“Courage is being scared to death but saddling up anyway.”  

John Wayne

“Every time you are tempted to react in the same old way, ask if you want to be a prisoner of the past or a pioneer of the future.”

Dr. Deepak Chopra

Community Management: The Missing Dimension  Mobilizing Social Media + More in Your Integration      Organizations that are in the midst of acquisitions need to seriously consider putting in place a community management approach to harness the powers of social media and any other related initiatives in the integration process.  Organizations that manage this complexity will get far more successful outcomes than those who do not take this path. Social media, for one, is moving from being seen as an interesting gambit into an set of tools and technologies to engage relevant communities in all types of organizations.  Although most social media is primarily used in marketing, it is taking on a growing role in connecting networks of people both internally and externally to projects and operations.  As of yet social media is only being used in isolated instances in integrating acquisitions to increase effectiveness, decrease costs and time spent.  But this will change over the next several years.  One stumbling block for using social media in integrations is that people have little experience in managing this array of processes so that they lead to creating value.  This is a critical gap that can be bridged by using community management to facilitate the full range of integration processes which, of course, includes social media. From Project Management to Community Management One of the major reasons integrations fall short of reaching their goals is that they are viewed, for the most part, as exercises in project management that are carried out by a select and limited number of people.  A contrasting approach fusing community management and social media together to allow the mobilization of a markedly broader range of critical people.  It seeks to engage individuals both inside the acquiring and acquired organizations as well as those in the network, but outside of the organization, to participate in necessary integration processes during that unique window of opportunity that an integration presents.A successful outcome requires quite a bit more than merely adding a few social media technologies to the integration mix.  Like any other element of an integration effort, social media will not thrive by itself.  All integration elements, including social media  require active cultivation and responsive, intelligent management. In a recent webinar, Rachel Happe, co-founder and principal at the Community Roundtable (www.community-roundtable.com) focuses on exactly these points. Happe and her colleagues developed the community management model that is discussed here.  She asserts that “Community is not social technologies…It is the about relationship and connections” and what is essential in these types of endeavors is a business understanding of community structure.  sHappe defines a community as a group of people with shared values, behaviors and artifacts.  If any of these three elements is missing the type of relationship shifts to a less powerful relationships found in an affiliation or network.What are the payoffs for instituting community management? The most valuable benefits are: A networked structure to that speeds information transfer Shared ownership and commitment Maximum investment, and Reducing costs A Strategic Initiative  Since community management is a strategic initiative, the first step is to address the need to understand goals and the business context.  That allows the organization to understand the size of the community that has to be created to accomplish the desired outcomes.For the community to work it cannot be a one sided proposition where the organizations harvests all the gains and those participating do not benefit in a significant way.  There has to be a balance between the goals of the organization and the needs of community members. Culture Eats Strategy For Lunch Those involved in managing the community must create the architecture and environment that support the people involved in an integration in achieving their goals.  Managing the community is not a mechanistic act.  It recognizes that an array of people from different backgrounds and perspectives must collaborate for success.  As Happe put it, “If the culture is not supportive of what you are trying to accomplish, you will not get very far. Culture eats strategy for lunch”. This is not an easy task and, in fact, integrations very often falter due to these underlying cultural conflicts. Culture as used here means the organizations values and its way of doing its business. The Community Maturity Model The Community Roundtable developed a “community maturity model”  to give an organization a way to gauge the maturity level of current competencies and determine what issues it needs to address to move through subsequent stages. The further along the continuum, the more ability the organization has to achieve outcomes that might not have been possible in earlier stages. There are eight competencies in the model and four stages of development.  Every organization will have a different competency profile.  Some may have a more developed strategy competency, while others will have come further along in culture or content and programming.  There will be uneven development until congruency across all competencies is achieved. When an organization determines where it is in the model it can have a realistic understanding of what it can achieve at its current stage and identify what is involved is building towards the next stage of development.  Project management is not jettisoned in this model.  Its importance is remains critical, but it is now seen as part of this fuller picture. According to Happe, the model allows you to: Identify desired business outcomes Understand target audiences and members Build short and long term value for all constituents for their participation Know the role and value of a community manager, Be able to prepare a State of Community Management Report Try This Experiment Map out your integration approach from the community management perspective. Gauge what stage you are at in these capabilities and what more you might be able to accomplish if you could develop them sufficiently to move to the next stage. In the course of this experiment you will learn both where your strengths are as well as about what gaps you have.  By doing this you will give yourself beginning familiarity with the community management approach and what it can do for you as well as a gaining a better understanding of where and how you are having the most success and what is having a drag effect on your integration efforts. Please send any insights or comments you have from trying this experiment to jaychatzkel@progressivepractices.com.  We are breaking new ground here and your comments will help build a body of knowledge and experience on how to use the community management model for the best outcomes.   Communication and Change Management Good communication is critical if your acquisition is to be effective.  First, you need to assure your investors that the acquisition is a good financial and strategic move.  Second, you need to make sure that your employees are aware of their changing roles and whether they will or will not have a place in the newly emerging company.  Transparency, openness and respect for people’s legitimate concerns are key in keeping everyone involved in a positive way during this trying period.  If you deal with your employees honestly and directly, you will develop their trust, which will help you enormously as you map out their future responsibilities.  It is essential that you have a clear plan and communicate information about who will stay and who will not stay as rapidly as possible, in order for your company to implement the changes you want. Change management has to be an important consideration when you are going through these transitions.  Acquisitions and integrations can be an extremely novel and volatile experience for both the acquired and the acquiring company.  When done in accordance with the “quantum leap” approach, the acquisition is not just a static addition to an existing company but an opportunity to rethink and reframe a large part of your company or even your entire company.  This means making almost every dimension of your company eligible for recasting in light of new conditions and a new set of options.  It is a time for reappraisal of strategic business goals, major markets, customer targets, core processes, and how your company is structured for making the newly emerging company able to succeed.

“Even if you’re on the right track, you’ll get run over if you just sit there.”

Will Rogers

In this blog:

First, the world economy continues to churn and funding its tightening.  Are we headed into a downturn or is the broader truth that we are in the midst of major change and reconfiguration of economic realities?  We examine the changing M&A global landscape, looking into the dynamic trends and countertrends that shape the market and our opportunities.  Step back from the day to day and think about where we have come from and where we are going.

Second, there are companies that continue to surprise in being successful, even more successful than incumbent companies in their own field or across borders in very different countries. What is their “secret sauce”?  What is involved in coming up with your very own version of a “secret sauce’?

The Changing M&A Landscape: Trends and Countertrends

Let’s take a look at three trends shaping and reshaping the M&A world.

Volatile Markets & Tighter Financing Leading to M&A Slowdown?

First, the most obvious dynamic is that the uncertainties and volatility of August continued into September due to global debt and unrest, and are all leading to a tightening of funds available.  With a tightening of financial markets, a good part of sizable M&A’s cannot be achieved since many are tied to debt financing.  This is causing PwC and others to predict an M&A slowdown for the balance of the year.  The overall economic slowdown is expected to put a downward pressure on valuations of companies in all sectors for the near term.

Enormous Cash Reserves Drive Selective M&A Activity

However, if we look at this from another perspective, which is that the world is in a dynamic change process, more than solely an economic downturn, we see other forces in play that will continue to redo the whole landscape of M&A’s and global economies over the rest of this decade.

The bottom line is that there is an enormous amount of cash available. This is both true on individual companies balance sheets, and is also the case for entire countries.

On the company and sector level, IT is a dominant sector in which companies such as Intel, Marvell, Broadcom, Microsoft and Apple amongst others, are rich in cash and are, or may be considering significant acquisitions.  Their cash reserves, coupled with cheaper acquisition prices for more financially pressed firms, will lead to a sizable amount of IT acquisition over the next several years.

Cross-Border M&A’s Increasing – West to East & East to West

A second long-term dynamic is the continuing growth of cross-border acquisitions.  On the one hand, some leading product suppliers in the West have recognized that to grow they need to establish a presence in developing countries, something that will be, in good part, accomplished through acquisitions.

But an even more powerful part of the cross-border dynamic is coming from Asian companies who are moving into European as well as North and South American markets through acquisitions.  These acquisitions are driven both on the company level as in the case of India’s Tata, and, in the case of China, by both individual companies and a by M&A’s being named a top national governmental policy priority.

China: The Largest Driver

According to Ross James, manufacturing M&A partner with Deloitte, “Industrial intellectual property, manufacturing know-how and strong brand names will continue to be the main incentives for Chinese manufacturing companies pursuing overseas acquisitions.”  These companies are also cash rich and have sufficient capacity to finance M&A’s.  James continues to say that, “If the current trend continues, 2011 to 2016 will see greater Chinese investment into the EU, with deals exceeding $1 billion becoming commonplace.  Significant domestic demand fueled by China’s burgeoning middle class, will play a key role in acquisition activity.”

The Chinese government is a major player in this dynamic.  In its 12th five-year plan, China’s Central Committee set out four major tasks for the future, with accelerating M&A activity being one of them.  This is something that Chinese “state capitalism” brings about. Just imagine the reaction to a push for that kind of industrial policy decision in the US or other Western countries.

