Gunslinger Wisdom

What does a gunslinger/cowhand know about acquisition integration? At least one useful thing in the Merger Verger’s view. The following quote comes from the kids/adult classic western novel Shane by Jack Schaefer:

Don’t let things being quiet fool you. When there’s noise, you know where to look and what’s happening. When things are quiet, you’ve got to be most careful.Shane

That’s a subtle concept in acquisition integration and one that trips up a lot of folks. “Quiet” may mean that troubles are over but – as Shane himself suggests – it may also mean that touchy issues are festering in silence.

Your choices are basically two:

  1. Praise the God of your understanding for a smooth and now-finished integration process; or
  2. Dig deeper and find out what is really going on.

For more thoughts on this important but oft-misunderstood topic in an earlier posting, Click here.Album cover: Shane sountrack

About the Art: Shane was first published in book form 1949.  Cover illustration from the original Dell paperback edition (top) and album cover from the soundtrack of the 1953 Paramount movie (bottom).

False Peace

When in an integration process does the cessation of griping mean not that the storm is over but that the hostilities have gone underground, that the people with issues have given up trying to get a resolution?

When is the quiet disquieting?

As a kid growing up on the Jersey Shore, The Merger Verger remembers distinctly his first experience with the eye of a hurricane. Have you Hurricane Sandyever been in one? After howling winds and blowing debris and trees bent sideways, the silence is absolutely enveloping. Utter calm … with no indication of the second round of pandemonium yet to come.

So what happens when a stakeholder’s complaints go unaddressed for so long that he just gives up asking for the desired change? And is there a moment before an employee or a customer walks that she can still be rescued if you don’t mistake the sounds of silence?

Somewhere in your integration process you will experience a time of false peace. Don’t fall for it. You’re in the eye of the storm and all hell could break lose if you don’t keep vigilant and focused. When the first waves of calm come, before you breath a sigh of relief, ask yourself one question:

“What could be going quietly wrong?”

Nine Points to Consider; Ten Really

Here’s a good, quick summary of issues to remember when doing an acquisition: Post-Acquisition Integration: Points to Consider.  It’s from a small-business website out of the UK.

The only comment that The Merger Verger would add is to remember that “post-merger integration” does not start post-merger. Very important.  See various postings on process and timing herein by exploring the tag “Timing.” And for CXOs, reread here, particularly attending to point #5.

Alternative: if nine points make your brain want to explode, try Five Points, also out of the UK.The Five Points Brewing Co.And if you can’t get to Hackney, you can pint pine here.

Hate Being Right

About a year and a half ago, The Merger Verger commented on an acquisition by a company out of Australia, Ansell Limited (ASX: ANN). In the announcement of the deal CEO Magnus Nicolin was quoted as saying the following:

The overall integration process will be a gradual one as we take time to get to know the Comasec business.

Bend Over, Mon Petit Shareholder
Bend Over, Mon Petit Shareholder

TMV’s posting was entitled “Short This Stock” because we know that a “wait and see” approach to acquisition integration is usually a prescription for disaster. So we got to wondering how that whole thing panned out for old Magnus.

Ansell’s recent financial reports have pretty vague and jolly things to say about their recent acquisitions (the largest of which was Comasec) and they don’t break out comparative data. But the point of the Merger Verger’s commentary was on the value of the stock and that picture is not so rosy. Over the 18 months since our posting, Ansell’s shares have risen approximately 10% while the S&P/ASX Health Care index has risen over 30%.

In other words, had you invested in the index instead of Ansell, you would have had less risk due to diversification and a gain three times greater.   (Yoo hoo, Magnus?)

One chart says it all (blue line = Ansell, black line = Health Care index; time horizon = 2 years to today):Ansell shares 2yr v Index

Lousy acquisition integration practices followed by lousy stock performance … cause and effect? Who knows? But an integration strategy as dumb as “wait and see” surely didn’t help.

Timing Is Pretty Much Everything

The Merger Verger is so confused.  People seem to be slow to get things started and then in a hurry to get them over with.  What’s up with that? I mean, if we were talking about eating Brussels sprouts, I could understand but if you’re in the merger business you must think it’s fun, right?  Why not dig in? Why not see it through?

When I hear CXOs talk about acquisition integration, they mention two timing events, almost exclusively: closing day and Day 100.  That’s it.  Life begins at time zero and ends 100 days later.  Hell, a stinkbug lasts longer than that.

Here’s the message:

Acquisition integration should start sooner than you think. It should start in the strategy stage.  Particularly when strategic expansion – either in the vertical or horizontal direction – is the plan, attention to integration issues can clear the pathway, identify issues to address in advance and sharpen the analytical assumptions that underpin your bidding.  If you are starting to think about an acquistion, start to think about integration.

