How to successfully integrate an acquired company
Last week I asked a few of my subscribers what is top of mind for them at the moment. One of the topics that came up was M&A because its a new muscle for many newer public companies and its on an upward trend due to the 3 biggest problems facing SaaS; an acute shortage of GTM talent, escalating acquisition costs and lower switching costs, all of which are driving market consolidation.
When done well, M&A can be a successful way to enter a new market or gain share in an existing market, especially in B2B, where having a portfolio of products usually leads to faster expansion and higher retention.
However, it’s a sad fact that 80% of acquisitions fail to deliver the intended impact. The bulk of these are down botching the post-merger integration. I’ve seen this first hand from the dozen acquisitions I’ve been part of in my career and the dozens more I’ve seen from the outside.
In this post I cover 3 aspects of M&A integration.
Why acquisitions fail.
Guiding principles for approaching an integration.
Defining the scope of an integration.
Why acquisitions fail
Usually for one of the following reasons:
Tinkering. The parent company thinks it knows the market, customer and business best, and sees its shiny new acquisition as the vehicle for executing all the great ideas that it has not been able to get to internally. Not only is it a distraction, it always seems to be additive ie “can you do this on top of everything else you are already doing”.
Neglect. This happens when the parent company executive who sponsored the acquisition leaves. Their replacement inevitably changes the strategy and sets a new course that sidelines the acquired company. The acquired company then gets written down and sold at a loss, or written off altogether.
Unrealistic expectations. In order to justify the purchase price in a competitive bidding situation, the corp dev team jacks up the assumptions in the deal model to show higher growth goals. Many of these assumptions are couched as “synergies” but are in fact a roadmap for tinkering.
Misaligned incentives. A high purchase price often comes with earn out, where the acquired company has to meet quarterly revenue and profit targets in order to get paid in full for their equity. More often than not, an earn out turns into a wall that blocks any attempt to integrate the business.
I like using guiding principles as they can help teams work through conflict, and there is a lot of conflict in a post-merger integration. Here are 3 I’ve seen work well for acquirers.
Act like an investor, not an operator. If you are the executive sponsor of the deal, assume the role or board member and meet with the leadership team of the acquired company regularly to review progress towards the plan that was agreed upon during the deal negotiations. Use it as an opportunity to learn the details of the business and understand the customer base. Resist the urge to jump to conclusions.
Ask questions, don’t prescribe solutions. When there is a variance to the plan, use it as an opportunity to ask what is driving the variance, what action is being taken to correct the variance, who is in charge and when it will be done by. This is a great way to see how a leadership team operates, to learn about differences in work style and to identify the strengths and weaknesses to address through integration. Resist the urge to be prescriptive.
Focus on patterns. If the same driver of variance keeps coming up, use it as an opportunity to identify whether integrating with the parent company would solve it. For example, if a lot of deals are slipping due to lawyers arguing, the solution could be to migrate to the legal process and terms of the parent company. Similarly, if product uptime is an issue or AWS costs are spiraling out of control, migrating to the parent company’s infrastructure could be a solution.
Just like a product doesn’t need every feature available to be successful, an acquisition doesn’t need every department and function integrated to be successful. A simple way to define the scope of what needs to be integrated vs left as-is is to ask the following questions:
Will the company remain a standalone entity? If yes, there’s not much integration to be done, outside figuring out who the CEO of the acquired company reports to and perhaps renegotiating vendor terms where the parent company has a better deal that can extend to its affiliate entities.
Will the brand remain intact? If yes, the back-office functions (finance, legal, HR, IT) should be the priority integration, as they will likely result in cost savings as well as bringing the employees slowly into the fold. However, you need to understand the impact any changes will have on customers. For example, if invoices start showing up under the parent company’s name, they are less likely to get paid. Similarly, if employees’ email addresses are migrated to the parent domain, questions will go unanswered and deals will stall.
Will the product remain intact? If yes, the go-to-market functions (sales, marketing, ops, customer success) are good candidates for integration in order to drive cross-sell opportunities (selling the acquired company’s product to the parent company’s customers, and vice versa). The key to getting this right is to understand the overlap in ideal customer profile between the parent company and acquired company, as it informs whether you will need to fully integrate the sales teams (same companies, same buyers), have an overlay specialist team (same companies, different buyers), or have completely separate teams (different companies, different buyers). Knowing the future structure of the combined sales team will then inform which sales processes needed to be integrated, which sales tools need to be integrated and where to change sales incentives. Understanding the overlap in customer profile can also inform how much of the product needs to be integrated, and therefore which parts of the tech stack to migrate over.
Will the team remain intact? If the company is an acqui-hire and the product is being shut down, the process still needs to be managed well to avoid bad reputation and legal risk.
Finally, and probably most importantly, be patient! There’s rarely a need to rush an integration. If the company was doing well when you bought it and you did a reasonable amount of due diligence, it’s not going to fall apart tomorrow.
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