While nationalism has some role here, there is much more to this decision by China. Duncan Innes-Ker of the Economist Intelligence Unit and based in Beijing says, “China would seek to diversify its investments after low returns from its US currency holdings and concerns about the greenback’s future.  China is likely to be increasing its appetite for risk, with mergers and acquisitions set to rise.”

Tata: A Template for Cross Border Acquisition and Integration?

India-based Tata Group, whose motto is “Leadership with trust”, provides an exciting glimpse of the future in the present.   Tata saw it could not confine itself to India if it was to become the big and international concern it believed it needed to be if it was to thrive in its chosen businesses.  Tata began acquiring an array of business in the UK, starting with Tetley Tea in 2000 that brought Tata immediately into being a global entity.  Tata followed by acquiring Jaguar/Land Rover (JLR) where it gained valuable off road technology that it brought back to its auto operations in India.  Much to the surprise of many, it has since turned JLR into a profitable venture.  Tata then went onto the acquisition of Corus’s steelworks, a transaction that brought Tata into the specialty steel business, something that would have been hard to build on its own.  All of this put together has made Tata the largest manufacturer in the UK, with a payroll of 45,000 and is positioning Tata as possibly the UK’s leading edge company in attitude and practice.

What is Tata’s “secret sauce”?  Tata was a challenger conglomerate from a formerly peripheral area that went international in order to access resources.  According to Andrea Goldstein, Senior Economist at the Organization for Economic Co-operation and Development (OECD) and the Center for the Advanced Study of India, “Tata was driven by multiple factors, including the need to access new markets, the opportunity to integrate the value chain (e.g., in steel), and the quest for brand control (e.g., in tea, autos, etc.).  This strategy proved feasible because Tata possesses strong leadership combined with vision; can exploit the possibility of leveraging increasingly developed financial markets in India, a large domestic market, and global liquidity; and reacted fast to the opening of specific opportunities at given times.”

Will One Size Fit All?

Is the Tata way the only way for all challengers?  No firm, or even a nationally backed venture, can copycat the core capabilities that were uniquely cultivated and have come together to enable Tata over time to to be the broadly effective enterprise it is in both India and in its extensions across the globe.  It turns out that its secret sauce is really not that secret: but one that involves strong values, vision, and leadership, coupled with risk taking, healthy discipline and excellent execution skills. Secret sauce or not, this is its competitive advantage and it works.

The reality is that any company, conglomerate or even national initiative can only succeed over time if it builds up a similar cluster of capabilities.  Leveraging financial strength is the usual focus. It is a necessary ingredient in the sauce but it is not sufficient.  All of these other capabilities need to be in play as well.  The look and feel of each of these initiatives will differ from one to the next, but the underlying sets of capabilities will have much in common.

To 2016 and Back

Where will these initiatives come from?  Entities from China, India and Brazil are the most frequently mentioned emerging players, but don’t be surprised if other challengers such as Turkey or countries in Eastern Europe and beyond come onto the stage as well.  And, with enough competitive stimulus, the next generation of recast existing firms (e.g.. possibly Ford and others) and new firms in North America and Europe will join into the mix.

With this as our starting point, let’s take a step back and note how the world of 2011 differs from the world of 2006, just five years ago.  From there, go forward to visualize the world of 2016 and detect in what critical and key ways it will differ as well. Going back and forth will help identify the dynamic trends that are reshaping our markets, both for now and into the future. An awareness of these dynamic trends gives a handle on how to reconsider how companies can move through all the pre-deal and post-deal integration phases to set themselves up for achieving unprecedented gains.

Create Your Own “Secret Sauce”

What will drive success in acquisitions and integrations going into the future is the kind of leadership that shapes and guides an operating context.  It sets the direction and tone for the organization through its work in shaping the vision, values and strategies for the new entity that emerges from the integration.  It is the leadership’s role to see that the organization is developing the capability to create opportunities for acquisitions and other growth combinations and to take advantage of those that are brought to the organization.  To do this, the leader’s strategic vision has to be shared by everyone who is involved with the organization in its supporting or partnering network.   This type of leadership cannot be passively delegated or assumed to exist at other layers or areas of a company.  However, it can be cultivated and manifested at all levels of the organization.  This is of great importance because every level has to take a leadership role in its area of responsibility.

If the leadership does not keep the organization nimble and responsive as it goes through acquisitions and integrations, the organization is likely to grow in size more than in capability, value and profitability.  It is important to note that in some cases, even companies with the best integration capabilities have made only marginal gains in financial and general performance when growth synergies have not been fully pursued.  The challenge that must be overcome is to integrate acquisitions in a manner that will continually renew the organization and its capability to perform and grow in a fast-changing business context.

For example, a new CEO set a stretch goal of doubling the company’s revenue in a three-year period.  To achieve this goal, business unit leaders had to reconsider everything they knew. Standard operating procedures would no longer work.  The leaders had to consider options that they had never seriously considered, including an aggressive acquisition model.  They had to see new possibilities, learn new skills, work with people inside and outside the organization in new ways, and achieve tangible success.  At the corporate level an infrastructure was created to engage with them to develop the acquisition capabilities to accomplish that audacious goal.  In this way, an acquisition/integration approach became an outgrowth of the overall strategy and, at the same time, created the opportunity for the organization to renew itself.

Comment on Microsoft’s $8.5 billion acquisition of Skype:

“Certainly Microsoft will be buying a fast-growing, well-positioned global asset with an unbeatable brand. But that’s what eBay thought when it bought Skype in 2005 for $2.6 billion. The devil is in how that asset is managed, and whether it can integrate with existing products and services. eBay blew it on both counts. If Microsoft does the same, we could wind up writing this story again with different names — or maybe with some of the same ones – a few years from now.”

Kevin Manley, Fortune and CNN Contributor

Quote of the Month:

“Integration is not just about cutting costs… I think the real integration is how do you energize the (newly combining) company and get the two companies to work together with one common goal, to put aside their ProLogis and AMB jerseys and really work well together.”

Hamid R. Moghadam, Chairman and Co-CEO, ProLogis

“Any dope with a checkbook can buy a company.  It’s what you do afterward that matters.”

Henry Silverman, CEO of Realogy Group, 2006

Trying to figure out if your proposed acquisition will be worth it?  Clayton Christensen and his colleagues, Richard Alton, Curtis Rising and Andrew Waldeck, offer a framework for sorting out what they see is complete confusion on what works in M&A’s and what does not in “The Big Idea: The New M&A Playbook” “(Harvard Business Review).   They say there is a good chance that much of what we understand about M&A strategy and integration is not only confused but wrong as well — and then offer some basic ways to look at things a different way to get the successful outcome you always wanted.   This is a significantly different take on M&A strategy and is a natural outgrowth Christensen’s previous work on disruptive innovations.

The authors give us a strategic perspective that enables differentiating which acquisitions will be worth pursuing and which will not.   A set of reference points is included indicating the particular forms of integrations that need to be implemented so that each of the different types of acquisition can be successful.  Christensen et al’s take on M&A’s gives us both the opportunity to cast off the strategic lenses we have become accustomed to wearing and a chance to try out this alternative way to approach what matters in M&A deal making and follow through.  The dust has not yet completely settled but they may be providing us a paradigm shift in how to consider and act on acquisitions, both large and small.  This is a landmark accomplishment.

Despite this achievement, there remains an important consideration to take into account:  like most M&A strategy-based viewpoints this framework does not sufficiently include attention to the practices required for carrying out a successful integration – and this is the half of the battle where most acquisitions falter.   Our advice is take advantage of Christensen’s breakthrough understanding to get on the right track strategically.  Then make sure to link it to the Beyond the Deal approach to integrations so that you can have the kind of follow through to complete the process for achieving unprecedented value creation.

What are Christensen et al saying?

Christensen et al say that acquisitions “fall short of expectations because executives incorrectly match candidates to the strategic purpose of the deal, failing to distinguish between deals that might improve current operations and those that could dramatically transform the company’s growth prospects.  As a result, companies too often pay the wrong price and integrate the acquisition in the wrong way.”

The authors see there are two reasons to acquire a company.  The most common one is to stage acquisitions that seek to boost a company’s current performance – either by improving its “premium” position or to cut costs.   They state that this kind of deal “almost never changes the company’s trajectory…and CEO’s are often unrealistic about how much of a boost to expect, pay too much for the acquisition, and don’t understand how to integrate it.”  Why is this?  These are mostly “resource acquisitions” where the acquiring company keeps certain resources that it incorporates into the acquiring company and jettisons the rest.  This type of acquisition succeeds in those scenarios where the acquiring company has high fixed costs and which allow it to scale up profitably.

Equally important is that the target company’s resources are compatible with the acquirer’s.  In those cases the acquirer dissolves the business model of the acquired company and folds in the specific resources that improve performance.  Cisco and Apple have been fairly adept at that and those types of acquisitions have paid off for them.  But very often in practice there are fewer opportunities for the kinds of scale increases that the acquirer expected.  The result is that actual cost synergies do not live up to what the acquirer anticipated going into the acquisition.  Other types of synergies also, such as cross-selling synergies also turn out to be considerably tougher to capitalize upon than what appeared on paper.

