booz allen why acquisitions fail

Making Acquisitions Work: Capturing Value After the Deal

Fourth in a Series of Viewpoints on Alliances

Making Acquisitions Work:Capturing Value After the Deal

by John R. HarbisonAlbert J. ViscioAmy T. Asin

Mergers and acquisitions have swept through

nearly every industry and have become an

essential element of corporate strategy.

The value of mergers and acquisitions announced world-

wide in 1998 pushed the $2.5 trillion mark, up over 50

percent from the previous year. Yet fewer than half of

these mergers succeed. Why? More, importantly, is it

possible to improve the odds of success?

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Our research shows thatsuccessful acquirers improve theodds of success to 70 percent. As a result, they achieve dramat-ically superior results in terms ofprofitability and growth. Theresearch points to the fact that moremergers fail due to inadequaciesin post-merger integration ratherthan to any fundamental failure ofstrategic concept. Until now, eachcorporation was left to its owndevices to develop best practices.However, Booz•Allen & Hamiltonhas recently completed a ground-breaking detailed study of 34companies active in acquisitions;our objective was to distill bestpractices.

Exhibit1 shows the dramaticdifference in growth achieved bysuccessful companies versusunsuccessful companies. Thesedifferences show that experiencesurely pays. But we do not stop

with describing outcomes such asthis one.

We have sifted through dif-ferences in integration practicesacross more than 100 dimensionsfor successful and unsuccessfulcompanies, thereby surfacing theunique differences in best prac-tices that are driving dramaticallydifferent results.

In this Viewpoint, thefourth in a series on corporatealliances, we explore in depththe challenges and fundamentalprinciples of success inherent in both the mechanics of post-merger integration and meetingthe strategic leadership challenge.In addition to our research,our ideas are supported by experience—working withclients in a full range of industriesacross the broad spectrum ofpost-merger integration issues.In a recent Business Week cover

story, Booz•Allen & Hamiltonwas involved in three of five successful mergers cited andnone of the 20 failures. In manyengagements, joint client Booz•

Allen & Hamilton teams havesignificantly exceeded, and insome cases doubled, pre-mergerexpectations of value capture.

We present a proven trans-formation framework, which wehave applied to post-merger integration that can guide com-panies in making successful post-merger integration a corecompetency.

Low-SuccessCompanies

High-SuccessCompanies

0

5

10

15

20

25

30%

ProfitRevenue

Annu

al P

erce

ntag

e Gr

owth

0

5

10

15

20

30

40%

Level of Acquisition Success

Perc

enta

ge o

f Rev

enue

from

Acq

uisi

tions 35

25

24%

12%

26%

16%

34%

22%

Exhibit 1Role of Acquisitions in Growth

Source: BA&H Survey on “Making Acquisitions Work”

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Background

Mergers and acquisitionsare a popular way to grow and fill capa-

bility gaps because they can beintegrated relatively quickly. Therace for growth and competitiveadvantage appears now to be a race to see which firms canadd capabilities or access newmarkets faster, not only bybuilding internally—a processoften too slow for competitivemarkets—but by creating newexternal relationships. In someindustries, in fact, the capabilityto accomplish successful mergersand acquisitions itself has becomea core competency and a source of competitive advantage.

The banking industry,for example, has seen more than2,000 mergers in the last fiveyears as firms scramble tobecome one of the handful ofnational franchises predicted to dominate by 2005. The tenlargest banks now account forhalf of all commercial bankingassets in the United States, andestimates suggest that by the turnof the century they will accountfor almost 70 percent of the totalafter further consolidation.1

Furthermore, as the number ofattractive acquisition candidatesshrinks, prices will escalate,forcing the acquirer to find morevalue in the target company.Under such conditions, integratingmergers and acquisitions quicklyand effectively becomes not onlya source of expanded capabilities,but a source of survival.

Putting pen to paper andsigning on the dotted line is onething. Post-merger integration(PMI)—bringing the companiestogether successfully after thedeal and using what has beenacquired to deliver maximumvalue—is the real challenge.Unfortunately, the success rate inPMI has been alarmingly low bymost estimates—only one-thirdto one-half prove successful.

The large number of well-documented failures—QuakerOats and Snapple, Wells Fargoand First Interstate, Novell andWordPerfect, to name a few—stand out in everyone’s mind, asdo the notable successes—FirstUnion’s, GE Capital’s and CiscoSystems’ abilities to integratemultiple acquisitions, for example.The burning question is: Whatdo the successful companiesknow about making mergers and acquisitions work that others have yet to learn?

In cracking the code, thesuccessful companies addresswhat Booz•Allen & Hamiltoncharacterizes as two criticalchallenges in a merger or acqui-sition. The first is a mastery ofthe mechanics of integration—being able to integrate the twocompanies in order to achievethe stated merger objectives—by planning in great detail fromthe outset, identifying sources ofvalue and how to capture them,managing the inevitable chal-lenges of cultural change, andensuring expert leadership. Thesecond is the company’s abilityto meet the strategic leadershipchallenge of post-merger inte-gration—being able to identify,enhance, and leverage the uniquecapabilities of the new entity tomaximize profit and growth—by creating a new vision for thenew company to lead its industryor compete in a new way goingforward. Both elements are nec-essary for success; mastering themechanics, while necessary, is notsufficient for long-term success.

