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Lecture6b1.pptxSM9632 Contemporary Issues in International Business
Lecture 6b: Post-acquisition Integration: Challenges and Opportunities
Dr Arrian Cornwell
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What is unique about the IB space
Why and how do firms become MNEs
Digital environment and Internationalisation
International Entrepreneurship and SMEs Internationalisation
International Financial Management
Internal Analysis – opening up the firm
Dynamic capabilities in international business
R&D Internationalisation
Foreign Operation (Entry) Modes (i.e. acquisition types & commitment decisions)
Previously on SM9632
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To underscore the importance of Post-Acquisition Integration (PAI)
To explore the ‘what’, ‘why’ and ‘when’ of PAI
To introduce the spectrum of integration
To discuss the five ‘integration styles’ / approaches to PAI
To uncover the opportunities and challenges associated with each style/approach
To investigate patterns in integration considerations, opportunities, and challenges
What are we doing here today?
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How is this lecture related to your assessment?
Q3: Discuss the potential managerial challenges in terms of post-acquisition integration.
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Lecture 6b: Post-acquisition integration (challenges and opportunities)
Q3: Post-Acquisition Integration
Q4: Spillovers
Acquisitions: Troubled Waters?
The Harvard Business Review found that:
Indeed, companies spend more than $2 trillion on acquisitions every year. Yet study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%
The reason:
Almost nobody understands how to identify targets that could transform a company, how much to pay for them, and how to integrate them
Deloitte found that the top reasons acquisitions do not generate expected value are:
https://hbr.org/2011/03/the-big-idea-the-new-ma-playbook
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Acquisitions: Troubled Waters?
April 2014
$7.9B
May 2013
$1.1B
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Post-Acquisition Integration: The ‘What’ and ‘Why’?
The What…
Post-acquisition integration represents a major organisational change process that requires extensive effort and resource dedication
In simple terms: PAI refers to a host of activities undertaken to combine two previously separate organisations into one.
In goal terms: PAI is preoccupied with linking, removing, transforming, and/or adapting prior models, routines and structures for the sake of benefit and synergy realisation
The Why…
PAI is critical for reaping the expected benefits of the deal, harvesting synergies and creating value
Important? Yes! Deficiencies in the post-acquisition process can lead to expected outcomes not being realised; can undermine value creation
Important? Yes! Integration activities should be determined by the type of acquisition made; i.e. the underlying strategic motivations
Important? Yes! Inappropriate levels of integration can be detrimental to performance
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Post-Acquisition Integration: Unbundling ‘What’ (1)
The post-acquisition integration process can be divided into two parts:
Human Integration
Task Integration
These two integration processes interact to foster value creation for the acquirer. Research predominantly argues that Human Integration should occur first in order to create a conducive atmosphere for Task Integration
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Acquisition Performance
Task Integration
Human Integration
Post-Acquisition Integration: Unbundling ‘What’ (2)
| Human Integration | |
| Focus | Possible Outcomes |
| Human integration refers to integrating management practices, cultures and values, or ‘softer’ issues aimed at creating positive attitudes and a shared identity among employees | Can result in identity threats, which negatively impact value creation. Employees will protect their self-esteem through the continuity of their existing identity, and are unwilling to contribute to the new organisation. |
| Amalgamation of different organisational cultures, with a culture emerging through convergence | Successful human integration helps achieve cooperation and employee commitment, and overall acquisition performance |
| Collaborative problem solving to reconcile conflicts and reduce employee uncertainty | Without human integration, uncertainty can create both active and passive employee resistance |
| Tackling uncertainties about careers and reporting relationships, in order to avoid role ambiguity and organisational resistance | Stress from changing procedures and workplace norms can lower cognitive efficiency and performance, if not managed in the integration process |
| Can create perceptions of oneness with or belongingness to an organisation |
Prioritising human integration equates to a 26% increase in post-acquisition integration success and performance
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Post-Acquisition Integration: Unbundling ‘What’ (3)
Task integration is focused on identifying and realising operational synergies or operational integration as well as organisational practices and coordination systems
Task Integration crosses multiple disciplines, such as production, marketing, accounting and finance
Essentially involves the combination / reconfiguration of activities and processes within the combined organisation (Acquirer + Target) in order to add value and reap benefits / synergies
Task integration is highly dependent on coordination capabilities
For success, task integration should follow human integration, rather than occur in parallel
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Post-Acquisition Integration: The ‘When’?