A second, but less frequent, reason to acquire a company is to “reinvent the business” model and redirect the company in a fundamental way.  The central dilemma with this model, according to the authors, is that “almost nobody understands how to identify the best targets to achieve that goal, how much to pay for them and how or whether to integrate them.   Yet they are the ones most likely to confound investors and pay off spectacularly. “

One Pill Makes You Larger and One Pill Makes You Small

For Christensen et al, the premise is simply this:

“A company can’t, however, routinely plug other elements of an acquisition’s business model into its own, or vice versa. Profit formulas and processes don’t exist apart from the organization, and they rarely survive its dissolution. But a company can buy another firm’s business model, operate it separately, and use it as a platform for transformative growth. We call that a “reinvent my business model” (RBM) acquisition. As we shall see, there is far more growth potential in purchasing other companies’ business models than in purchasing their resources.”

This less traveled path requires a different type of thinking and acting.  Instead of going towards the expected and increasing commodizing a company’s resources and products, the successful acquirer seeks to decommodicize.  It locates where the value resides in the acquiring organization and finds the unique arrangement for integrating the processes, offerings and resources of that entity.  It may find it worth paying a significant premium for a target that can be utilized to reinvent its business model.  This is the case when it understands that the target firm’s business model may be a unique input for the trajectory it seeks to put in place.

Making the best strategic choice can be very rewarding.  EMC acquired VMware and recognized that its business model was quite distinct from own storage model. EMC choose not to closely integrate VMware, kept both business models and has reaped extraordinary rewards from VMware’s disruptive practices in its market.

On the other hand, if an acquirer confuses the two approaches the result can be disaster.  When Daimler-Benz acquired Chrysler it did not perceive that there was value in the business model that Chrysler had been developing and focused on eliminating “redundancies”.  As it folded Chrysler’s resources (brands, dealers, factories and technology) into Daimler, “the real basis for Chrysler’s success (Chrysler’s speedy processes and lean profit formula) disappeared.   Daimler would have served itself far more to preserve Chrysler and its business model as a separate entity”.

Christensen et al’s approach gives us a way to distinguish exactly what can be accomplished with each acquisition using each business model – and that, in itself, is their great contribution.

Acquisitions: Look at Them as Three Legged Stools

Try this thought exercise: Take a look at several acquisitions, either inside or outside your organization.  See if the acquiring company gave sufficient consideration as to where the real value lies and structured the integration to capitalize on that reality?

Also do not lose sight of the fact that even when making the best strategic choices an acquirer must also forge a strong link to an adequately comprehensive, deep and effective integration practice.  Look at the model as being a stool with three legs.  This is the third leg on the stool. The first leg is to strategize for your desired outcome.  The second leg is to sort through to optimally structure and leverage for the value that is possible.  And, the third leg is to have in place the integration process that you can mobilize to create unprecedented value for the new organization.

Capabilities are often discussed in admiring terms, but rarely grappled with in a way that will make real differences in organizations.  Paul Leinwand and Cesare Mainardi of Booz & Company, have done exactly that in their new book, The Essential Advantage: How to Win With A Capabilities-Driven Strategy (Boston, Harvard Business Review Press, 2011).  Their framework is the result of years of working with a variety of companies in different fields, markets and geographies.  They focus on what it takes to makes companies successful overall, but recognize that a capabilities perspective is something that is both underrepresented and uniquely important in an acquisition and integration setting.

Here is a working review of their new book and juxtaposed it with the Beyond the Deal approach.  No matter how good a good piece of work, and this is one of them, there is only so much that the authors can fit between the covers.  We are delighted with the contributions that the authors have made but see that the Beyond the Deal approach is an essential complement to what Leinwand and Mainardi are offering.

The Essential Advantage is a provocative piece of the pie.  It raises important questions and provides a viable road map to a company achieving exceptional outcomes in any market.  At the same time the combination of the specific set of capabilities advocated by the authors with the core integration capabilities mapped out in Beyond the Deal provide an even more compelling synergy for those organizations that have the leadership, desire, determination and vision to carry this out over the long term.

Another Important Piece of the Acquisition Integration Puzzle Comes Into Place

A Valuable Contribution

Paul Leinwand and Cesare Mainardi of Booz and Company give us a handbook for how to forge a capabilities-driven strategy that can be used to sharpen the choice of acquisition targets and then guide the creation of value in newly integrating firms.  Booz’s research shows that a firm’s success in any market is an outcome of achieving a coherence premium, which the authors define as a tight match between strategic direction and the capabilities that enables them to outperform their competitors.  Coherence becomes a firm’s essential advantage, and what strikingly separates the successful firms from their competitors.

While coherence is something that is easy to talk about, it is quite challenging to work through and put into practice in a complex organization.  Think about it: As firms evolve they develop a variety of product lines, customers with unique needs and characteristics, and most frequently widespread geographies and diverse cultures.  A great amount of dedication, insight, determination and ongoing practice is necessary to navigate the process that yield such an essential advantage.  And, this is precisely the path the authors chart.  They have consistently found three major elements make up coherence:

·      A way to play – which is how everyone in the company understands the way the company creates value for customers

·      A capabilities system – the engine for creating value – this consists of the three to six capabilities that, in concert, allow companies to most powerfully deliver their value proposition by providing the basis for coherence, and

·      A products and services fit – where all products and services leverage the same capabilities system.

What is a Capability?

The authors are very clear in how they define these core capabilities:  i.e., a capability encompasses the ability to reliably and consistently deliver a specific outcome.  In their view, capabilities are distinctive strengths, with each representing an extraordinary competence that few others can master.  These capabilities can take years to develop, and the more distinctive that capability and the more related it is to the way a company “plays”, the more valuable it is. Good examples are Amazon’s merchandising capability or UPS’s logistics capability.

Successful capabilities-driven companies may combine seemingly unrelated capabilities to achieve their desired outcome.  One such company is Zara, a Spanish retailer, which brings together customer insight, rapid response manufacturing innovation, logistics and nimble fashion design in a very specific way.  The result is that Zara underprices its competition by fifteen percent, changes its inventory ongoingly, and sells a higher proportion of its clothing than other retailers.  These capabilities are carefully selected and nurtured, shaped and reshaped as understandings and conditions change.   Zara’s facility with the capabilities it has cultivated enables it to position itself in a way that is very difficult to copy or challenge.

The “Right To Win”

A specific aspect of a capabilities-driven strategy is that having the necessary set of key capabilities is the deciding factor in whether a company can see itself as having the “right to win” in markets in which it seeks to operate or as relates to winning an acquisition bid.  Finances may matter, but capabilities determine if the company can succeed in carrying off what is necessary to make an acquisition a success.   Then again, there is the question of whether the target company has the capabilities that complement and extend the capabilities of the acquirer.

Answering these questions requires a lot more than wishful thinking and acquiring bargain or trophy properties.  A “good buy” or a good surface match may be difficult to impossible to integrate into the new organization.  The acquirer needs to thoroughly evaluate the types and qualities of the target’s capabilities, something that changes the nature of target search criteria, due diligence, negotiations, integration planning and the actual integration itself.  In short, taking on a capabilities-driven strategy is a game changing act over both the short and long haul.  But it is just a much a necessary one.

Without this kind of discipline capabilities are too vaguely defined.  Any looseness undermines building the judgments necessary to cultivate the specific skills and technologies required for success.

But Wait, There’s More

As much as we applaud what Leinwand and Mainardi outline in The Essential Advantage, we feel that the authors have not sufficiently acknowledged the other types of capabilities that we at Beyond the Deal see provide the pillars of a winning acquisition process.  The authors call the other necessary capabilities “table stakes”, meaning that they are essential but that any and all players need to have them to be “in the game”, but at the same time they do not necessarily provide distinctive advantages.

In our experience, while companies have achieved various levels of core integration capabilities, we have yet to find any that have fully, thoroughly and comprehensively cultivated them to the degree that enables achieving quantum leap integration outcomes.  The six core capabilities we find central to integration success are:

·     Strategic Agility: Ability to create strategies and shape action plans that take advantage of market opportunities and organizational strengths

·     Market Agility: Ability to respond to changing dynamics of the marketplace and uncover new possibilities to serve customers

·     Organization Building: Ability to build the right culture, implement the right leadership principles, build trust forge robust processes, and incentivize engagement of those involved

·     People Management: Ability to recognize talent, build on strengths, select people quickly and make sure the right people are at the right levels of challenge

·     Project and Process Management: Ability to put the right integration plan in place and to implement that plan effectively, and

·     Knowledge Management, Learning and Innovating: Ability to share knowledge throughout the company to insure rapid learning and deep, experience-based knowledge that continually sharpens acquisition and integration practices.

An organization needs to determine the “recipe” or “mix” it requires from both the strategic selection of capabilities advocated by Leinward and Mainardi and the core integration capabilities discussed in Beyond the Deal.  One without the other may leave the acquirer and the newly emerging company lacking in what is necessary to build the “new organization” from the legacy resources of the original firms.