1Mergers and Acquisitions, May/June 1998

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The Survey — An Antidote to the Anecdotes

Much of the existing literature on mergersand acquisitions

seems more anecdotal than ana-lytical. Most books and articlesfocus on explaining what not todo, instead of presenting hardevidence of what actually works.

Booz•Allen has brokenthrough this noise and clutter.We recently conducted a studyof 34 major companies world-wide active in mergers andacquisitions. They came fromdiverse industries includingfinancial services, telecommuni-cations, electronics, health care,real estate, chemicals, pharma-ceuticals, and others. The trans-

action size of the companiesstudied ranged from less than$500 million to more than $17billion, and the study covereddifferent levels of success asreported by the participants.Additionally, we have collectedbest practices from our 50 mostrecent major engagements.

The goal of this researchwas to find out how these companies address the challengesof making mergers and acquisi-tions work and to isolate theapproaches and specific tacticsused in both successful andunsuccessful ventures.

According to the partici-pants, their depth of past experi-ence in mergers and acquisitionswas highly linked to future suc-cess. On average, the firms thatdefined themselves as successfulhad been through 20 deals.

In contrast, the firms that wereconsidered unsuccessful hadcompleted only about an averageof eight deals.

What kind of mergerobjectives are most likely to lead to success? Exhibit 2 showsthat strengthening the currentbusiness is more likely to lead tosuccess than diversification andexpanding into related productsand markets.

And what causes deals to fail? Overestimating value,paying excessive premiums, andinadequate integration planningand execution (Exhibit 3).

In fact, the odds of successare much greater when the objec-tives of the merger allow for theintegration to be aggressive andfor full integration to occur(Exhibit 4).


High-SuccessCompanies

Objectives toStrengthenCurrent Business

Lead/respond toindustry restructuring

Least Important

Improve positionin existing business

Expand intorelated markets

Diversify thebusiness portfolio

Learn about new(but potentially related)

businesses

Expand intorelated products

Most Important

Exhibit 2Forced Ranking of Objectives


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Best Practices — Unlockingthe Value

By sifting through the differences in how suc-cessful and unsuccessful

companies approach integration,we have surfaced a frameworkof over 60 best practice elements(Exhibit 5) that statisticallyexplain why the successful companies succeed.

The top ten of these bestpractices, based on the biggest“spread” between high and low success companies, are (indescending order of criticality):

1) Appoint strong executive toclearly lead the integrationprocess

2) Compress change duration by taking bold strokes early

3) Provide for real incentives to reach targets

4) Set out credible milestonesand maintain pressure forprogress

5) Move quickly with regard to personnel changes

6) Build a robust plan detailingintegration activities

7) Emphasize the transfer ofcritical capabilities to cap-ture value

8) Ensure senior managementinvolvement in integrationactivities

9) Adopt best practices in key functions from eithercompany or external source

10) Get task forces (with peoplefrom both companies) inter-acting as soon as possible


High-SuccessCompaniesSynergy

overestimated

Premiumexcessive

Integration planninginadequate

Implementationfailed

0 10 20 30 40 50%

Exhibit 3Reasons for Failure


• Value sourcewell understood

• Straightforwardaction plan

• Value fromcreatingsomething new

• Value from learningtheir business

• Success depends onletting them manage

0

10

20

30

40

50%

“Absorb”

Perc

ent A

vera

ge A

nnua

l Pro

fit G

row

th

“Assimilate” “Autonomous”

0“Absorb”

Succ

ess

Rate

“Assimilate” “Autonomous”

20

40

60

80

100%

Exhibit 4Integration Approaches


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Companies willing to applythese best practices now have atool to enable them to leapfrogthe learning curve and improvetheir results. The rest of thisViewpoint will explore these and other best practices in more detail.

Not Just Bolting Together

Most companies focusonly on the mechanicsof putting the two

companies together. Whileimportant, mechanics are onlypart of the story. Managing themechanics requires a disciplinedand tested integration program—“fire-ready-aim” just won’t work.Meeting the strategic leadershipchallenge is the steady hand thatputs the pieces together into acohesive whole.

VAL-ue: A Framework for PMI

In order to achieve the transformation required during post-merger integra-

tion, Booz•Allen applies whatwe call the VAL-ue framework(Exhibit 6)—the Vision, Archi-tecture, and Leadership essentialto success in post-merger inte-gration, implemented throughUnderstanding and careful Execu-tion. In simple terms, these threeelements represent the what, howand who of both the mechanicsand the strategic leadership.

Companies that successfullyintegrate following a merger havemastered these three core elementsand found the answers to themost critical questions they face.

ELEMENTS

Strategy & Objectives

Value Capture

Leadership

Structure

Actions

Quick insertion ofnew leadership team

Strong executive tolead integration

Senior managementresponsibility

POST-MERGER INTEGRATION ACTIVITIES

Etc.