Query to Readers: I would welcome stories from readers who have been involved in integration activities that by virtue of starting either early or late have given rise to potentially useful observations.

Acquisition integration should continue longer than you think.  There is no finish line, no “The End,” no graduation, not even any fat lady singing in acquisition integration.  Even the attainment of financial metrics does not necessarily mean “it’s over.”

Remember the adage “old habits die hard?”  Old habits prevent the adoption of change.  And acquisition integration is about the effective management of change towards a specific strategic intent.

Let me see if I can explain this timing thing in a way that even the visual learners will understand.  If we view old habits as including practices, perceptions, expectations and the like, we might ask “to whom does the adage apply?”  Let’s look:Hmmm.  That’s odd.  It seems to apply to everyone.

So, Sherlock, what does that suggest to integration professionals (and the executives that depend upon them) about the timing of the integration process?

Wait, I answered that question already … about a dozen lines ago:  “Acquisition integration should continue longer than you think.”

This does not mean “forever” but nor does it mean in full accord with the best-laid plans.  Not everything will go according to plan and most of the unforeseens will require more time than less.  So be prepared for that in advance.  In fact, any good integration plan will prescribe how to handle key delays.

  • CXOs: challenge your people but be open to change.  It is better to be flexible and successful than rigid, punctual and errant.
  • Integration Directors: lay out clear plans and expectations, monitor them closely and prepare in advance for any project’s inevitable sloths.   And keep your CXOs informed, good or bad.

Unfortunately, despite years of working on deals and a zillion conversations with people about them, I cannot offer a formula for when an integration process can be declared complete.  It is just different with every deal, with every team, with every set of circumstances.  So your focus should be on the objectives, not on the clock.

This is a vital topic and we’ll likely come back to it again often but let me close here with another …

Query to Readers: What are the metrics you follow (using the term “metrics” both numerically and subjectively) to assess/sense when an integration process is nearing completion?  What lessons can you share from those times when the numerical metrics had been achieved but softer goals had not?

Too Many Balls (and Too Few Planes) in the Air

So the woes are official.  United’s recent announcement of its 2Q 2012 quarterly results confirmed what virtually every customer already knew: the merger of United and Continental is still causing problems.  It’s not quite Jeffrey Smisek with his Head on Fire but it’s not good either.

Even the most carefully orchestrated integrations can hit clear air turbulence, particularly when merging entities as complicated as airlines.  Let’s look at some of the issues in hopes of finding a little preventive medicine.  (Ahem … American, are you out there?)

The UAL announcement noted the following problems:

  • Cut-over to a single reservation system has been more complex than anticipated.
  • Changes to the frequent flier policies have wrought confusion and pissed off customers, particularly at the most-active flier levels.
  • On-time arrival metrics have slumped.
  • Flight cancellations have increased.
  • Baggage handling mishaps have increased.
  • Spare plane inventory was cut back only to have to be rebuilt.
  • Reservation transaction times have increased, making them more expensive and more frustrating to customers.
  • Changes to the company’s revenue accounting system have led to revenue adjustments.

Continue reading

The “Lesser Whole Theory” Bites United

Poor United Airlines has been receiving a lot of unfavorable press recently, mostly about unhappy premier customers. The Merger Verger has discussed the integration process with United at some length over the last few months and basically believes that they have done a good job at planning for and executing the merger.

So what’s going wrong? And are there lessons for the rest of us in this turbulence?

Much has been written about the “need for speed” in the integration process over the last few years. (Who hasn’t read the Band-Aid metaphor a zillion times?) But does that need apply to all aspects of the integration process or is it better used selectively? Clearly in the case of financial controls and employee (and management) reshuffling, speed counts.  But United’s problems seem to center around customer service issues, in particular the combined software systems and the training on those systems.  That suggests three possible explanations:

  Continue reading

Cat Eats Bucyrus and Rocks

Nice piece over the weekend in the Milwaukee Journal Sentinel interviewing Steve Wunning, President of the mining division of Caterpillar Inc. (NYSE: CAT) about the integration of Bucyrus, now eight months underway.

Link here: http://www.jsonline.com/business/caterpillar-pleased-with-bucyrus-integration-2u4fq4o-142194715.html

Cat made two important integration decisions:

  1. Despite a history of the Bucyrus name dating back more than 125 years they chose to get rid of it, and
  2. They did so immediately.