The recent acquisition bid for Groupon by Google, examined in previous newsletters, is a good case in point of a clash of cultures, coupled with a sufficient development of core integration capabilities.  Google did not demonstrate to Groupon that it had the right to win its bid and Groupon rejected that bid.  Groupon saw that Google did not sufficiently appreciate the specific capabilities it had cultivated and viewed that it had brighter prospects by pursuing them on its own.  The technology-based Google was rebuffed not only by Groupon, but also by a number of other social media companies it sought to acquire.  In addition to the specific capabilities at issue, we see that Google’s did not show marketing-based Groupon that by acquiring it, Google had the core integration capabilities to fast track the newly combined entity to even greater gains than if Groupon stayed on its own.

Can We Learn From History?

One more intriguing example to consider is the recent acquisition by AOL of the five year old Huffington Post (for $315 million).  The question is whether AOL’s integration capabilities have grown sufficiently beyond those it had at the time of its TimeWarner acquisition/integration debacle.  AOL wants Huffington Post’s ability to generate content, but does it have both the specific and core capabilities to navigate an integration that creates a higher level of synergy or will a poorly supported acquisition effort drag both companies down to lower levels of mediocrity?  Hope springs eternal, but the reality is that there is no quick, magical fix – and both types of capabilities take extensive time and levels of effort to build.

Towards A Dynamic Fusion

We are indebted to Leinwand and Mainardi for skillfully demonstrating how choices of specific capabilities support the a company’s ability to create its brand of distinctive value.   Our caveat is that, while specific capabilities are the foundation for path and actions for a company, it remains the case that it is the core integration capabilities that enable an integration that can achieve unprecedented results.  Armed with this realization we can better articulate how a core set specific capabilities can join with the full power of core integration capabilities to yield the full complement of what a company needs for its quantum leap change.

Why will 2011 be a big year for M&A? The catalysts are: growth, technology, cash and the economy

Hillary Cramer of Forbes looked at various sectors where significant acquisition activity is likely to take place, providing a good road map for the months ahead.

In our era of slow internal growth, managers are looking to move top-line numbers – and adding new business units or customers via a transaction is a way to improve growth projections. Acquiring firms that are focused on particular sectors can be candidates to provide desired growth. Such companies are very attractive, as buyers are looking for technology-based competitive advantage to leapfrog competitors.

According to Steve Lipin, senior partner at the global corporate communications powerhouse, the Brunswick Group, “We’re seeing a lot of interest from overseas acquirers closely studying their options in North America,” says Lipin, who specializes in all areas of global M&A, especially cross-border transactions. “But don’t count out the big U.S. companies using 2011 to expand their strategic and geographic footprints as well.”

Attractive Sectors

We can anticipate a growing number of deals this past year across a number of sectors.

Technology is one such major sector, having seen a huge number of acquisitions by companies of all sizes over the last year. The largest buyer has been Google, with 25 acquisitions in 2010. Oracle made nine deals, including the $7.4 billion acquisition of Sun Microsystems. Additionally, International Business Machines did 15 transactions and Hewlett-Packard acquired six companies, including 3PAR for $2.35 billion and Palm for $1.2 billion. This activity shows no signs of slowing; indeed, technology transactions should only accelerate as tech continues to be a key component of businesses and consumers’ purchasing decisions in this renewed economy.

Keep an eye on these other sectors for significant acquisitions to take place are:

• Advertising industry and media companies from both strategic and financial buyers interested in content and services

• Other sectors that were rocked severely during the recession, like real estate and finance, are now seeing survivors move to increase market share and divest non-core assets

• Health care: Big pharmaceutical companies like Eli Lilly, Pfizer and Merck, along with biotech firms and those in the health care services sectors will all be on the prowl.  Increasing demand from an aging population, health care legislation, and expiring patents creates the need to buy smaller biotech firms with new drug discoveries.

Of course, stockpiled cash and other factors, including regulatory changes, are prompting major acquisition moves more broadly across the US and other world economies.  The acquisition by Duke Energy of Progress for $13.7 billion is another sign that the broader market is thawing under the right conditions.

All of this comes together to drive more and more deal making in 2011.

Another Take on Groupon’s Rejection of Google’s $6 Billion Acquisition Bid

Too often we who are focused on our special areas need to listen to other voices.  Here are excerpts from an interview of James Altucher (JamesAltucher.com) with Henry Blodget on why Groupon turned down Google’s $6 acquisition bid.

The refreshing thing that this conversation reveals is that there is a broader dynamic at work here.  This is not just the case of one company seeking to acquirer another and being thwarted.  Rather, what is taking places is the emergence of a whole new group of companies that are moving their field, and in this case the Internet, to a next level.  The move for acquisitions takes on a new and different meaning here.  There must be much more than the usual incentives to entice the owners of these new generation companies to sell out at a time they are seeing that “they” are the future.  The question then becomes, “What could a company like Google do and how could it relate to these new generation firms so that they could leverage each other for a greater outcome than either could achieve themselves.”

Consider James Altucher’s (jamesaltucher.com) comments in a interview with Henry Bloget, Editor in Chief of The Business Insider (http://finance.yahoo.com/tech-ticker/groupon’s-rejection-of-google-marks-a-new-and-improved-internet-bubble-says-james-altucher-535706.html?tickers=goog,yhoo,^ixic,qqqq,xlk):

According to Altucher:

“It’s not only Groupon.  Everybody has rejected Google:  Facebook, Yelp, Twitter, maybe Foursquare, maybe LinkedIn, etc.

“All of these companies are fast growing, earnings positive companies.  It is not just a bubble.  This is a real boom.  They are saying, “No” to Google not because Google’s cash or stock are no good.  They will make more money than if they took Google’s stock.

“These companies are going to be worth hundreds of millions of dollars.  The investors and employees are going to recycle that money into the next generation of Internet companies.  These companies are growing 15-20% a year.  They should be worth $15-20 billion or more.  The owners know that.  The owner of Groupon is worth $100 million.  Why would he want to be an employee of Eric Schmidt when he could go on to make $3-4 billion out of this?

“All of these companies are going to go “public”, meaning that Google won’t be the only acquirer.  Groupon and others (Facebook, Twitter, LinkedIn, etc.) will also be active acquirers.”

To confirm Altucher’s point, the financial news service, Dealbook, reports that Groupon Inc. is pushing forward with its plan to take the company public, at an estimated $15 billion or more.”

This is another dimension of the “new normal”.  It is not just the “Crash of 2007″ but also the emergence of a whole new cluster of companies that are creating value that did not exist in exactly this way before.  These new companies and new futures need to be appreciated for what they are.  For those involved with growing organizations through strategic acquisitions, this is a departure point for rethinking what an acquisition is and what it could mean.

For one thing it means that the company that is seeking the acquisition must present at least as good an opportunity for the target firm as the one it could create on its own.  The acquirer must also offer a compatible culture, provide a high degree of recognition, and serve as a vehicle for the target to achieve its goals.  In a sense the acquisition equation is being reversed here.  The acquirer must demonstrate that it is worth considering, rather than the other way around.  Partnering between the acquirer and the target moves to a whole new level of equity here.  Once this is understood, the choice to acquirer becomes much clearer.  The acquirer must demonstrate that it has the set of capabilities that will lead to mutual success for all parties.

The upcoming blog will go into types of both partnering and critical integration capabilities in significant depth.  We will be reviewing a the newly published book, The Essential Advantage, which has a major focus on capabilities and examine the related need to take partnering in acquisitions and integrations into account to achieve unprecedented outcomes for the newly emerging company.

I wish everyone a wonderful holiday season and an outstanding New Year in 2011!  As you can see below, we are in a transition into a year of promising outcomes.

Thanks for being part of the Beyond the Deal Newsletter community.  We appreciate your inputs and look for our vibrant community to grow over the next year.

All the best,

Jay Chatzkel, Editor

M&A’S To Hit $3 Trillion in 2011, According to Report:  The Integration 2.0 Approach and the Rise of the “New Normal”

The New York Times DealBook has commented that “The recent rebound in mergers and acquisitions is expected to strengthen significantly next year, according to a new report, with global deal activity on track to rise 36 percent, to $3.04 trillion.”

This would be the highest amount since 2007, when the market registered $4.28 trillion in deals in the months prior to the financial crisis.

“A widespread surge in confidence will power the rally, according to the report, a joint project by Thomson Reuters and Freeman Consulting Services that included interviews with 150 executives from a broad swath of industries.”

$3 trillion is a lot of money but this is still lower that pre-recession levels.  The comment is that the appetite for deal is gaining momentum in spite of lingering credit concerns.

So, the pace is picking up.  But are we just repeating the cycle with the same approaches and practices?  Yes and no.  Despite the dropping out of the bottom of the economy and all of the talk of the “new normal”, the “old normal” of tactical acquisitions focusing on deal pricing continues dominate the thinking and practices of many firms.  At the same time, some firms like Southwest Airlines, are revisiting their strategic models and realizing that they need to reframe themselves to be competitive over the next number of years.  Additionally new tools and approaches are coming together in the Integration 2.0 model that continues to be discussed in this Newsletter.

The companies that grasp the Integration 2.0 approach will be able to leverage greater gains though more agile processes and an understanding that the real work of the integration is to engage all parties in contributing to the bringing the two companies together as one transforming new organization.  These companies most likely will be a minority but they will also be the real winners in the M&A upswing.