ELEMENT

SharedStrategy

FormulationProcess

WIDESPREAD PRACTICESCURRENT

BESTPRACTICE

WORLDBEST

PRACTICE

Level 1 Level 2 Level 3 Level 4 Level 5

Strategyformed by

acquirer withlittle input orinteractionwith target

Strategyformed

by acquirerwith some

input orinteractionwith target

Target includedin formulationprocess but

acquirerdominates

Target includedbut startingpoint not aclean sheet

Cooperativestrategy

formulationprocess thatuses a clean

sheet approachto the new

organization

AVERAGELEVEL

ACHIEVED

LEVELOF BEST

COMPETITORS

Rating: (1 to 5)

IMPORTANCETO BUSINESS

PERFORMANCE

LEVEL 1 LEVEL 5BEST PRACTICE LEVELS

Exhibit 5Best Practices of Successful Companies


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All Three or Nothing at All

Exhibit 7 shows the likelyoutcomes when one ormore of the VAL-ue com-

ponents are missing or not fullyrealized. For example, withoutVision, the new enterprise lacksfocus and direction. Without awell-structured process for inte-gration—the right Architecture—chaos reigns throughout the newenterprise. And without effectiveleadership, the required changedoes not occur throughout bothcompanies at all levels.

It doesn’t matter whereyou start. Failure to address all

three elements of the VAL-ueframework can actually destroyvalue.

Meeting the StrategicLeadership Challenge

We believe that what sets apart theBooz•Allen approach

to post-merger integration is theemphasis on meeting the strategicleadership challenge. In its sim-plest terms the strategic leadershipchallenge answers the question:How will the newly consolidatedcompany compete and thrive

What: The Vision How: The Architecture

Who: The Leadership

Exhibit 6The VAL-ue Framework

What: The Vision• What is the vision for the new

enterprise?• How will the new enterprise

create value for its customers?What incremental market pres-ence can be created?

• How will the new enterpriseachieve its objectives? Whatnew capabilities, products,markets or other value-addedoffering can be provided?

How: The Architecture• What parts of the business

should be integrated?• At what level in the business

should change occur?• At what pace should the inte-

gration proceed?• What capabilities should be

migrated, shared, and builtupon?

• What operational and overheadsavings can be obtained? Whatare the specific cost-savingstargets?

Who: The Leadership• Who leads the post-merger integration process (overall and day to day)?• How is change created and managed? How should the integration be managed?• What are the roles of CEO and key executives?• How is participation between the two companies balanced?• What level of resources should be dedicated overall to the process?• What are the cultural differences and how should they be managed?

PLUS: Understanding and Execution

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once the merged entities cometogether? In this way, we look atpost-merger integration as creatingopportunity through corporatetransformation. Stakeholdersexpect change. Corporationsshould exploit this expectationof change and act with a trans-formation mindset rather than anincremental change mindset. Atransformation mindset opens upthe possibilities for a new vision,new strategy, new businessopportunities, and long-termsustainable growth. And it allstarts with a vision.

What Does Vision Mean?

Although all three elementsof our VAL-ue framework(Exhibit 6) come into play inboth mechanics and strategicleadership, it’s the “V” or visionthat separates the winners fromthe losers in meeting the strate-gic leadership challenge. Thevision for a consolidated organi-zation defines its purpose, whereit is heading, and how it intendsto get there. Exhibit 8 graphicallydepicts the elements of a clearlyarticulated vision. It begins withthe mission of the new organiza-tion—setting tangible goals anddescribing the actions requiredto reach them.

The vision includes a well-defined set of core values andbeliefs—the basic precepts thatwill reinforce the new organiza-

tion’s culture and purpose. Thevision also identifies the distinctset of competencies that willenable the new organization todeliver the unique value requiredto remain competitive as it goesforward. A clearly articulatedvision also defines the value—the new organization’s funda-mental purpose—that thecompany and its people will create and deliver. And it alsolays out (in concrete terms) theexpectations for what the com-pany will look like and how itwill operate over time—thevision for the architecture wedescribed earlier.

There are many companiesthat enter into a string of acquisitions, particularly whenan industry is consolidating,without a real vision for what

ELEMENTS PRESENT

Vision Architecture Leadership Outcome

Successful post-merger integration

Change isn’t cascaded throughout both companies or to all levels

No focus: New enterprise lacks direction

Chaos: No process for integration

An academic exercise

Bureaucracy

Empty charisma

Exhibit 7Three Elements Necessary for Change

Source: BA&H Analysis

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they will do once they have finished the acquisition binge.Supermarket chains, banks,insurance companies, and othershave all set out on a path to getbigger. Companies must realizethey need to start early on todevelop the vision for how theywill compete once they achievetheir attained size.

For example, in supermar-keting, many chains are makingacquisitions in order to achievemore scale. They want the scalebecause they believe that theyneed it in order to compete withmass merchants, discounters,and club stores that are addingmore and more grocery items totheir stores. So, as these super-markets make acquisitions andintegrate them for the immediatevalue, they must also begin toset the vision for the future.

What will be their basis of com-petition with the other channels?What capabilities, such as morecentralization of certain aspectsof merchandising or sophisticatedlogistics, will they need? Howcan they begin to develop thesecapabilities now as they integrateone acquisition after another?

GUIDING PRINCIPLES: Strategic Leadership — Vision

• Know where you are goingoverall and the extent to whichthis merger helps to fulfill the vision

• Begin to plan for the future as you integrate today

An Architecture Upon Whichto Build

Once the vision is set,it’s time to begin understandingthe architecture for transformingthe company. Presumably theacquisition itself was pursuedbecause it fit into some vision ofwhere the company was headedand the capabilities it needed toget there. The acquisition inquestion should provide some of those capabilities. But theacquisition also provides anopportunity to reassess. Whatcapabilities did we acquire thatfit with the vision? Where are westill in need? What did we getwith the acquisition that we don’tneed? What was unexpected thatwe can now use? The answers to these questions will drive thearchitecture of the strategic leadership challenge.

