atherton, 1971):
16.
54
Duck et al., 8.

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considerations are not just for cross-border acquisitions, because experience has shown
practitioners that the cultural differences between two companies can be greater than the cultural
differences between nations.55

1. Are the mission and values of the two companies compatible?

After the merger, the new company must align the purpose (the mission) of the
organization and the set of values it will uphold in pursuit of this mission, because these two
heavily influence the underlying culture. Furthermore, while the strategic intent for achieving
this mission may change after the merger, it must be aligned with the mission and values. The
reason alignment is so important is because “vision creates intent. Culture determines action.
Often the two are out of sync. When they are, culture can actually undermine vision and prevent
a company from achieving essential business goals.”56 And while putting together documents
that align and outline the new company’s mission, vision and purpose matters when it comes to
creating the culture that enacts the vision, walking the talk is what actually builds the right
culture.

One method for gaining insight into the values that a company holds is by examining its
compensation structure. For example, while a company may put up posters or executives speak
regularly about a long-term focus, if employees receive quarterly or yearly cash bonuses,
employees will likely have a short-term focus. Understanding how the compensation structure
incents its employees to act matters because “a culture rewards and punishes individuals in
proportion to the significance it places on the value.”57 Of course, while change is expected in
mergers, changing the compensation structure can be a contentious issue among all employees.
But in the long run, if a company does not incentivize its employees to act in unison with its
mission, vision, and values, it will likely have a tough time realizing the required benefits of the
merger.

2. Do we know which elements of each culture we are going to keep?

Next, it is necessary to decide which elements of the target’s and acquirer’s cultures are
going to be retained. While many acquirers choose their own culture, important capabilities of
the target can depend upon the target’s internal culture. For example, top talent and state-of-the-
art laboratories are likely only partly responsible for the stellar R&D track record of a group of
researchers. The group’s culture, which informs how the scientists collaborate, share ideas, and
focus on priorities, also has a significant influence on its success. Understanding that a capability
relies upon a given culture is paramount. Without this realization, an acquirer may fail to
establish the correct organizational design to preserve the culture.

55
Struven, 5.
56
Eric Olsen, “When Culture Undermines Vision,” bcg.perspectives, July 1, 1999,
https://www.bcgperspectives.com/content/articles/when_culture_undermines_vision/ (accessed August 22, 2013).
57
Arensberg et al., 37.

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On the other hand, just because businesses have similar national makeup, lines of
business, and are of similar size, that is no guarantee that their cultures are similar. For example,
consider the two U.S.-based airlines Southwest and American. While both operate similar
aircraft on similar routes in the same regulatory environment with many of the same customers,
Southwest is known for the humorous antics of flight attendants and the generally more light-
hearted atmosphere on flights. This perception is in sharp contrast to the more serious and
professional tone on American flights.

3. When speaking about similar topics, do both companies use the same language?

As the merger proceeds, one must pay close attention to the language the target firm’s
employees use, because “probably nothing more clearly distinguished one culture from
another.”58 Since employees exchange ideas, enforce rules, reward, punish, pass on knowledge,
and learn using a particular language, the continuity and growth of any culture are dependent on
it. Target Corporation’s well-known use of the word “guest” to describe its customers reveals the
underlying culture prevalent within the firm. In addition to specific words, how many terms
people have for a given task or product can reveal the importance of that task. For example, the
Eskimo language has many terms to describe snow rather than one general one in English. This
profligacy of terms makes sense because the specific type of snow falling had a large effect on
and thus was important to the Eskimo people.59 One term portends a blizzard while another
portends the beginning of spring. In the same sense, if the terms employees use to describe the
company’s operation are very specific, the culture could be geared to focus on operational
excellence.

Perhaps even more fundamentally, one must make sure that both companies speak the
same language when communicating with each other. For example, just as IT executives, who
might speak in terms of project costs and timelines, and CEOs, who might speak in terms of unit
costs and market share, may need to get on the same page to effectively communicate.60
Understanding the language used by those in the target company will help uncover their world
view. If the language used reveals a fundamentally different view, it could be an uphill battle to
get everyone on the same page. Furthermore, a miscommunication during the integration
process, when a regular open dialogue is necessary to assuage the fear and uncertainty related to
any merger, could be disastrous to value creation.

4. Are their meetings like our meetings?

For some employees, meetings are the bane of their existence and simply a time-wasting
activity that they want to avoid. For others, they are crucial time for bonding and decision

58
Arensberg et al., 37.
59
Arensberg et al., 39.
60
Chris Curran and Howard Rubin, “IT Costs: Do You Speak Their Language?” Harvard Business Review
(2009).