Springboard #1:  Identifying the Customer Strategy for Your Newly Combined Company

Setting in place the right set of springboards is necessary if an acquiring company wants to achieve a quantum leap integration.  The first springboard involves identifying your renewed customer strategy and building your brand framework from that.

This customer strategy should outline how your company will provide value to different segments of your customer base.  It should identify the brand experience and levels of customer relationships that your company is seeking to obtain.  A good customer strategy examines the new customer franchise that has been brought about by the acquisition and finds new ways of leveraging this franchise as a whole.  The key requirement is for our company to reexamine your previous assumptions as how how to segment and approach your customer franchise.

An effective customer strategy is geared toward making sure that your new company is focused on your most profitable customers and reinforces the relationships with those customers, but also aims to grow a customer base that values your company’s updated suite of products and services.

Your emerging company should work to define the footprint you seek to occupy in your new market space, given your newly combined capabilities and configuration.  This space is likely to be different from what it was before the acquisition because your new company will have new products and/or services and possibly new distribution channels to reach customers whom you could not reach before.  In other words, you need to define your market space in terms of:

• Who your customers are
• How you segment those customers
• How that corresponds to your company’s brand

A way to get a handle on this to map out your responses to the questions below:

• What is the new customer franchise of our newly combined company?  How does it differ from the customer franchise we had before we acquired this new company?  What new opportunities does this present to us?
• Is there any merit in keeping the two franchises of our new company separate?  If now, how will we segment our new customer franchise?
• Given the configuration of our new customer franchise, how can we accelerate its growth with the acquisition of new customers?
• What new approach, if any, do we need in order to deal with different customer segments?
• How will we structure the portfolio of brands involved in our new company?  Are the existing brands best kept separate?  Is there any advantage in double branding?
• How can we ensure that the combined capabilities of our new company are brought to bear to meet the needs of our customer segments?
• What are the most profitable segments of our new combined franchise?  Is there any justification for dropping the less profitable segments?

Examining what customer strategy you have is the first step.  Seeing how you will move forward to reframe that strategy in light of the significant acquisition is a major challenge but one that will be a springboard to establishing the framework, practices and offerings that will create major additional value for your universe of current and potential customers.

The next Beyond the Deal Blog will look into Springboard #2: Setting the Company Strategy for Your Newly Combined Firm.

The six springboards are:

1.  Customer strategy and branding: The new customer strategy should outline how your company will provide value to the different segments of your customer base.  The brand promise defines the targeted customer experience.

2.  Company strategy: The purpose of your company strategy is to make sure that the organizational structure and processes you have put in place can best realize your overall business and customer strategy goals.

3.  Integrating culture and leadership principles: To integrate the culture of your newly combined company you need to align the values that underpin the culture of the two companies before they combined.  The reconciled values define the new cultural principles and leadership expectations, in line with the vision of your new company.

4.  Integrating knowledge insights and business principles: As part of the integration process, it is important that you combine and reshape the bet knowledge and insights of both the acquiring and acquired companies to form an integrated set of business principles.

5.  People strategy: The purpose of a people strategy is to select and retain the best people from the two existing companies for roles in your newly combined company.

6.  Information technology and systems: The goal in an integration of information technology and supporting systems is to design your new company’s information architecture based on what your new company is seeking to achieve.

Using these springboards effectively provides the thrust to move the integration forward much more rapidly and effectively.  Springboards enable you to work through and attack potentially paralyzing issues and areas, while at the same time energizing the people and the emerging structure of your new company.

Planning and then taking action to become a high-performance company strongly contrasts with what most often happens after acquisitions.  Instead of moving to a higher level of value creation, too many newly integrated companies end up performing at the lowest common denominator of the two previous companies.

In most of these cases, the primary gain is in sheer bulk, in terms of more customers, more distribution channels, more products, and more overall revenue.  However, bulking up does not necessarily go hand in hand with achieving high performance.  Enhanced bulk may help a company gain a higher market share, but it is another thing to transform a company from one that is simply bigger to one that performs better.   Instead a frequent outcome is that the increased bulk results in a clumsy, plodding company with a slower response time than it had before it acquired the new company.

Here is the formula for how each of the six springboards can help your company reach a higher level of performance.

Capabilities + Springboards = Quantum Leap Performance Outcomes

The next series of blogs will explore each of these six springboards.

Southwest Airlines is moving beyond its strategy of organic growth with its acquisition of AirTran. It went as far as it could go with the strategic model that it first sketched out in 1970 and needed to consider the kind of changes that would allow it to move to its next stage of development.  This major shift in strategy will soon enable its customers to stay on Southwest aircraft to travel on Southwest to major airports across the US.  It also means that Southwest will now compete more broadly and directly with legacy carriers in the US as well as the Caribbean, anywhere and everywhere, as it becomes a significantly fully national and international carrier.

The M&A media and reviewers universally focus on a certain array of factors that have to be worked out in the acquisition and its integration, including :

• Southwest is faced with adding 8,000 new faces to its 33,000 current employees.

• It must bring two cultures together

• Southwest has to deal with always difficult union/non-union, seniority and wage differential issues,  all of which must take place while its keeps its planes flying.  Further, one of Southwest’s great strengths is that is has a personnel  policy based on hiring for attitude and training from skills.  Will it have to revamp that approach with very sizable influx of new staff at all levels of the organization.

• Southwest must deal with moving from a business model based that is keyed on 1)  fast turnarounds at smaller, regional airports and 2)  using  a single model of aircraft.

Looking at Southwest’s challenge from a different perspective that centers on developing a set of core integration capabilities would yield a significantly better outcome. This core integration capabilities approach takes the concerns raised by analysts as real but deals with them as related concerns that are part of the overall integration process.  Developing this set of core integration capabilities supports the integration in every phase and aspect of the acquisition process in a way that actually enhances Southwest’s ability to deal with these thorny issues, such as seniority of flight officers.  It needs to be noted that these are issues that no other airline has, as yet, successfully resolved.

There are six core integration capabilities that Southwest needs to bring to bear to achieve unprecedented gains from this acquisition.  These are all capabilities that already exist in varying degrees at Southwest and Air Tran as well and now need to be seen from the perspective of the acquisition.

1.      Strategic agility: Southwest has shown the ability to create strategies and shape action plans that take advantage of market opportunities and strengths.  This is not a one-time action since that strategy has to be continuously renewed with every significant change of circumstances.   One framework for instilling strategic agility is to adopt the rapid prototyping model described in the January 2010 issue of the Beyond the Deal Newsletter (www.beyondthedeal.net/Newsletter.html).  Also draw on the Beyond the Deal book for extensive discussions of strategic agility as well as the other five core integration capabilities.

2.      Market agility: Southwest needs to be able to respond to the changing dynamics of the marketplace and uncover new possibilities to serve customers.   The opportunities created by the acquisition are huge if Southwest can keep to its core values and present a viable and enriched value proposition to customers in comparison to what its competition (other legacy carriers) offer.

3.      Organization building: Southwest needs to build on its current capabilities to be able to nurture the right culture, implement the right leadership principles, build trust, forge robust processes, and incentivize the engagement of those involved in the company.

4.     People management: Southwest needs to draw on and enhance its tradition of recognizing talent, building on strength, select people quickly and make sure that people are placed at the right level of challenge, neither underestimating nor overestimating their abilities.

5.     Project and process management: Southwest needs to put the right integration plan in place and to implement that plan effectively.

6.     Knowledge management, learning and innovating: Southwest needs to be able to share knowledge throughout the newly combined company to ensure that rapid learning and deep, experience-based knowledge continually sharpen its acquisition and integration practices.

The acquisition is a unique window of opportunity to bring about significant change.  One comment was that the challenge to Southwest in this acquisition is that it remain “Southwest”.  When done well, growth does not mean losing what is of value, but transforming it at a higher level, with a more powerful set of offerings, opportunities and direction.   We will continue to follow how well Southwest is taking advantage of this major acquisition as an opportunity to dynamically renews itself, while preserving its essence, which has been carefully cultivated at Southwest since its beginnings.

We are indebted to Blogger Steve Cheney (Steve’s Blog: Thoughts on technology, business  and strategy) for his very incisive statement concerning Intel’s recent major acquisitions of McAfee for $7.7 billion, Infineon’s wireless businesses for $1.4 billion and Texas Instruments’ cable modem product line.  Cheney’s comment was that M&A activity does not substitute for having a good strategy.  In particular, “M&A should be used to augment a corporate strategy, not as a strategy to grow in and of itself.”   Despite, or perhaps because of Intel’s great success as the world’s largest semiconductor chip maker, it has an unenviable record with acquisitions aimed at diversification.   This past pattern could repeat again with the new acquisitions.

The question is whether Intel is willing to go beyond being the acquirer and move onto the path where it remakes itself as a different kind of organization.  This does not happen often, but it does happen, as seen in the case of IBM under CEO’s Lewis Gerstner and currently Sam Palmisano.  This remaking is not as essential where a company makes a series of smaller, bolt-on acquisitions which can be readily absorbed by the acquirer or even kept as autonomous or semi-autonomous business units, but this is not the case with Intel’s recent transactions.

