THE ACQUISITION CHALLENGE

~ REALISING THE POTENTIAL OF YOUR PURCHASE ~

by Duncan Angwin and Professor Robin Wensley, Warwick Business School Volume 1, Number 4 January 1997 KEY SUCCESS FACTORS FOR ACQUISITION
Clarity of purpose
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Many companies are failing to gain full value from their acquisitions, by taking the value capture approach which minimises risk and impresses investors. Instead they should place far more importance on the transfer of knowledge and post-acquisition management, to reap fully the benefits of their investment. Greater emphasis on transferring information can also bring symbiotic advantages while minimising the disruption of full integration. Media attention given to mega deals and take-over personalities, such as the battle of philosophies between Rocco Forte and Gerald Robinson of Granada, highlights the fact that acquisitions are an increasing feature of UK corporate life. Indeed even the record value of take-over deals reported in Acquisitions Monthly for 1995, of 60.15bn, looks likely to be easily overtaken for 1996. Acquisitions now seem synonymous with corporate restructuring and present a threat rather than an opportunity for most executive careers. As a result most executives have colourful stories associated with acquisitions which fall into one of two camps: They believe either that every acquisition is different and therefore has to be judged on its individual merits, or that all acquisitions are essentially the same. Those with direct operational exposure will talk of a handful of complex deals absorbing years of effort with many tales of woe and hardship along the way. Those citing experience of 100 - 200

Set non-financial objectives Define financial objectives Understand similarity between acquirer and target

Bridging the gap between evaluation and implementation

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Select the integration team Develop integration plans down to specific objectives Choose the right managers to run the acquired company

Delivering the benefits

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Act quickly to

reduce conflict and ensure momentum

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Impose a new organisational and reporting structure Manage the culture to reward behaviour Communicate the objectives of integration and of the new entity

transactions will often be financial directors at Head Office, who carry out the pre-planning, rapidly impose financial systems then move on feeling that the deal has been done. Several dominant types of acquisition have been identified, although until recently this issue was approached in terms of pre acquisition planning. Significant problems have now been identified in the post acquisition phase, and strategy researchers have tried to combine pre acquisition strategic issues with post acquisition integration, to identify dominant types of acquisition management. The most current framework, based on work carried out in the USA and France, outlines three main types of acquisition; Absorption or full integration of the acquisition into the parent, Preservation where the acquisition is left to stand alone and Symbiotic where there is mutual dependence between the acquiring and acquired companies. There is also the suggestion that there could be Holding acquisitions where the acquired company is simply held to be traded at a later date. UK acquisition types To apply the framework, we examined all acquisitions in the UK from 1991 - 1994. These years corresponded with a general downturn in the economy and may have influenced managers' choice of acquisition and style. Despite the relative lack of takeovers, this period is probably more representative of background acquisition activity in the UK as it is not subject to the large distortions that mega deals can cause.

Applying the framework to acquisitions in the UK gave some surprising results. While previous studies have focused on the difficulties of creating synergistic benefits through resource transfers, and in particular on Symbiotic acquisitions as an important method for achieving this, our results show that Symbiotic acquisitions are in fact a minority.

This may reflect the difficulty of the managerial challenge with high risks and long time frames. It is quite clear that the dominant category, with nearly half of all respondents, is Preservation acquisition. These acquisitions were often financially healthy companies in unrelated industries and acquirers clearly felt that they could not contribute or would in fact 'contaminate' these companies by interfering in any way. We were surprised by the number of Preservation acquisitions, but it may be that acquiring companies were risk averse and just wanted to buy well performing companies rather than embark upon the difficult process of integration. While Absorption or fully integrated acquisitions were represented in the survey, we had expected more examples. One reason may be that full integration is difficult, expensive, and can be a risky process which many companies viewed as inappropriate during a time of recession. The major surprise was the large number of Holding acquisitions; companies held to be traded. It may be the case that parent companies are avoiding contamination as the acquired companies were often poor performers pre-acquisition. The parent company generally insisted upon tight financial controls and on occasion gave some financial support, but the acquired company was largely left to its own devices. In fact apart from returning the business to a sound financial footing, there was little if any further consideration about how further value would be created. This was very frustrating for the acquired management, many of whom echoed the following view; 'I was extremely frustrated and mystified that I never had a discussion with any main Board member about the future of the company. There was no discussion as to potential synergy'. Frustration was common and many of these executives were very depressed. On enquiring about interviewing one managing executive, we were informed that he had committed suicide. If Holding companies are held to be traded, then we might expect their situation to be short lived. In fact the Holding acquisitions studied had been in this state for several years. In many cases there was the strong belief that the acquiring company really didn't understand their business and this accounted for the void in post acquisition management. From Diagram One it is clear that the majority of acquisitions (76%) show low resource transfer. This suggests that most corporate acquisitions were viewed as a parcel of assets to be bolted onto existing businesses. Almost half the executives when asked the reasons for making the acquisition, described it in terms of just purchasing assets - even though the survey specifically targeted corporate acquisitions rather than asset purchases. The attractiveness of this style of acquisition is that companies can purchase parcels of capabilities/resources rather than spending a lot of time developing their own. This route offers short term certainty which may be

WE WERE LEFT IN A COMPLETE VACUUM. ALL WE DID WAS CARRY ON. I HAD A FUTILE ROLE AS MANAGING DIRECTOR. Holding Acquisition

preferable to the difficult and messy business of integration with its uncertain outcomes.

