SEPTEMBER 22, 2008

MERGERS & ACQUISITIONS

The Secrets of Successful Acquisitions

By KOEN H. HEIMERIKS, STEPHEN GATES and MAURIZIO ZOLLO

Managers who have been involved in mergers and acquisitions know the odds of a painless integration are low. Rarely, it seems, does combining two organizations go smoothly, at least in the short term.

All of which leads to an inevitable question: What do the successful acquirers do right?

Based on our study of the M&A activities of 101 companies world-wide, we concluded that the key factor for successful companies was something simple yet uncommon: They made systematic efforts to learn from their past acquisitions.

Many of the successful companies were "serial acquirers" -- those that made continual acquisitions an integral part of their growth strategy. But it wasn't the amount of prior M&A experience that made the difference. It was the fact that these companies had devoted a lot of time and money and thought to what they had done, and had changed their practices as a result. Companies with lots of M&A experience that didn't invest in a learning process actually fared worse, on average, than companies with less experience.

In other words, "learning by doing" isn't enough. Companies must also "learn by thinking."

For instance, at one company we studied, an international chemical firm, a risk-management team was closely involved in every stage of the company's M&A activities -- from helping to prepare bids to performing post-integration reviews. The team would play key investigative and advisory roles on a host of issues, such as personnel, legal, financial and regulatory problems. Once acquisitions were approved, the team coordinated efforts by both companies to address these issues. And when deals were finalized, the team played a similar role in overseeing integration, ensuring that key parties from both companies were involved.

Pass It On

Such involvement uniquely qualified the team to perform post-integration reviews -- and to preserve and pass on any knowledge gained about the process.

The M&A team at another global chemical maker conducted post-integration reviews in which open-ended surveys were sent to key players and one-on-one interviews were conducted to hear unvarnished analyses of what had worked well and what hadn't.

The team and the business manager responsible for the integration would also codify anything new learned in each acquisition for use in coaching sessions. Lesson subjects could involve assessing the worth of a potential acquisition; environmental, health or safety issues that weren't foreseen; or organizational challenges, such as how to absorb the acquisition's sales force with minimum disturbance to customers. Lessons produced in this manner, including more than 100 scenarios, covered integration issues ranging from customer service and purchasing to engineering.

'Deal Room'

One company, the finance unit of a global industrial conglomerate, used a wiki-style online "deal room" which served as both a forum where integration teams could discuss initiatives in progress, and as a generator of lessons for the future. Details in deal-room discussions were documented and referenced for access on the company's intranet to ensure that employees could easily find the latest insights.

Maintaining a body of M&A knowledge, organizing it into lessons and making it easily accessible are key to developing and leveraging a company's M&A capability. Without such a framework, companies can slip into applying general types of strategies developed in prior acquisitions that are inappropriate to the one at hand. Managers might also become overconfident by thinking that the mere accumulation of experience brings with it a stronger capability.

Codifying and studying lessons from prior acquisition experience makes it easier to foresee, identify and act on specific integration problems. It also can help at the negotiating table, making it easier to walk away from deals that appear overpriced in relation to the expected integration issues. In addition, when managers reflect on acquired firms' contributions to the acquirer, they often find unexpected wisdom that emerges from adopting the target's new perspectives and different ways of doing things.

—Dr. Heimeriks is assistant professor of strategy at the Rotterdam School of Management, Erasmus University, Rotterdam, the Netherlands. Dr. Gates is professor, department of strategy, at Audencia Nantes School of Management, Nantes, France. Dr. Zollo is dean's chaired professor of strategy and director of the Center for Research on Management at Bocconi University, Milan, Italy. They can be reached at reports@wsj.com.