A set of tangible goals and actions

Basic precepts that reinforce culture, values, and purpose

A set of competencies that enables the deliveryof an organization’s unique value

A definition of the value that the companyand its employees create and deliver

A common understanding of the future

Mission

Core Valuesand Beliefs

Distinctive Capabilities

Fundamental Purpose

Expectations About the Future Environment

Exhibit 8Elements of a Vision


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The completed architectureshould lay out a plan for usingthe capabilities that exist withinthe corporation and capturing(by building, buying or allying)the ones that are still needed.

GUIDING PRINCIPLES: Strategic Leadership —

Architecture

• Understand what your capability gaps are

• Devise a plan for filling in the gaps

• Develop a plan for using orremoving acquired capabilitieswhich are not critical to theoriginal vision

• Assess what to do with theunexpected benefits of themerger

Leadership for the Future

Tackling the strategic leadership challenge will alsorequire leaders who are willingand able to help develop thevision and move the corporationin the established direction. AtBooz•Allen & Hamilton, werefer to the company’s ability todo this as the Strategic LeadershipQuotient or SLQ. The SLQ mea-sures whether the company has acadre of managers who under-stand the mission, vision, andvalues of the company, andunderstand their role in making

Exhibit 9Strategic Leadership Quotient Sample Diagnostic

1 Can everyone in your company clearly explain the meaning of the corporate vision after the merger (or series of mergers)?

2 Is there a clear understanding by everyone of what they have to do in order to realize the company’s vision?

3 Are conflicts resolved in ways that advance overall company goals?

4 Do people on the front line routinely do the things necessary to achieve corporate goals/objectives?

5 Is behavior at all levels consistent with your stated aspirations?

6 Are the best people in the company working on the most important priorities?

7 Does every manager live your company’s values?

8 Does your top management team have the capabilities to execute the corporate strategy?

9 Is the quality of leadership evaluated — and rewarded — at every level?

10 Is there superior leadership at all levels of the organization?

Rarely AlwaysWHAT’S YOUR SLQ? 1 2 3 4 5 6 7

Source: BA&H Strategic Leadership Center

STRATEGIC INTENT

Industry consolidation

Strengthen current business

Vertical integration

Cross-selling

Seed a new business

Diversification

11

it happen. It means that every-one knows the “right thing todo,” has the right skills to do theright thing, and is empoweredand rewarded for doing “right.”

The mini-diagnostic shownin Exhibit 9 can help companiesassess whether they have a highenough SLQ to meet the strate-gic leadership challenge in post-merger integration.

GUIDING PRINCIPLE: Strategic Leadership —

Leadership

• Build your StrategicLeadership Quotient

Mastering the Mechanics

While we believe that addressing thestrategic leadership

challenge is the key to real long-term success after a merger, mostcompanies in the throes of inte-gration are focused on gettingthe mechanics right. There is noshortage of challenges in thisphase of the integration. Manycompanies never get past thisphase to address strategic leader-ship. Here’s what we think ittakes to succeed:

Setting the Vision

The mechanics of post-merger integration developdirectly out of a clear under-standing of how the merger fitsinto the overall vision for thenew company—the strategicintent of the merger. This thenleads to a set of priorities forcreating the new organization’sunique value.

Successful acquirers in our study tended to focus moreintently on specific means ofcapturing value by developingan in-depth understanding ofvalue sources and then pursuingthem relentlessly. They focusedon the critical elements of the

Exhibit 10Strategic Intent and Value Creation Priorities

EXAMPLES

In banking, cut costs quickly to maximize thebenefits of the deal and justify the premiumspaid in an increasingly competitive biddinggame

AT&T/TCI — AT&T acquired access to TCI’sinfrastructure and TCI gained broader distribution capabilities

Merck/Medco — Merck gained a strong distrib-ution arm

Citibank/Travelers — intention is to allow foreach company to distribute through the other’schannels

IBM/Lotus — Lotus brought a new business toIBM. The challenge was for IBM to leverage itbut not destroy it

Allied/Signal — balanced the defense businesswith commercial aerospace

VALUE CREATION PRIORITIES

• Apply best practices to acquired assets• Fold back office into acquiring scaleable

infrastructure

• Bring complementary capabilities into businesses

• Capture additional value added• Integrate capabilities

• Integrate for commonality• Create new capabilities• Capture scale

• Isolate/maintain/strengthen acquired assetsand capabilities

• Keep the best of acquired assets and people• Rethink structure


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business as value sources andalso emphasized the transfer ofcritical capabilities to captureadditional value. In other words,their “mechanics” stage of inte-gration was guided by a clearvision of where they were goingand why.

Exhibit 10 outlines exam-ples of how value creation prior-ities, and therefore the vision forthe mechanics, develop directlyfrom the strategic intent of theconsolidation.

GUIDING PRINCIPLES:Mechanics — Vision

• Gain agreement on yourstrategic intent and let thatguide the vision for the merger integration

• Explicitly identify the criticalsources of expected value

Mechanics Meets Architecture

Most of the actual mechan-ics of post-merger integrationrelate to building the right archi-tecture for the new organiza-tion—the “A” of the VAL-ueframework. This requires anunderstanding of the capabilities,people, and infrastructure neededto achieve the vision. It beginswith knowing what the companyalready has, what it needs, andhow it should get there.