Creating value Most acquisitions in the UK involve the purchase of value and capabilities rather than the creation of value. However there may be an interesting qualifier to this general message. When each acquisition was assessed in terms of the degree to which there was a resource transfer between the acquired and acquiring companies, it was noticeable that some things were transferred more often than others. In particular a disproportionate number (52%) showed above average transfer of knowledge and information between companies. Other items such as sharing of assets, and transfer of personnel showed low transfer. The study revealed two important and yet partly contradictory findings. Firstly that the majority of acquisitions in the UK during 1991 - 1994 were of a value capture nature, involving little or no resource transfers between acquired and acquiring companies. And secondly, that successful acquisitions assessed along a number of different dimensions, were strongly associated with the transfer of knowledge. Clearly if companies want to make successful value creating acquisitions, then they should place a greater importance on the transfer of knowledge and information. A value capture approach is attractive as it minimises risk and allows instant benefit; always appreciated by investors and the City. The greater emphasis on transferring knowledge and information also allows some of the advantages of symbiosis to occur without the disruption of full blown integration. In other words attending to knowledge transfer may allow companies to move away from the difficulties of head to head integration. Type and timing of post acquisition change AFTER WORKING WITH YOUR EYEBALLS OUT ON 90% of acquired companies mentioned changes in terms of stronger financial controls, improved reporting requirements and removing

STALKS 24 HOURS A DAY TO DO THE DEAL, THEY STILL EXPECT YOU TO HAVE ALL THE ANSWERS.

management. In addition there was a degree of new product market focus. While stronger financial controls and improved reporting requirements may be symptomatic of acquisitions during recession, there was strong evidence that they were imposed by the parent regardless of acquisition type. Indeed most executives interviewed complained of tomes of onerous standardised reporting procedures which arrived on day one. 93% of acquired companies showed major management changes but there was an important distinction in the treatment of chief executives. Strenuous efforts were made to keep chief executives in well performing unrelated businesses which were then preserved within the parent group. Where businesses were in a related area, chief executives tended to leave after a short transition stage. Major differences in post acquisition change were reported between different acquisition types: q Preservation acquisitions saw little overall change apart from the adoption of parent financial reporting procedures and the weeding out of superfluous or under-performing directors. The emphasis was on preserving the core capability from parental influence. q Absorption acquisitions saw changes in most areas, with a strong emphasis on reducing costs through the de-duplication and rationalisation of activities. q Symbiotic acquisitions saw a lower level of change and these were oriented towards increasing investment rather than reducing and controlling costs. Effort was applied to focusing on new product market opportunities and other marketing initiatives. q Holding acquisitions saw a broad range of change especially in terms of the immediate reduction of costs, and were kept at arm's length from the parent group to avoid contamination. Timing of changes Acquisitions are a time of crisis and uncertainty with extensive and rapid change; some 59% of all changes are started within three months and 80% had been initiated within nine months. Clearly these figures mask substantial variations in terms of acquisition type. Changes are initiated much more rapidly in Absorption and Holding acquisitions than Preservation or Symbiotic. This is linked to the retention of the chief executive who in the latter cases is able to provide protection for the core capabilities of his business. Where chief executives remain, developments are generally incremental to streamline and build with minimal disruption. In contrast, Absorption acquisitions see the removal of senior management who would be a major barrier to change. The strategic aim

is to achieve economies by rationalising the business and this is disruptive and expensive. Speed of action is therefore perceived to be vital. Holding acquisitions see an even more pronounced peak of early change as their survival often depends on rapid action. Some changes are easier than others , and it is notable that changes in communications happen very rapidly indeed when new management is injected. Changes in the financial area also occur rapidly, particularly in terms of controlling expenditure, improving financial controls and adopting the parent financial reporting structure. After that the most significant changes tend to be those that are relatively easy to achieve but have a substantial impact, such as making management changes. In several cases executives said that it was important to signal to the City and other stakeholders that things were happening. In the case of Absorption acquisitions this would also include closing down head offices and duplicate facilities, rationalising distribution and improving terms with suppliers. After that the changes were more complex such as changing IT systems. Achieving control through finance and communications is at the vanguard of change. The type of acquisition will have its influence but the speed of change is also positively related to the ease of implementation and level of impact. Following the imposition of 'formula' changes, the danger for management is that the passage of time weakens the impetus for further changes just when every effort should be directed at difficult value creation opportunities. About this Study This Hot Topic combines the findings from a number of different research studies carried out by Warwick Business School, and also work done jointly with Ernst & Young. The authors are currently working on further research into post-acquisition management. Further Information About This Topic Detailed technical papers on this research project listed below are available by writing to the Hot Topics Office, Warwick Business School, University of Warwick, Coventry CV4 7AL. Please enclose a 10 cheque payable to the University of Warwick if you are ordering a copy of The Dynamics of Post Acquisition Management. q Key Success Factors in Acquisition Management- a joint research project into integrating major acquisitions by Warwick Business School and Ernst & Young. q European Acquisitions: getting it right- a joint research project on evaluating cross-border acquisitions by Ernst & Young and Warwick Business School. q The Dynamics of Post Acquisition Management, Duncan Angwin, Warwick Business School Research Papers No. 204.

THE PARENTS WERE LOOKING TO SATISFY THE CITY BY MANAGING FOR THE SHORT TERM BUT IN THE MANUFACTURING BUSINESS I HAVE TO TAKE A LONGER TERM VIEW. Preservation Acquisition

1996. Absorption Acquisitions: The first 90 days (forthcoming).

1997 Warwick Business School