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making that help keep the company nimble. And for some, they are forums for in-depth
discussions of crucial strategic issues. Either way, meetings give insight into several aspects of a
culture.

Glancing at the topics of the meetings on executives’ calendars gives insight into what
the senior management team at the target firm values. Lots of meetings with employees and
customers versus a schedule filled with investor meetings reveal two different foci. Furthermore,
these topics can reveal if a company actually “walks the talk.” For example, if a company
professes to have a collaborative, open culture where the best idea wins, disagreements and
debates should be apparent in meetings, even those with senior leaders. Also revealing is how the
final decision, whether it happens within or outside of the meeting, is made. Once the new
organization is formed, very different meeting and decision-making styles could hinder
collaboration and cause friction.61

The frequency of meetings can also hint at how much the organization empowers its
employees. Frequent meetings that cover dense technical details may demonstrate a culture
where employees have little decision-making power; while infrequent meetings called by the
employees themselves hint at a culture where employees feel empowered to make decisions and
one where they are comfortable drawing upon the expertise of their co-workers when necessary.
Furthermore, once integrated, those used to working in meetings focused on consensus building
have a hard time being heard in a meeting where a rough-and-tumble style of debate is common.

5. Do we have the time and resources to allocate to understanding both companies’

cultures?

Allocating the resources to undertake these cultural observations can be crucial to a

merger’s success. Indeed, because of culture’s reach and influence “it’s critical for companies to
take a systematic and fact-based approach to understanding corporate culture if they hope to
retain critical people and capabilities after a transaction.”62 Unfortunately, a recent survey shows
that “while nearly three quarters of respondents say the companies they work for understand their
own cultural strengths and weaknesses, far fewer conduct internal organizational due diligence to
confirm that understanding.”63 In addition, “less than half say their companies do so…in the
context of specific deals, and just over a third do so when they’re not doing a deal. Furthermore,
29% say their companies are not willing to make changes or launch targeted interventions to
address cultural gaps.”64

Setting aside the time and resources to understand both companies’ cultures will not only
inform downstream decisions around creating the proper organizational design, but also help the

61
Struven, et al., 5.
62
Martin, 4.
63
Martin, 4.
64
Martin, 4.

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firm make the right choices around how to interact with the new firm. This interaction matters
because “ultimately, the atmosphere necessary for capability transfer results from the stream of
interactions between members of two firms.”65 By understanding the cultural strengths and
weaknesses of both sides, the acquirer can learn what to do and what not to do to create the
atmosphere that leads to a successful integration.

Conclusion

Although simple at first glance, addressing 20 yes-or-no questions can lead to fruitful in-
depth conversations that provide a sound foundation for successful PMI planning and execution.
By answering these questions in open dialogue, PMI managers and senior executives will expose
the potential weaknesses in an upcoming merger and highlight the arenas in which detailed
planning is not only warranted but fundamental.

65
Arensberg et al., 117.

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Exhibit 1
TWENTY QUESTIONS FOR EVERY M&A:
IMPROVING POSTMERGER INTEGRATION PERFORMANCE

Strategy
1. Are senior leaders in agreement on the strategic goals of the acquisition?
2. Have we identified and prioritized the sources of value?
3. Do we know who is going to lead the integration efforts and who is responsible for the results?
4. Do we have the resources to maintain the momentum of the base business during integration?
5. Do we know the key risks and who is responsible for making decisions to quickly mitigate them?

Architecture
1. Do we know which divisions must be tightly integrated and which must remain autonomous?
2. Can we identify and move quickly to choose individuals for top positions?
3. Can we identify and retain key talent?
4. Can we place excellence over “fairness” and internal politics?
5. Do either of the firms have the talent to run a business organized with the new structure?

Plumbing and Wiring

1. Is our systems architecture well suited to integration and our back office in order?
2. Have both firms invested each firm’s industry average in IT?
3. Can senior IT leaders sit at the table and provide technical expertise as necessary?
4. Do we know which back office systems enable competitive advantages and are necessary to
realize the merger benefits?
5. Can we identify systems that must be integration now versus those that can wait?

Culture
1. Are the mission and values of the two companies compatible?
2. Do we know which elements of each culture we are going to keep?
3. When speaking about similar topics, do both companies use the same language?
4. Are their meetings like our meetings?
5. Do we have the time and resources to allocate to understanding both companies’ cultures?

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