The purpose of architecturein the “mechanics” phase is tochange the content of the workpeople do and help them adaptto the change. The architectureputs into place the processes thatinstitutionalize change and allowchange to filter throughout thenew organization. It includes

both the end game—what thecompany will look like post-integration—and the changeprogram to achieve that goal.

Architecture for Change

In our study, participantsoverwhelmingly confirmed thatproactive, up-front planning fosters success. Those who hadexperienced successful mergersreported that they had clearlydefined their objectives early onand had created detailed battleplans that encompassed all inte-gration activities. While planningdoes not necessarily guaranteesuccess, the odds for failure aresignificant without it. Accordingto our study, fully two-thirds ofthe mergers that were character-ized as lacking specific imple-mentation plans prior to closing

the deal were unsuccessful. Thesame failure rate was experiencedin those mergers where the risksand uncertainties of implementa-tion were not explicitly identifiedup front.

It is therefore clear thatplanning is important, but howshould the plan be shaped? One of the key decisions will beto determine the pace of integra-tion. Our study showed that successful companies were ableto capture value almost 70 per-cent faster than their unsuccessfulcounterparts. Speed, given theconstraints of the merging compa-nies characteristics, is critical.Exhibit 11 shows that whencompanies are of unequal size,the pace of integration can bemore rapid than when they areof similar size.

Accelerated

PACE OFCHANGE

HighLow

TYPE OF BUSINESS

EXTENT OF INTEGRATION

Aggres

sive

Cautio

us

Unequal

Equal

RELATIVE SIZEOF COMPANIES

Slow

SimilarDiverse

Exhibit 11Extent and Pace of Integration


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The matrix also shows that the extent of integration can increase if the companiesare in similar businesses. Theimplication is that the mostaggressive merger integrationprograms consist of the combi-nation of two similar companiesof different size (i.e., the bigbank swallowing up a little bankphenomenon) while the mostcautious are mergers of equalsbetween relatively dissimilarpartners.

Once the pace and extentof integration are decided, thenext challenge will be to priori-tize the vast array of opportuni-ties. We believe that by arrayingthe opportunities across thedimensions of size, risk, andeffort needed for further analy-sis, it is possible to determinewhere to attack first. Typically

the highest value, lowest risk andeasiest to analyze opportunitiesshould be addressed in the firstwave. Successive waves shouldaccount for those opportunitiesthat are lower value, need moretime to analyze, and require moredetailed implementation planningin order to minimize risk.

Developing the plan meanshaving a clear sense of what needsto happen when (Exhibit 12).

GUIDING PRINCIPLES:Mechanics — Architecture

for Change

• Begin planning early and create detailed plans

• Set the right pace; work witha sense of urgency

• First attack the opportunitiesthat combine the lowest riskand highest reward

• Due diligence plan– Financial– Governance– Legal– Culture– Operational– Synergy– Regulatory– Environmental

• Build vision

• Understand role of synergiesin achieving vision andpaying for the deal

Agreement toLegal Closure

• Day one– Consolidate financial

reporting and treasury– Transfer corporate center

functions which interactwith public

– Begin week-longcommunication program

• Learn the business

• Install core integration team

• Focus resources on priorityprojects

First 30 Days

• Assess ongoing initiatives

• Implement changes wherepossible

• Monitor progress againsttargets

• Continue communications

Next 30 Days

• Continue execution

• Build capabilities

• Merger integration becomespart of business

OngoingIntegration

Exhibit 12Sample Checklist Items


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Architecture for the New Company

Where do these opportuni-ties lie? What is the architecturethat actually needs to be built?Developing the architectureshould be based on the overridingvision and objectives of themerger and should involve arelentless approach to identifyingand capturing value. The newarchitecture will emerge fromthe new entity’s sustainablecompetitive position and thesources of value. Achieving the new architecture will requireintegrating and redesigning critical functions and processes,redefining key roles, and devel-oping the new organizationalmodel. These changes will havea profound impact on the abilityto capture sustainable valuefrom the acquisition.

The emerging architectureshould be crafted to provide asustainable position that allowsfor the ongoing capture of value.Value capture should be viewedfrom an integrated approach, toensure it fits the strategic intentand is internally consistent.

In our experience, thesources and relative impact ofvalue capture vary considerablywith each merger. However,some areas where joint client-Booz•Allen & Hamilton teamstypically find value include:

Growth-Oriented

• New products (individual and“bundled”), service offerings,markets, customer segments,distribution channels• Enhanced market presence,market capture

• Enhanced product develop-ment efficiency (leveragedR&D, internal best practices)• Combined technologies or capabilities• Leveraged sales force• Increased capture of the value chain

Efficiency-Oriented

• Integrated supply chain• Leverage procurement volume(product and non-product)• Production footprint optimization• Facility optimization

0

5

10

15

20

25%

RawMaterials

Perc

enta

ge S

avin

gs

Components Other ProductRelated

Other

4%

12%

17%

4%5%

3%

20%

25%

Exhibit 13Procurement Savings from Recent PMI Examples

Note: Other Product Related includes items such as packaging, logistics, and marketing suppliesNote: Other includes items such as systems, insurance and office supplies

Source: BA&H Engagement Experience

Example: Sources of Value in ProcurementWhile the sources of value capture vary in each acquisition, pro-curement is a likely driver of value in virtually all situations.Often sourcing benefits can be derived in product-related (e.g.,paint, raw materials) and non-product related (e.g., insurance,travel) categories. Sourcing improvements can often be consid-ered in two phases in a PMI environment. The first phase entailsthe ability to leverage greater volume purchasing and consolida-tion of the supply base. Longer-term but more fundamentalimprovements are derived from enhanced supplier relationships(e.g., strategic sourcing) and product redesign/rationalization.Collectively, our experience has identified 10-25% improvementsin several product and non-product categories (Exhibit 13).

