Merger Integration Gets (Some) Respect

The Good News: The power and value of proper acquisition integration has dawned on the rating agencies.

The Bad News: They’ve realized that poor integration can hurt a company (and its credit strength) more easily than good integration can help it.

Despite having seen a ton of integration checklists over the years, I can recall few that focused any special attention on the rating agencies.  Lots of lists talk about stakeholders and about investors and even about lending banks, but the needs of bondholders and rating agencies generally get short shrift.  Maybe it’s because few if any of the spokespeople announcing a company’s latest and greatest deal want to shine any spotlight on the risks that it poses.

But that is the rating agencies’ job, assessing the downside.  And like other forms of stakeholder communication, the integration professional’s choice is to shape the message or let the message randomly shape itself.  Take your pick.

Here is where the importance of addressing your content to the needs of the precise audience becomes absolutely critical. 

It is not overly simplistic to differentiate between the debt and equity audiences in the investor base in this way:

  • Equity analysts and stockholders want to know that the deal brings upside potential.
  • Ratings agencies and lenders want to know that the deal WILL NOT bring downside potential.

As you can see, their interests are fundamentally different.

So your messages should be fundamentally different.  Not the facts obviously; the focus.

Illustration: Express Scripts’ acquisition of Medco Health Solutions

At the time of the acquisition announcement, here are some of the value drivers that the two companies identified as behind the deal:

  • Generating greater cost savings for patients and plan sponsors
  • Creating more efficiency in the supply chain
  • Closing gaps in care and achieving greater adherence through our combined behavioral and clinical approach
  • Optimizing our ability to respond to an increasingly complex Medicare and Medicaid environment
  • Enhancing mail pharmacy technology to optimize patient care and satisfaction
  • Accelerating the research, development and deployment of trend management solutions to address inefficiencies in the marketplace

Each of those goals will require an enormous amount of analyzing, strategizing, and planning, followed by intense amounts of coordinated “picking and shoveling.”  The good news is that Express Scripts has a long history of successful integration so the right framework is there.

That said, the rating agency S&P is still concerned and announced this past week that it had put a negative outlook on the debt of the newly combined company.

“The acquisition introduces integration risk, in addition to a temporarily stretched financial risk profile.  Express Scripts will need to rationalize the combined back office functions, distribution capabilities, and claims adjudication platforms while maintaining its existing customer base.”

Translation: The success or failure of this $30 billion dollar deal will rest with the integration process.  FULL STOP. 

Recommendation: This is a clear case where there needs to be an entirely separate set of stakeholder messages aimed at the lending side of the investor base.  And it has to be not just about “what” but about “how.”  How are all of those goals going to be met? How are the two companies working together to achieve that? Accepting that all of those goals are bold and good but that you will not be able to achieve them all at once, what are the priorities and why? What are the systems in place to achieve them and what systems to track results?  What things could impair progress and what fallbacks do you have for them?  Make me comfortable that this is all going to work.

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