Which integration model is right for an acquisition?

Several thesis of acquisition can be adopted when integrating a company or a business unit. For a long time, the one option all buyers went after was full integration. That made sense, the logic being that it would help achieve most synergies and therefore most impact the bottom line. But as we acquire more and more experience on the matter, it seems that going for more options should be considered and full integration is not the only way to go. Considering a more flexible approach can also be a good strategy to best align with the deal thesis. A few safeguards are to be studied before rushing into one option vs the other.

Standalone: when the business is profitable and the model distinct

Standalone allows the Target to keep a high level of autonomy within the Buyer’s organization. You can easily measure the payback of the acquisition since the company keeps track of its own revenue, EBITDA and cash flows. It’s an attractive model for founders who want to continue to run their business as usual with as little disruption as possible post M&A. On your side, the model can be convenient if you are buying far from your core model and need time to understand how the business operates. This could be the case if you are a service company buying a tech startup, a B2B business moving to B2C or Enterprise sales vs small business. The two models need to operate separately to avoid breaking the startup growth dynamic. Obviously, in such an archetype, the Target is expected to create value on its own, without counting on topline and cost synergies. This is not a recommended model if the target is burning cash and is far from profitability.



Still, you need to be careful because Standalone is often a by default archetype chosen by non-experienced buyers. On paper, there is less risk in letting the Target continue to run its business autonomously rather than start a painful integration process with uncertain outcomes. It’s only on paper because this integration model comes with its own challenges and questions:

• Can the acquired company truly operate independently? How to protect the Target from all the internal processes and slowness? Why not invest rather than acquire if the Buyer is not looking to have any impact on growth or the bottom line?
• What if things do not go according to plan? It can be tricky if the Buyer has no control of the Target if / when key people leave. Lack of transition management leads to back-to-back incentive plans that can become very costly.

• Even when trying to change as little as possible with the acquired company, some fundamental elements such as governance and processes need to be aligned.

• Is it just a default option for reassuring the founders to close the deal? Or to be able to get a clean P&L to measure success and calculate the earn-out?
• How can you not become too dependent on the founders and key employees if your team is not in charge? It is not unusual for the Buyer to be forced to put in place successive expensive incentive plans to keep operations running and retain top employees. Watch for uncontrolled costs of the M&A and lack of value creation.

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Hybrid: when innovation has to keep boiling

It is quite rare to keep a company on a Standalone model in the long run. All acquired companies end up having some level of integration. Admin functions such as HR, finance and IT need to be merged as fast as possible. Sales and marketing integration can make sense as well, especially if the acquisition thesis is to drive revenue synergies. The Hybrid model makes sense if you need to have a good level of control over the acquired business and minimize the dependence over the management team. The business can't be put at risk because the knowledge is concentrated in the hands of key employees who act as a standalone entity. It is quite common to keep R&D fully standalone or with mild integrations to avoid freezing innovation.

Large buyers are experts at loose integration. Cisco takes pride in retaining over 80% of the acquired staff after 2 years and 87% of the executive. We witnessed the same trend with emerging countries conglomerates that counts successful stories when acquiring with a Partnership approach. Tata Group, an Indian multinational conglomerate has used this strategy for many of its acquisitions. Like when they took over Daewoo Commercial Vehicle, a Korean car manufacturer. In the words of Tata when he addressed Daewoo’s employees: “Tata Motors will operate a Korean company in Korea, managed by Koreans, but will work as a part of a global alliance with Indians." 

Full Integration: when the Buyer has dedicated resources and playbooks

Now for the full integration path: It’s a much more aggressive plan that requires strong resources and planning on the Buyer’s side. It’s the preferred path of most tech giants who have strong corp dev and integration teams at hand (Salesforce, SAP, Microsoft and others). They have the resources, knowledge and playbooks in place to manage such structural changes. Their goal is to reach a full merge of all the Target’s business functions in 12 to 24 months.

In this approach, synergies have to be implemented very quickly. Top management will soon be replaced by the Buyer’s resources who will look to secure the most talented mid-managers and rely on them for the continuity. The organisational structure is blended within the acquirer’s because this is how they are the most efficient. 

Timing is of the essence, and, at the end of the day, the Target will need to be integrated. The question is more about the speed of the integration, which can range from 6 months to several years, rather than the level of integration. The shorter the better. When looking at successful integrations, one factor is crucial: the length of the transition period on the acquisition has been announced. The longer you take to integrate, the higher the risks to join the 70%+ failed acquisitions. 

A simple way to pick the right model is to map out both businesses’ differences on all the major topics: Culture, Sales model, Strength of the brand, IT and systems.

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