Architecture must alsoconsider information technology.It can be a major enabler ofchange if e-mail, voicemail, andintranet technology are integratedquickly in order to smooth com-munications between companies.Value can be achieved throughrationalizing projects and plat-forms over the long run, a newinformation architecture mustfully integrate the two companiesand address strategic goals.

Post-merger integrationalso often provides a rich oppor-tunity to make a fundamentalchange to organizational design.Once again, the post-mergerenvironment creates an opportu-nity to modify the organizationwithin the existing structure orit provides an opportunity tocraft an entirely new structure.A new organizational modelmust be established, which

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• Vertical integration,de-integration• Distribution channel optimization• Sales force optimization• Headquarters consolidation• Support function consolidation(HR, finance, IT)

Other

• Financial value (balance sheetitems, taxes, etc.)• Optimized programs and policies (e.g., benefits programs)• Rationalization and/or elimination of special programs,projects, etc.• Additional alliances or relationships

Identifying the key sourcesof value is only the beginning of value capture. While therewill be some opportunities thatrequire little or no redesign,most opportunities will requirethe redesign of key processesand activities. In general,there are usually near-termopportunities in procurement,selected facilities and supportfunctions which can providesavings. However, most revenue,supply chain, facility redesignand distribution efforts requiresignificant redesign. In someinstances, the emerging designwill take the form of one of theprevious company’s (e.g., bestpractice), while in other instancesthe design will be tailored tomeet the new business model,potentially based on outsidebenchmarks.

Value capture must also beviewed from a capabilities per-spective, i.e., the portfolio ofcapabilities that the new corpo-ration must have at its disposaland how it will build or sharethese capabilities across the origi-nal merging entities. This isoften the single largest driver ofthe ability to attack new revenueopportunities and reflects a criti-cal role of the global core.

Typically, the acquiredcompany brings capabilities rel-evant to achieving the overallvision and therefore, the goal isto determine their integration. Butoften there are overlapping capa-bilities that need to be rational-ized. And in cases where theacquired company brings capa-bilities outside the vision, theyeither need to be isolated orsold, or the vision needs to beexpanded (Exhibit 14).

Company A

Company B

Shared Capabilities Relevant to Vision

Individual Capabilities Relevant to Vision

Individual Capabilities Not Relevant to Vision

Capabilities to SupportPost-Merger Vision

Exhibit 14Capability Portfolio Challenges


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allows for flexibility to respondto change and to fully integratethe acquisition.

Post-merger integrationpermits an organization to reori-ent focus (e.g., products and geo-graphies), redesign the underlyingstructure (e.g., business units), andalter the delivery of services(e.g., from embedded to shared).Percy Barnevik at ABB appliedthe 30-30-30-10 rule to the cor-porate and services organizations.Thirty percent was parceled outto the business units, 30 percentwent to a services company,30 percent was dropped and 10 percent remained in the corporate center. Business unitsmust be realigned to reflect thenew portfolio of capabilities andoptimize the likelihood that newbusiness opportunities can bepursued. Mergers also present anopportunity to rethink the gover-nance structure of the organiza-tion: What composition shouldthe board have? What should bethe role of the board? How shouldthe board processes be structured?

Finally, mergers present achallenge to retain key personneland to release those who are nolonger needed. Policies must beset and followed regarding issuessuch as severance, relocation,transfers and pay to stay bonuses.Furthermore, existing compensa-tion and benefit plans must beintegrated. Creative options suchas stock plans and re-employ-ment pools for laid-off workerscan ease the transition. Mostimportant, these decisions needto be made as quickly as possibleand communication must betimely, open, and honest. Peoplewant to know where they stand.

GUIDING PRINCIPLES:Mechanics — Architecture

for New Company

• Focus on relentless identifica-tion and capture of value(cost, revenue, and other)

• Build an organization thattakes advantage of the strengthsof both companies and looksat outside benchmarks

• Address information issues toboth enable change and cap-ture value

• Restructure the business in a way that maximizes valuecapture and optimizes thebusiness for the future

• Handle personnel issues swiftlyand according to policy

Mechanics Requires Leadership

The “L” in the Booz•AllenVAL-ue framework speaksdirectly to the need to developtransition leaders throughout thenew organization and at all lev-els—those who can get the com-pany from where it is (once thedeal is finalized) to where itwants to be (as defined in thevision.) The most successfulcompanies determine their newleadership teams immediatelyfollowing the merger agreement(if not as part of the agreement.)Personnel decisions should bemade as far down the organiza-tion as possible. Ownership anddefining key roles is essential for“running the business” as wellas for value capture. Mergersinherently create an era ofuncertainty which can potentiallyhinder the business (e.g., lower

sales during integration) andeven the best personnel may beunsure of their role in the orga-nization. Announcing these deci-sions as early as possible is keyto inspiring confidence from allaudiences—internal and exter-nal. In some cases, companieshave faced the trade-off of mak-ing the top leadership announce-ments quickly, rather than takingthe time to make the choicesperfect. As one executive toldus, “The impact of hundreds ofthousands of employees and cus-tomers waiting around for adecision would be a lot worsethan not getting it quite right.”