Day 1
PAI can be described as a process involving at least two phases:
“The first 100 days”:
Begins immediately after the realisation of the acquisition, and the main goals are to maintain the impulsions of both companies and the creation of a favourable climate for exploiting synergies
“The phase of transfer of competencies”:
The main goals of this phase is to transfer competencies, resources, and capabilities in order to realise synergies and create value expected from the transaction
Phase Two can only be executed effectively if an adequate atmosphere is created – i.e. phase one groundwork complete!
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What: What is it all about?
Why: What is it all about?
When: What is it all about?
Section Summary The Three ‘W’s of Integration:
The Spectrum of Integration (1)
The spectrum is a holistic depiction of integration within acquisitions, which is based on three fundamental areas of integration:
Procedural: legal and accounting integration
Physical: integration of production lines and technology
(3) Managerial / Socio-Cultural: changes in organisational structure, development of combined culture, and selection of management
Increasing levels and/or scope of integration
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The Spectrum of Integration (2)
No / Low levels of integration =
Technical and administrative changes are limited to sharing financial risks and resources, and the standardisation of basic management systems and processes in order to facilitate communication
Moderate level of integration =
More substantial changes in the value chain, as well as the sharing and exchange of physical resources based on learning. Selective modifications in reporting relations and authority delegations
High levels of integration =
Sharing all types of resources, implementing operation systems, planning and control systems and procedures. Complete structure and cultural absorption of the acquired company
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Post-acquisition integration styles
Intensive Care
‘Deculturation’
‘One night stand’
‘Absorption’
‘Assimilation’
‘Pillage and Plunder’
Preservation
‘Separation’
‘Courtship/Just Friends’
‘Symbiosis’
‘Integration’
‘Love and marriage’
‘Best of Both’
‘Transformation’
Need for Acquired firm level of autonomy
Knowledge Transfer / Interdependence
Low
Low
High
High
Style 1
Style 3
Style 2
Style 4
Integration typologies are centred on the “autonomy vs. absorption” debate
Re-orientation
Style 5
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Outline:
Acquiring firm acts, basically, as a holding company
Acquirer is highly directive, with significant and immediate directive instructions
Tend to be associated with ‘poor health’ target firms; focused on rapid health rejuvenation
Main focus is on trying to effect a turnaround; financial gains from the acquisition
Processes Involved:
Integration is a speedy process, with tight controls imposed (these controls are absolutely rigorous)
Stringent and unyielding parental controls
Acquired firms experience high levels of change forced upon them, but remain autonomous and keep their identity
Integration Level:
Weak integration in the short-term horizon, with possibility of integration in the future, dependent on health of acquired firm
Focused more on instructions, rather than integration
Firm pays no attention to integration and creating value through anything except financial transfers, risk sharing, or general management capabilities
Style 1 – Intensive Care
Acquirer
Target
Imposition of rules; parent-child dynamic
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Style 1: Intensive Care
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Opportunities
Financial transfers (increase in leverage)
Risk sharing
Development of general management capability
Future value in target sale
Limited transaction costs
Issues
Negative emotions and sentiment
Restricted decision making in target
Value destruction
Short-term horizons, long-term competitiveness?