Cheney’s observation is well worth considering, especially now that M&A’s have quickly “roared” back on the radar screen.   The glut of cash in corporate accounts, coupled with cheap credit and meager returns from organic growth options has made pulling the M&A trigger very attractive for many companies.  But, does having the money and even getting a good “deal” make that deal a success?

If a company like Intel turns out to have a “not invented here” attitude, there is little gain even from a good acquisition.   If that is the case, in its post merger integration it cannot freely seek out and experiment with its new assets, creating breakthrough synergies as it goes about emerging as a newly combined entity.

Even though Intel may want to go beyond its lucrative chip making base, its strategic thinking may be captive of that very success.  It may find it difficult to make the stretch moves to question its premises and open up fruitful avenues to leverage the new assets that come to it through these major transactions.

The issue here is not the usual question of fit, but one of the willingness to change.   Even the best “deal”, or having all of the right techniques and integration tools may not make the difference if companies cannot see their significant acquisitions as a “windows of opportunity” and a signal call to renew themselves.

The “aha” insight here is that the real basis for success, or failure, for companies taking on major acquisitions is whether they take on the challenge of making the necessary leap in imagination and  embody a will to change.  In the end, it may be this lack of willingness of acquiring companies to recast  themselves that is the real cause for the high failure rate for acquisitions – that is, a failure to meet expectations and performance levels.  This can quickly change when companies becomes honest with itself about how much they are willing to transform theirs basis of operation as they move forward to take on these major acquisitions.   Their willingness to change has to be at least equal to the scale of venture they are in the process of carrying out.

Conversation with Francois Gossieaux and Ed Moran: Part II

The corporate development or an integration group that cracks this nut as they bring their target into the fold will definitely be at an advantage.  They would say, “Let’s start identifying the tribes that matter, asking the leaders are, how they communicate, who we need to communicate with, etc.”   When this approach is carried out, the quality of the integration has to increase.   The hidden value that comes from the target has to be improved.

Ed Moran, Co-author of The Hyper-Social Organization

JC:          How does a company migrate from being a collection of “business” processes to becoming network of “social” processes?

EM: I am going to guess that “socializing” the integration processes is not on the “deal checklist.”

I argue that understanding the tribes within the target company should be on at least the post merger “to do” list.

When you think about social media and you thing about your target that you just acquired has a bunch of tribes, both within it – engaging in the day to day operations of that company, and also tribes of customers that company dealt with on a day to day basis, you start to realize how important it is to understand who these tribes are, who is important within them and how they could help the company in core business processes.  When I acquire a technology company, I acquire it because they have people, products and patents that are interesting to me.  If you engage in social media, you start to understand the company’s tribes.  Essentially, you will do that in due diligence.  You will understand the chances for combining products, what the value proposition is, what might be issues with the products that you might not be aware of on the surface.  When you get to the post merger integration phase you can think about how you will really be able to connect much more effectively with these new employees who are going through a wrenching experience now having their company being absorbed, the uncertainty of what that means for their future and their careers.

Engaging with these people allows you to understand the dynamics of the relationships with those tribes.  Who are the people that are important?  How is product development done?  Does customer care process have any processes that could easily be rolled into your customer care?  Is there something that you can learn from the organization?

We believe that the culture will be extensively impacted by social media.  It will be the way our culture is defined and transferred between people in the company.   If you understand these factors, you understand how critical social media is as far as how people are interacting with one another.   How are they using this in their business processes?

Let me flesh out what we mean by social processes.  When we socialize a process, it is not something that it is not something that needs to be done from the top down.  People are socializing processes.  In most companies right now, people are doing things that are probably not their “official” jobs within their job description, because they like it, they are good at it and they have a passion for it.   We found through our research and our studies that organizations that allow people to do that, to cross over boundaries and do things outside their job descriptions actually increase the quality of their outputs.

Some companies expand the process outside the organization, which is a marked shift from the past.  You look at what are the present processes that are important and ask how they can be socialized.  Some of these could go outside of the company.  For example, marketing could be successfully handed off to the tribe, with the result that the internal marketing effort is shut down, realizing that the people that are already using the product are doing a great of generating demand and awareness

We were now in the era of Integration 2.0.  While traditional Post Merger Integration focuses on the mechanics of integrating an acquired company after the”deal”, Integration 2.0 is strategic, looking at integration as a continuity – with each phase being the foundation for the next.  This starts from the moment a company strategically considers an acquisition, through every acquisition/integration phase, ultimately laying the seeds for the transformation that the acquisition has now made possible.

The unique dimension of Integration 2.0 is that this is takes place in tandem with an emerging world of hyper-connectivity that allows, and even demands, that we leverage the acquisition opportunity, fusing it with the array of next generation outlooks, practices and tools.  That is what M&A Integration 2.0 is about.

A grasp of Integration 2.0 is a “must know” for participants in the newly resurgent M&A market.  The current level and type of M&A activity is in a phase that was not predicted just one year ago.  It has taken several years for those involved in M&A’s to regroup and re-seize their ground.  This remarkable re-emergence has several special drivers that characterize it.  This edition of the Beyond the Deal Newsletter examines this resurgence, including its special opportunities and challenges.  Also in this edition is the first of two installments of a conversation with Francois Gossieaux and Ed Moran, co-authors of the recently published book, The Hyper-Social Organization: Eclipse Your Competition by Leveraging Social Media (wwwfacebook.com/hypersocialorg/).   Incorporating the type of outlook discussed in The Hyper-Social Organization significantly enhances your ability to engage employees from both organizations involved in the acquisition in key ways that substantially aid the potentials for unprecedented gains from these major strategic acquisition ventures.  Think over what is being presented and get back to us with your questions and ideas.

The M&A Drumbeat Grows Louder and For Good Reason

August saw the busiest month for M&A’s since 2007.  Some highlights of the month’s acquisition activity are: HP and Dell fight over 3Par Inc, with HP eventually coming out as the bidding winner for $2.7 billion, Intel’s $1.4 billion acquisition of Infineon Technologies AG, Burger King’s sale to 3G Capital $4 billion, and the largest deal, not yet realized, was BHP Billiton’s bid for Potash Corp for $39 billion.  And it is still possible that BHP Billiton could be outbid by interested Chinese companies.  In this changing world there are no boundaries and new entrants come to the table at any time and from any place.

A combination of factors has driven this burst of M&A activity.  One is that companies have built up massive reserves of cash, reputedly in the neighborhood of $2.3 trillion worldwide, in good part as a result of extensive cost cutting campaigns and a rigid curtailing of development.  Companies eventually realized that cash by itself does not generate revenues.  Cash can buy back stock, pay larger dividends but it does not, by itself generate new markets.  Huge stockpiles of cash burning a hole in corporate pockets, coupled with very low interest rates and the limited growth prospects for existing offerings finally became the recipe for the substantial jump in acquisitions.

A key and related factor is that the cutbacks in internal expenditures and layoffs have hollowed out many company’s capabilities for innovation.  R&D efforts were pruned and idea development streams for breakthrough offerings were systematically starved or eliminated.  The result is that there has developed a condition with two faces:  One is lots of financial resources and the second is little capability for internal organic growth.

How do companies such as HP or Dell seek to resolve this dilemma?  They seek out companies that have unique capabilities or resources they don’t have.  How else are they going to compete over time in a world where leaps in cutting edge technologies or having access to key resources make the difference between winners and losers?

The contradiction is that companies that have healthier innovation practices are also in the process of renewing themselves on an ongoing fashion (such as IBM, and possibly Dow and Wells Fargo), and as part of that will tend to be more effective at acquisitions and integrations.   They are more attuned to the range of assets, both tangible and intangible, and how those assets can be accessed and leveraged for significant gains.  These companies are active across the whole array of development.  They are engaged in organic growth, acquisitions where it organic growth cannot accomplish specific goals, as well as in strategic alliances, licensing and any other arrangement that will enable achieving strategic goals.

It took about three years for companies to overcome the trauma of the recession and return to actively pursuing acquisitions.  There are many more acquisitions in the pipeline since many more firms have similar cash build-up and limited organic growth prospects.  At the same time this recovery is still fragile, with the possibility of new downturns.  The best policy is to continue to develop the core capabilities of:

• Strategic agility
• Market agility
• Organization building
• People management and
• Knowledge management and learning

These acquisition capabilities are core to the everyday health of the firm and simultaneously provide for the necessary level of readiness when opportunities/conditions for acquisitions present themselves.

A Conversation on The Hyper-Social Organization: Eclipse Your Competition by Leveraging Social Media with Francois Gossieaux and Ed Moran

Most of us are familiar with the phrase, “May you live in interesting times.”  That adage looks to be a good description of our current era.  Just as we are experiencing unprecedented upheaval and the birth of the “new normal” we are also developing new frameworks and models for thriving in these new conditions.

I had the pleasure of speaking with Francois Gossieaux and Ed Moran, co-authors of their newly published book, HThe Hyper-Social OrganizationH.  This work has offers a set of breakthrough understandings on the principles and practices that are necessary to leverage social media in core ways to move beyond your competition.  Sections of the conversation will be published in a series of blogs.