The merger integrationprocess itself should be led by a strong executive, usually dedicated to the task, with performance rewards linked tothe success of the integration.GE Capital, one of the most suc-cessful companies at integratingmergers, appoints a dedicatedintegration manager to each ofits acquisitions.

The integration leader mustalso have a team and a plan. Thetransition team should actuallybe multiple teams, each focusedon a particular area or source ofvalue. The individual teamsshould be coordinated through aproject manager, or if the situa-tion calls, a project managementoffice. The teams should havespecific targets to reach andshould move to implementingideas as soon as possible. Inorder to show fairness andobjectivity and to make the bestdecisions, data and analysisshould be used to cut through thepolitics and anecdotes that some-times cloud decision making. But

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this is not a mandate to formdozens of teams. Choosing thehighest value opportunities toattack and setting teams against thehighest priority items are key tofocusing and completing the job.

The composition of theteams is critical to success. Teamsneed the right mix of skills—financial analysis, functional orbusiness expertise, leadership,and project management. Alsocritical is choosing people seniorenough in the organization whocan command respect and takeaction, and also junior enough tobe willing to roll up their sleevesand devote real time to the project.

Functional managers, whowill be responsible for deliveringresults, should also be activelyinvolved in the process. Key personnel should be responsiblefor identifying and quantifyingthe opportunity and then deter-mining the key actions needed torealize the savings. Duringimplementation, progress shouldbe tracked by comparing theresults to “milestone” and finan-cial scorecards. Finally, success-ful companies have teams thatare comprised of people fromboth organizations who are ableto work well together.

Creating rapid culturalchange appears to be one of themost important leadership respon-sibilities and a distinguishingtactic among those companiesreporting successful mergers.Ensuring effective leadershiprequires that transition leaders insuccessful integrations must sharecommon attitudes and demon-strate consistent behaviors.

Our study showed that thetactics used in creating and lead-

ing cultural change seem to focuson having employees from bothcompanies perform meaningfultasks together. The successfulcompanies reported more exten-sive use than the unsuccessfulparticipants of tactics such asensuring early interactionbetween task forces from bothcompanies, allowing adequatetime to gain mutual understand-ing, and transferring best prac-tices between the companies.Furthermore, successful compa-nies explicitly identify culturaldifferences through diagnosticsand create a plan to address them.They attempt to create the bestculture, not necessarily pick oneor the other.

Perhaps one of the mostcritical elements of successfulintegration is communication.Successful companies communi-cate early, often, and openlyabout the integration process.They focus on answering thequestions that their audiences

want answered in an honest way.This means giving answers totough questions and admittingwhen decisions have yet to bemade, along with presenting atime frame for when they will be made.

Communications must betailored to the audience. Forexample, employees at differentlevels will have more or less desire to hear about the overallreason for the merger versus whatdetailed effects it will have ontheir daily lives. Geographic andcultural differences must be considered, especially whenaddressing audiences in differentparts of the world. Successfulcompanies often use a cascadingmethod where senior managerspresent a fairly standard andbroad message to the entire cor-poration and then individualmanagers meet with theiremployees to focus more closelyon their concerns.

Employees

Customers

Suppliers

Annually Weekly

UnsuccessfulMergers

SuccessfulMergers

Frequency of Communications

Exhibit 15Frequency of Communication

Source: BA&H Survey — Preliminary Results

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Often overlooked is theneed to communicate to a broadset of audiences. Employees at both companies have a needto know about the combination.Suppliers are anxious aboutbusiness being lost or gained.Customers are eager to knowhow their service will changeand what potential new benefitsor problems are on the horizon.In any event, communicationsneed to be frequent and targeted(Exhibit 15).

GUIDING PRINCIPLES: Mechanics — Leadership

• Choose the new leadershipquickly

• Pick the right people and ded-icated resources to be involvedin the integration process

• Show fairness and objectivityby using data to make decisionsand by including people from both companies in thedecision-making process

• Set out credible milestonesand maintain pressure toprogress by providing for realincentives to reach targets

• Keep the focus of the integration team on value capture

• Address cultural issues directly with an explicit plan

• Communicate clearly, early,honestly, and often; use a toneof decisiveness; don’t forgetthose outside of the two combining companies

Where to Go from Here?

For many companies, theopportunities for craftingsignificant mergers and

acquisitions are a new frontier.But even many newcomers recognize that developing theability to integrate mergers andacquisitions on an ongoing basisis critical to future success.

In both their planning andexecution, successful companieshandle both the mechanics of themerger and the strategic leader-ship challenge. They address thethree essential elements of post-merger integration: the “what”or the vision of where the newentity is going; the “how” or thearchitecture necessary to getthere; and the “who” or the lead-ership required to sustain forwardmovement. All three elementsmust be in place; companies thatfail to thoroughly address one ormore doom themselves to far lessthan optimal outcomes from thestart. But those who do masterthe three elements exponentiallyincrease their likelihood for capturing maximum value afterthe deal.