Change management
Talent losses
Style 2: Absorption
Outline:
Absorption occurs when there is a low need for organisational autonomy, but a high need for strategic interdependence
The aim is to realise the complete consolidation of the operations, structure, and cultures of the two companies
Given the substantial degree of change, execution must be predefined, consistent, and speedy in order to minimise possible disorders and uncertainties
Processes Involved:
To deal with the challenges imposed by absorbing the target firm, this approach requires preliminary planning for key integration issues, a transition structure to oversee integration efforts, communications throughout the process, and a calendar with milestones as well as time pressures for change
Integration Level:
Full integration
Assimilation of the target firm into the acquirer
Acquirer
Target
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Style 2: Absorption
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Opportunities
Capacity effect
Contagion
Scale and Scope
Efficiencies
Cross-functional synergies
Issues
Culture / Acculturation
Organizational identity
Resistance
Over-capacity and excessive contagion
Increased transaction costs
Risk of duplication
Increased need for developed absorptive capacity
Style 3: Preservation
Overview:
The acquired firm retains a high degree of autonomy and freedom, which enabled them to preserve its structures and sustain its own identify
Acquired operations are managed at arm’s length, but clear goals and objectives are predefined by the acquirer
Acquirer is focused on shielding the acquired firm from change
Processes Involved:
The main processes are related to communication channels
Limited resource reconfiguration
Limited resource sharing and knowledge transfer
Integration Level:
Weak integration as the acquired firm is kept as an ‘add on’ to the organisation
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Style 3: Preservation
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Opportunities
Fewer cost disruptions
Avoid duplication and deleterious impacts on capabilities
Mitigate decision making paralysis
Short-time horizon; minor disruptions
Increased market power of parent
Limited uncertainty
Issues
Limited KT, which can restrict synergy realisation
Clashing organizational identities
Power-relationship dynamics
Increased demand for monitoring capabilities
Competition / Cannibalization
Risk of duplication
Style 4: Symbiosis
Overview:
Managers in symbiotic integration processes find themselves torn between the competing needs of preserving the culture of the acquired company and encouraging cooperation between managers from both companies to harness the synergy
High needs for both strategic interdependence (because substantial capability transfer must take place) and organisational autonomy (because acquired capabilities need to be preserved in an organisational context different to the acquirer’s)
Processes Involved:
The high synergistic potential requires intense efforts and sophisticated processes of interaction and coordination to avoid human resource problems resulting from cultural differences and to achieve high commitment and cooperation from both management teams
Requires simultaneous boundary preservation and boundary permeability – both learn from each other and adapt to a complementary state
Integration Level:
Symbiosis indicates a moderate level of integration, where the acquiring and the acquired firms co-exist and gradually become interdependent (and combined)
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Style 4: Symbiosis
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Opportunities
Learning and adaptation
Cultivate knowledge assets
Leveraging cooperation
Reduction in transaction costs
Avoidance of cultural clashes
Added value from separate operations
Issues
Managing ‘winners and losers’ mentality
Control and coordination; decision making paralysis
Challenges parent goal congruency
Slow to channel resources and capabilities
Change management
Emphasis is placed on integration effectiveness
Uncertain synergy realisation
Style 5: Re-Orientation
Overview:
Purpose is to create a combined firm that reflects core competencies and best practices of the two firms
Acquirers intention is not to restructure the acquired firm’s sources of distinctiveness
Preoccupied with the co-existence of value capture and value creation
Processes Involved:
Stratified integration and deliberate harmonisation of coordinating administrative structures and outward facing functions, such as marketing, and occasionally sourcing, in order to achieve exploitative gains
Business units such as operations, production and development functions, remain independent, which permits exploration gains over time
Acquired company may find its external orientation and image being adjusted, alignment to the new parent and a coherent outward face are necessary
Integration Level:
Re-orientation indicates a moderate level of integration, where certain functions are fully integration, but others are kept autonomous
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Style 5: Re-Orientation
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Opportunities
Employee retention and commitment
Knowledge assets
Mutual accommodation of views
Marketing and sales synergies
Financial savings associated with streamlining
Value capture and value creation
Issues
Adaptations for conformity
Decision making deficiencies and paralysis
Complexities in adopting a new, shared vision
Strategic fit
Risks in balancing value capture and value creation
Ambidextrous trade-offs
Loss of acquirer/target culture
5 Styles and the Spectrum
Style 1:
Intensive Care
Style 3:
Preservation
Style 2:
Absorption
Style 4:
Symbiosis
Style 5:
Re-Orientation
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So… what are the main considerations in post-acquisition integration? What are the main factors that we should be looking at?
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Summary:
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Lecture 6b: Post-acquisition integration (challenges and opportunities)
Q3: Post-Acquisition Integration – managerial challenges
Q4: Spillovers
Next Lectures
7a: Government Intervention & Role of Institutions in International Strategy
7b: International Business Networks
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