There are specific lessons here for what the emergence of social media means for achieving successful integration of major acquisitions as well, particularly that we need to shift our thinking of our acquisition integration processes from “business processes” to thinking of them as “social processes.”  This changes the whole nature of how we go about carrying out an integration.  The conversation below gives a perspective on what is involved in emerging as a Hyper-Social Organization.  The examples discussed may be on other than integrations but they are indicative of the possibilities for how to rapidly achieve this type of transformation.  Integrations not only bring two companies together to operate as one: A successful integration also sets the stage and vision for the new company to emerge, how it will operate, what its offerings will be, how they will be accessed by its customers and all of the relationships that allow for this to happen.  Hyper-social organization is the wave going forward.  Choose to be in the vanguard or to fall behind the curve.

JC: What do you mean when you say that, “The Hyper-Social shift should be based on the realization that your customers can now interact with you and others in the way they always wanted to but couldn’t”?

FG: There is an asymmetry between the information that was available from companies and the information that people could find out about the products those companies offered.   We are not hardwired to deal with corporate entities and getting ”corporate speak” sent to us.  Yet, from a scalability point of view, for the longest time, this was only way we could get information about products and services that we were buying.  Deep down, we trust friends and colleagues and people from our tribes who are giving us information about where to go and not to go.   All of a sudden, when social media came out about, what happened is, we now have massive platform for participation that allows the social, for which we humans are hardwired, to scale to the point where it makes a difference again in business. And, all of a sudden we had enough critical mass of other people that we could talk to and get recommendations from, which is something that we much prefer, versus getting information from companies.  The other thing to realize is that one of the core human features that we are seeing at work here is that of reciprocity: I will scratch your back, because I know that at some point, someone in the community will scratch my back when I need it.  One of the things that we do that is human is being reciprocal.  When you have a conversation with another person, it typically is steeped in reciprocity.  When you talk to someone at a party, it triggers something in the other person’s head.  She will build up on it.  That will trigger something – And that is how a conversation builds.  If somebody is just spewing information about themselves, you are going to quickly move on to somebody else at that party.  The same is true in business environments.  We much rather get information in a reciprocal fashion than in a non-reciprocal fashion.  That is what companies tend to do with us.  We don’t treat our customers in the context of reciprocity.  We just push stuff at them.  That is why we gravitated back to something we felt more comfortable with, and some we are just more hard-wired to deal with rather than to deal with faceless organizations.

EM: People read review sites.  People want information that comes from their tribes. The conventional wisdom a few years back was that people don’t trust other nameless and faceless people on the web.  People get past that.  If you are looking for a product, you will look at the star ratings and reader views and come to a conclusion that this is something I want to buy or not.

People, when they engage with companies, want to hear what other people are interested in that product or lifestyle are doing and their decision making. When you think about conventional legacy business, that is usually not part of the equation.  You have channels.  You send information down that channel to your customer or target.  That is not the way people in the digital economy think.

We try to communicate to companies that this hyper-social shift is not discretionary.   Companies need to make room for the way human beings do commerce – socially.

This edition of the Beyond the Deal blog looks at the improving climate for taking on significant acquisitions and in an extended interview with leaders from BrightArch, how their tool, OrganizationWeaver, enables migration of large numbers of staff to the new organization when two major companies combine.

The arrival of OrganizationWeaver on the scene is indicative of the coming of age of a new set of supporting integration tools that will forever change the world of large scale integrations in key ways.  Of course, this in no way reduces the need for a sound, grounded and visionary corporate acquisition and integration strategy to guide the use of these tools, such as that outlined in Beyond the Deal.  Otherwise companies get to go “where they may not want to go” faster.

Technology is the tool, not the master.  Never forget that the greatest tool for acquisitions and integrations is your collective organizational brain.  You are the guiding actor in this complex undertaking.  Make sure you take advantage of the quicker cycle times, value enhancing capabilities and power of the emerging array of tools as we move into the Integration 2.0 era.

Finally, another dimension of Integration 2.0 is the availability of the wide array of social media to incorporate into the integration process.  The opportunity here is to move from “business” processes to the more powerful and multi-dimensional world of “social” processes that have the potential to engage all of the stakeholders of the two combining companies as well as those participating financially, as suppliers, customers and community members in a wealth creating conversation in which all can become co-creators of the new organization.  Sound risky, idealistic, impractical – not really!  Look at the approach created by Beyond the Deal and Euan Semple and think about where you might want to experiment in moving in this more expanded direction.

Shift in the Winds:  M&A’s Are Coming Back

Several announcements came out in July that indicate that major acquisitions are again on the table for leading companies.

One of these significant announcements came from Sandy Cutler, Eaton Corporation CEO, who told Reuters: “We are now seeing more attractive opportunities,” Cutler said in an interview. “Our hope is to deploy the capital at advantageous rates that makes it better than a buyback to our shareholders, but it remains to be seen whether we get the deals done….We’re willing to enter again. A year ago we weren’t, because we were worried about the economy.”

Eaton Corporation is a diversified power management company, with $12 billion annual revenues and 70,000 staff worldwide. As the recession began, Eaton decided to concentrate on preserving its capital and staff.  With earnings rising Eaton and others are revisiting that strategic position.

Another source was the publication, Mergers and Acquisitions, which reported that the consensus of those speaking on the ‘Corporate Development Leadership’ panel at the July Argyle Executive Forum (www.Argyle Forum.com) was similar, saying that before the year closes out the M&A market will return.

Brian Cook, vice president of Honeywell International’s corporate development team, said he is aware of “a desire for folks to jump into the M&A market.”  Scott Barnette, with Hitachi, said, “Chief executives were only temporarily distracted from promoting growth plans to boards over retrenching.” He added that “the industrials space, in particular, has regained its footing on the M&A front.”

Panel members agreed that deals they began discussing as far back as 2007 remain tabled, for the most part, over the past few years. Today, though many of these opportunities are being re-evaluated.  This is largely due to increased confidence that comes from improving earnings reports.

We may be at the beginning of a shift beyond the defensive, consolidating acquisitions that dominated this past year and towards growth oriented acquisitions that allow firms to reach different levels of performance in an array of geographical arenas and types of activity.

We will soon see who has retained or developed not only their “deal” skills buy also who can bring their integration capabilities back into play in the updated, post-recession world.  Will they employ standard operating procedures, or will they be experimenting with becoming customer-centric, with a lowering of firewalls and an increase in the use of social media and other forms of collaboration?  Companies have become more nimble and global in their other processes.  Will they be similarly adept and fluid in their integration approaches?

A Conversation on BrightArch‘s Human Capital Integration Tool: OrganizationWeaver

Retaining, attracting and selecting the people that have the right combination of skills, attitudes and talent to move a newly combining company forward is one of the central challenges when two sizable companies combine in a major acquisition.

OrganizationWeaver, by BrightArch, incorporates both advanced technology as well as a much more participatory outlook on working through the complex people issues when two large organizations combine.  Tor Kielland, CEO of BrightArch and Nick Peters, Chief Marketing Officer, spoke with me about what OrganizationWeaver is and how it works.

This conversation is part of the Beyond the Deal’s ongoing exploration of tools that are becoming available to make M&A integrations build value, be more effective, efficient, and collaborative, as well as reduce financial costs and lower organizational stresses. These are approaches with characteristics that are compatible with the overall Beyond the Deal approach.

1. What is OrganizationWeaver and how does it give combining companies major advantages beyond normal integration practices?

OrganizationWeaver is the efficient way to design and staff combining organizations transparently. Normal workforce integration practices tend to take too long, are susceptible to political wrangling, and leave employees frustrated. OrganizationWeaver can cut the typical human capital integration time in half and significantly reduce on-going personnel problems. We think this is a considerable advantage for combining companies, and can set the foundation for meeting strategic goals.

2.  How does OrganizationWeaver support the framing/achieving of strategic goals in the newly combining company?

Strategic goals are just words until people throughout the company have defined roles and want to achieve the goals. OrganizationWeaver helps define the roles and structures so that the right people can settle into the right jobs. One of the most intriguing aspects of OrganizationWeaver is that it manages to accomplish this in a way that gives all stakeholders a reason to be engaged in the process. It gives management an efficient way to work through the details of every division, unit, and position. It gives employees a chance to take charge of their personal goals and match them to the strategic goals. And finally, it provides a strict decision-making framework to fill every position with the best person. Engaging an entire organization to achieve strategic goals quickly is a monumental task, but OrganizationWeaver makes getting the right people in place much easier from beginning to end.

3.  How do the elements of OrganizationWeaver work together to rapidly accelerate an integration of large companies and yield a higher quality outcome at the same time?

OrganizationWeaver consists of three modules that work together:

• The Organization Design module imports and standardizes key data about the combining companies into one central database. With data all in one place, multiple team members can simultaneously rearrange organizational structures (or build entirely new ones). This saves considerable time when it comes to understanding what the companies look like today, and how they should look in the future. In addition, requirements and descriptions for each position can be defined using templates.  Further, this ensures that each position is fully defined before moving on to the next step.