About Booz•Allen &Hamilton’s Post-MergerIntegration Work

Booz•Allen & Hamiltonhelps clients accomplishpost-merger integration

by capturing more value withless risk and with the appropriatetempo. We also use our depth ofstrategic experience to preparethe new company to competeinto the future, creating steplevel change within the companyso that it can drive its industryforward. We help you to masterboth the necessary mechanicsand the strategic leadership challenge.

We bring to this task:• A proven methodology forpost-merger integration built ondeep and broad experience withclients, and solid research aboutwhat does and does not work inthe post-merger environment• An understanding of clientcompanies’ industries, whichhelps to provide the context forchange and for critical decisions• A Post-Merger IntegrationTeam of experts who standready to assist client teams• A team of people who areeasy to work with and sensitiveto the difficult issues involved in post-merger integration

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of the work we do is for clientswe have served before. Sinceour founding in 1914, we havealways considered client satis-faction our most important measure of success.

Booz•Allen & Hamiltonalso has extensive experienceassisting clients throughout theprocess of forming strategicalliances and acquisitions,including vision definition, iden-tification of critical capabilities,screening for partners, evaluatingpriority partners, negotiating andimplementing alliances/acquisi-tions. We work together withour clients in three ways to helpthem improve their performancein alliances/acquisitions:• Process (InstitutionalizingCapabilities): Assisting clientsto build/improve their underlyingcapabilities in identifying, eval-uating, negotiating, implement-ing, and managing acquisitionsand alliances — based on ourbest practices frameworks andmethodology.• Content (Transactions):Working together with a client ona specific alliance or acquisition,at individual stages in the processor throughout the process.• Alliance Portfolio Renewal:Revitalizing a client’s portfolioof existing alliances by involvingthe client’s current partners in an effort to improve performanceof those alliances, by tuningthem up and reinvigorating them.

We couple the understand-ing from our industry practiceswith our functional expertise inalliances and our geographicalfootprint to help our clientsachieve superior results in theiralliance efforts.

Other related Viewpointsin our Alliances series:

1) A Practical Guide toAlliances: Leapfrogging theLearning Curve(1993)

2) Cross-Border Alliances in the Age of Collaboration(1997)– An Asian Perspective on

Cross-Border Alliances:Different Dreams (1997)

– Betting on Stability andGrowth: Strategic Alliances in Latin America(1998)

3) Institutionalizing AllianceSkills: Secrets of RepeatableSuccess(1998)

Related books in The Age of Collaboration Series byBooz•Allen & Hamilton authors:

1) Smart Alliances: A PracticalGuide to Repeatable Successby John R. Harbison andPeter Pekar (Jossey-Bass, 1998)

2) The Trillion-Dollar Enterpriseby Cyrus Freidheim (Perseus Books, 1998)

3) Balanced Sourcing:Cooperation and Competitionin Supplier Relationshipsby Timothy M. Laseter(Jossey-Bass, 1998)

Booz•Allen & Hamilton is a global managementand technology consult-

ing firm, privately owned by itspartners, all of whom are officersin the firm and actively engagedin client service. As world mar-kets mature, and competition onan international scale quickens,our global perspective on busi-ness issues grows increasinglycritical. In more than 90 coun-tries, our team of nearly 9,000professionals serves the world’sleading industrial, service, andgovernment organizations. Eachmember of our multinationalteam has a single, common goal— to help every client we serveachieve and maintain success.

Our broad experience inthe world’s major business andindustrial sectors includes aero-space, agriculture, automotive,banking, basic metals, chemicals,construction, consumer goods,defense, electronics, energy,engineering, entertainment, foodservice, health care, heavy indus-try, high technology, insurance,media, oil and gas, pharmaceuti-cals, publishing, railways, retail-ing, steel, telecommunications,textiles, tourism, transportation,and utilities.

With our in-depth under-standing of industry issues andour expertise in strategy, systems,operations, and technology, weassist our clients in developingthe capabilities they need tocompete and thrive in the globalmarketplace.

We judge the quality ofour work just as our clients do —by the results. Their confidencein our abilities is reflected in thefact that more than 85 percent

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John R. Harbison, Vice Presidentfor Booz•Allen & Hamilton basedin Los Angeles, specializes instrategic alliances, acquisitions,and post-merger integration. Hehas recently published the book“Smart Alliances: A PracticalGuide to Repeatable Success.”

Albert J. Viscio, Vice Presidentfor Booz•Allen & Hamilton basedin San Francisco, specializes inpost-merger integration, corpo-rate organization, and manage-ment and strategic leadership. Hehas recently published the book“The Centerless Corporation: ANew Model for TransformingYour Organization for Prosperityand Growth.”

Amy T. Asin, Principal forBooz•Allen & Hamilton based in San Francisco, specializes inpost-merger integration, corpo-rate organization, and manage-ment and strategic leadership.

For more information, contact:

John R. HarbisonVice PresidentBooz•Allen & Hamilton Inc. 5220 Pacific Concourse DriveSuite 390Los Angeles, CA 90045310-348-1900E-mail: [email protected]

Albert J. ViscioVice PresidentBooz•Allen & Hamilton Inc. 101 California StreetSuite 3300San Francisco, CA 94111415-391-1900E-mail: [email protected]

Amy T. AsinPrincipalBooz•Allen & Hamilton Inc. 101 California StreetSuite 3300San Francisco, CA 94111415-391-1900E-mail: [email protected]

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