The Merger Verger has seen this choice backfire on a large company buying a much smaller one to launch a new business line.  In that instance, the buyer did not have the goodwill that the seller had in its market place and the name change – together with a pompous “big player” approach to selling – sent customers packing.  That has NOT happened in the Cat/Bucyrus merger and the combination sounds like it’s hitting on all cylinders. 

The article does not address cost cutting in the integration process but one has to presume there was at least some operational overlap.  What is absolutely clear is the extent to which Cat paid attention to the revenue side. Try to imagine the sales lead time for a product like a large piece of mining equipment. Clearly, plans were being drawn up for integrating the selling effort long before the deal closed.  A key part of that process for Cat was communicating the benefit of the merger with customers, particularly on the Bucyrus side.  The result is that their demand is so strong, they are running short of product. 

Sidebar: Readers’ comments on the article are almost entirely from former Bucyrus workers lamenting the loss of the brand.  I too tend to mourn the loss of longstanding American brands but in this instance am certain that Cat’s leaders made the right – even if locally unpopular – choice.

Question: Is the reported shortfall of available product for sale a misstep in the integration process?  If there was an imbalance of focus on top line (odd, but possible), then yes.  If sales are exceeding expectations for the merger, then probably not.  That said, there is definitely something that has slipped somewhere if product is running short.  Anyone got any insight into Cat or similar situations?  We’d all love some color on this.

When to Change Financial Reporting Systems

When is it appropriate to cutover reporting systems immediately upon closing and when does it make more sense to wait? 

The Merger Verger was asked this question in an email from a friend who is the head of the Americas for a global logistics company headquartered in Europe. This company and this individual have both had fairly deep deal experience so the fact that the question still arises suggests that the answer is not a simple one.
 
One the one hand, prevailing deal logic says to integrate most business elements as quickly as possible.  Cutting over to new financial reporting systems clearly gives the acquirer more immediate control.  It also makes a statement about urgency, old ways of doing things and other issues that may need visible reinforcement.
 

However, retaining an existing system for a period of time may also be useful.  As my friend states, keeping an old system theoretically “allows the acquisition target to continue to look at their financials in the manner they are accustomed to so as not to lose focus on the results during the critical post-merger period.” Excellent point.

The issue here is monitoring financial performance and, to a lesser extent, not having the demands of a new system distract from the performance of the very business that system was intended to measure.

A couple of thoughts occur:

  • In deciding whether to retain temporarily an old reporting system at a target, there had better be pretty compelling evidence that the change could be so potentially disruptive as to be counterproductive. Do not cave to mere whining.
  • Likewise, there had better be a clear date for the eventual transition to the buyer’s normal practices.  Postponing so critical an element of integration leaves a flavor of “business as usual” at the target.  If there are operational challenges that require close attention, a sense of business-as-usual is decidedly one that you want to avoid.
  • Is the decision to postpone cutover aimed at preventing the finance team from being temporarily over burdened or at ensuring that the key performance indicators (KPIs) that are produced each month follow the target’s old system so that its managers can continue to understand and monitor performance effectively?
  • If the latter is the case, could the target’s historical results be recast to reflect (or closely approximate) the buyer’s reporting practices so that relevant KPIs could be derived for pre-acquisition periods in order to track future performance against them.  This can be complex or expensive undertaking obviously but it could be better than postponing cutover.
  • Could there be some reason why the buyer would want to revise or refocus the target’s historical KPIs?  If so, an immediate change might make the most sense: get on with the new because both the old numbers and the old measures don’t cut it under the new regime.

There will be pain in any merger.  As a general rule delaying it does not lessen it.  Usually, the contrary. 

Questions:

What are those special circumstances that would lead a company to postpone a cutover of reporting practices in order to ensure focus on operational matters and better tracking of ongoing KPIs?

Has anyone had experience with postponing a cutover?  How did it work?  Did it accomplish the objectives?

Are there “half-way” measures that can allow the immediate cutover yet permit better KPI tracking at the target than might occur under an entirely new reporting system?

Who’s Wily at J. Wiley?

The Merger Verger connected recently with a senior contact at J. Wiley & Sons (NYSE: JWA, JWB), a highly-regarded publisher of books and texts, dating from 1807.  The company has recently closed on the $85 million acquisition of Inscape, a producer of digitally delivered training and assessment products to the business market.

The person with whom I spoke was receptive to talking about their integration process but suggested I call back in, say, three months when there would be more to report.  When I pressed the matter, they said that, of course, they had an integration plan “but its execution is what is only beginning.”

You can’t always tell with remarks like; you may just not be talking to the right person.  But the problem of companies seeing a deal closing date as the starting gun for integration is still surprisingly – and frustratingly – common.  In the context of Wiley, it’s even more disturbing.

Continue reading