• The Employee Preferences module is an intranet application for employees to voice their job priorities and capabilities. Thanks to work completed during the Organization Design phase, employees can browse through the entire new organization and communicate where they think they can add the most value. Engaging employees doesn’t have to just mean top-down communication anymore. With OrganizationWeaver, management can listen to, and act upon, the preferences of every employee. This substantially increases the quality of the new organization and gives employees a reason to stay.

• The Staffing module is where company needs get matched with employee preferences. All of the data from the Organization Design module and the Employee Preferences module are brought together so that the project members can objectively review, rate, and rank each person on relevant positions.

4.   What does a company need to do to become ready to use OrganizationWeaver to best advantage?

At a bare minimum, the integration project needs to have a separate workstream for handling the development of the new organization. That workstream needs a core group in charge who understands the importance of putting people first.

Ideally, there will also be people within the company (or trusted advisors) who understand the core capabilities of OrganizationWeaver and how it fundamentally changes the human capital integration process including how it can alter timelines, projections, and project staffing.

5.  What kinds of experiences have companies that used OrganizationWeaver had?

OrganizationWeaver was used in an organization that reallocates thousands of employees every year. They said that OrganizationWeaver “quickly became our most important working tool for staffing and implies considerable savings for us”.

Key participants in the reorganization of a 10,000 person Scandinavian energy company that employed OrganizationWeaver to staff people quickly and efficiently, commented that:

• “There were no information leaks. We were held continuously updated, so that no-one could spin any fear scenarios.”

• “We were challenged to think through our own career. [..] Nothing is more exciting than this.”

• “The process has been tidy and sound. We have been asked for input all the way.”

6.  How would companies adopting OrganizationWeaver reflect a change in the way of thinking?

There has recently been a large push within corporations to incorporate more social interactions and have flatter organizations. When employees have the tools to speak for themselves, there is less need for the top-down approach of traditional hierarchical structures. When a company adopts OrganizationWeaver, they are acting on this new way of thinking. They’re saying that bottom-up information is valuable, manageable, and provides a real competitive advantage.

Any final thoughts?

OrganizationWeaver brings together some of the best ideas about how to overcome the imbedded problems of human capital integration. We incorporated technical “best practices” (e.g., data-handling, security, process, and user-interface) with business “best practices” (e.g., efficiency, transparency, meritocracy, etc.). The result is something much more than buzz-words and promises for the future. OrganizationWeaver is real. It’s robust. And it provides concrete value over the short and long-term.

Turn your “business” processes into powerful “social” processes: Learn how to set up and implement a social media strategy for integrations:

Progressive Practices, partnering with Euan Semple, a leading practitioner in social media, offer a strategic approach of social media across the range of action areas involved in integrations. Click on this link to Social Media Strategy to Transform Integrations PowerPoint presentation to get a strong picture of a strategic approach and how you can start developing this capability in your organization now.  See how you can develop and implement an effective social media strategy in your firm.  Contact Jay Chatzkel or Euan Semple to make arrangements and for further information.

Achieving Quantum Leap Acquisition Integrations in Unsettled Times

The world of mergers and acquisitions transitioned in the past year from the recession period of bottom feeding and fire sales (when iconic financial institutions were acquired over a weekend) to the current phase of dominated by sector consolidation (i.e., the Oracle/Sun Microsystems, Delta/Northwest Airlines and United/Continental Airlines transactions).  Companies are still not feeling sure footed enough to move for more solidly growth based acquisitions in this “new normal” economy, but that will be coming over the next year.

While conditions have markedly changed the dominant emphasis in acquisitions is on “the Deal”, with only secondary attention tending to be given to the complex but critical work of the integrations that follows.  Yet it is the companies that have built up the more developed capabilities in integrations that are generating superior performance.

Integration Capabilities Make The Difference

Dow has weathered a rough sea of economic changes to stay afloat and reconstitute itself by being able to leverage its extensive experience in the integration of Rohm and Haas and the related reshuffling of its assets.  Wells Fargo is systematically integrating its Wachovia assets in a process that recognizes the qualities of Wachovia staff and processes.  Continental Airlines operations experience may make the positive difference in the outcome of its acquisition by United.

At the same time, Bank of America will continue to suffer through its integration difficulties with its Countrywide and Merrill Lynch acquisitions in its less well conceived and organized integrations.  So, integrations capabilities do matter and they do make the critical difference between exceptional outcomes and middling and poor outcomes.  This is especially true in during our more unsettled economic era where valuation is not easy or clear, and growth opportunities must be worked at from any number or angles to yield remarkable outcomes.

That is where a good grasp of a companies integration capabilities comes in as well as having the processes in place to build and leverage those capabilities.

Four Levels of Acquisition/Integration Capability: Moving Your Company through the Next Levels

There are four levels of practice found in integrations.   Here is a dynamic, stage by stage maturation model that shows how companies tend to move incrementally from one stage to the next, but it also shows that every company has the opportunity shift onto a quantum leap development trajectory, where it systematically builds the critical integration capabilities that allow it to realize unprecedented performance and value creation gains.

A company taking on major acquisitions has to bring to bear a set of integration capabilities to succeed.  Most companies can find some measure of the necessary integration capabilities in their already existing organizational processes.  The challenge for companies is to develop the full complement of capabilities so that they reach the highest levels of performance and value creation.

The Characteristics of the Four Levels

The characteristics of the four levels are:

• Level I: Low Readiness/Capabilities – This is the starting point for most companies.  Acquisitions are opportunistic, with little preparation for acquisition or being acquired.  This type of acquisition has the highest risk for failure.
• Level II: Repeatable Processes – Companies on this next level have greater readiness but tend to do the same type(s) of acquisition repeatedly with  little new learning or capacity for value creation.  These acquisitions focus mainly on financial synergies and efficiencies.  They can achieve a certain degree of success, but can also lead to the one sided failures of over emphasizing either expense synergies (Daimler/Chrysler) or growth synergies (AOL/TimeWarner).
• Level III: Advanced Organizations – These companies have worked diligently to comprehensively incorporate continuing learning, codify their knowledge, build skill and know-how centers, and bring practice knowledge sharing and mentoring into their acquisitions approach.  While these firms place a greater value on knowledge assets and intangibles, they still tend to see growth potential synergies as “icing on the cake” and do not exploit them with the rigor as they do with expense synergies.
• Level IV: Quantum Leap – Quantum leap firms demonstrate substantial capabilities in both readiness and value creation.  They fully explore both expense and growth synergies.  They see acquisitions as not additive but transformational.  A quantum leap company exhibits solid business planning and project management skills allow for managing the unpredictable.  Different companies have developed particular quantum leap capabilities but no one company has made has made the leap to become quantum organization.

Ask your self and your colleagues what level your organization is on.  Discuss what being on that level allows you to achieve and not to achieve.  Investigate how you can use continuous learning to not just improve from one level to the next, but also how to shift your strategies and actions onto the quantum leap path.

You can start by asking these questions:

• How open is our company to systematically looking into bringing into full play both growth synergies as well as expense synergies that will lead to quantum leap gains?
• What unprecedented performance and value creation gains could our company attain through a major acquisition?
• What could block us from achieving those gains?
• What could enable us to accomplish those gains?

When you move in that direction your company will begin to coalesce its core set of acquisition capabilities and be on its path to becoming a quantum leap organization.

We look forward to hearing from you about what you learn by using this framework, what issues you see and how you can move forward to the next stage of integration capability.

Thanks again for reading.  Please let me know what you think of this newsletter and pass it on to friends or people you think might enjoy it.

All the best,

Jay Chatzkel

Principal, Progressive Practices

Tel: + 1 623-826-7294
e-mail:  jaychatzkel@progressivepractices.com
websites:  www.progressivepractices.com and www.beyondthedeal.net, Newsletter: www.beyondthedeal.net/Newsletter.html
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The Beyond the Deal Blog is geared to continually develop and renew a unique approach to create extraordinary value through acquisitions.  This approach is in our book, Beyond The Deal.   We work to use the BYD Blog to fill out and more fully explore key integration issues that are central to the post acquisition integration community.  The BYD Blog welcomes your interest and inputs to make that conversation as rich and useful as possible.

Why a Beyond the Deal Blog?

The BYD Blog explores how you can:
• Leverage M&A’s as strategic springboards for unprecedented performance and value creation gains
• Achieve those gains, with timely and updated information about how to make a major M&A work for you, from strategy setting through integration and culminating in your newly combined company
• Gain a network of sources and colleagues to help you meet the goals for an overall successful integration, not just on the “deal”
• Go beyond the focus on financial and physical resources by taking into account the intangible assets that are increasingly what makes the difference in enabling exceptional outcomes
• Put together the facts of your integration and develop responses to ever changing conditions, some expected and some very surprising
• Establish an expertise center for integrations

To accomplish these goals, the BYD Blog looks into:

• Appraisals of trends and issues in M&A’s
• Commentaries on developments in the field
• Interviews with leading players involved in acquisition integrations and
• Mini-case studies of both those organizations that use the full range of organizational capabilities for quantum leap outcomes, as well as firms that have not

We need to hear your comments about what your issues and concerns are.  There will be many exciting conversations shared here.  Participating in these conversations will enable you to generate unprecedented gains from your post acquisition integrations.