PMI Strategy, the acronym for Post Merger Integration Strategy, is one of the most difficult conundrum for buyers of companies. Indeed, there is enough evidence in the literature showing that acquiring companies actually destroys value.
Then, why not challenge buyers on their real reasons for engaging in an acquisition process?
Note that I am not even talking here about “closing” acquisition deals, but about “engaging”, because the reality is that a vast majority of merger talks fail to materialize. “Engaging” is time-consuming, can ruin the buyer’s reputation, divert him from his day-to-day business priorities and cost him expensive advisory and legal fees.
Therefore, if most M&A negotiations are unsuccessful and post-merger integration is likely to destroy value, why should one still want to acquire a company?
Given the weight of the human factor in M&A, there is a myriad of emotional reasons that could motivate a buyer – pride, egocentrism, fear, greed, foolishness, love, megalomania … – and many others not emotional, but still anathema to business savvy such as bad judgment, deceit, government regulation, tax incentives, opportunism, market benchmarking, competitors watching etc…
But let’s leave aside all those dodgy reasons to focus on good strategic ones.
In my opinion, before “engaging” in an acquisition process, rational buyers should first define a PMI Strategy and have a clear answer to the following question:
If I close the deal, what am I going to do with the target?
Philippe Haspeslagh and David B. Jemison have come up with a simple PMI Strategy framework that could be the starting point of any prospective buyer’s reflexion.
The framework is a 2X2 matrix that helps choose between 4 PMI Strategies:
- Holding strategy
- Preservation strategy
- Absorption strategy
- Symbiosis strategy
PMI Strategy for acquiring a company
The choice of the PMI Strategy is conditioned by two factors:
- The strategic interdependence factor and,
- The organizational autonomy factor
To choose the best PMI Strategy, Acquirers need first to score those two factors.
Scoring the strategic interdependence factor
When two entities are merged, there are four types of value creation derived from strategic interdependencies:
1. Resource sharing
Value is created using economies of scale and combining functions at operating level. Most business units can share support functions such as IT, HR and Accounting. Non-support functions such as procurement or logistic can also be shared when operating units display enough similarities.
2. Functional skills transfer
Value is created by sharing information and know how. This tends to be people driven but supported by the IT department.
3. General management skill transfer
Value is created through governance, better coordination and control.
4. scale benefits
Value is created by leveraging the size of the combined entity: greater bargaining and purchasing power, more borrowing capacity.
Scoring the organizational autonomy factor
This factor refers to the level of autonomy the managers of the target company should keep or give away to the governance of the acquiring company. It is a strategic decision and can evolve over time. Some acquirers can decide to gradually increase their control when others would prefer to start with a high level of control and to loosen their grip little by little thereafter.
Depending on the score of the two factors, the preferred PMI Strategy should be one of the following:
PMI Strategy: Holding
Acquirer has no intention of integrating the target and value is created only by financial transfers, risk-sharing or general management capability.
Acquiring a company just to “hold” it in a portfolio goes against Michael Porters’ statement saying that businesses need to focus. Here, there is little or no economies of scale. It is a loose strategy.
On the upside, the buyer does not need to worry about strategic interdependence across entities and can deploy his own organizational structure.
From the buyer’s perspective, following a “Holding” Strategy is an easy route because any target is potentially a good fit.
PMI Strategy: Preservation
Acquirer’s focus is to keep the target’s sources of value intact.
Fewer interdependencies shall de-risk the buyer’s portfolio and some claim that more autonomy can be a factor of motivation to the management team.
Some companies such as General Electric, Altran or Alten have adopted that model successfully.
From the buyer’s perspective, a “Preservation” Strategy forces him to make sure that the target is viable as a stand-alone business. As a corollary, Acquirers should stay away from spin-offs, special and distressed situations.
PMI Strategy: Absorption
Acquirer needs to impose his governance model.
This is the “natural” way of developing a business through acquisitions. Companies usually implement an Absorption Strategy to accelerate too time-consuming an organic growth or in case of shortage of resources.
On the downside, “Absorptions” typically generate cultural conflicts and companies the like of HP, Chrysler or AOL have suffered it in their bones.
From the buyer’s perspective, an “Absorption” Strategy is complicated. First, he needs to define his acquisition criteria to meet the need for strategic interdependence, and then, he needs to assess the target’s culture to make sure that there is a potential fit.
PMI Strategy: Symbiosis
Acquirer must ensure simultaneously boundary preservation and boundary permeability.
This is by far, the most complicated post-merger integration model but also, if successful, the most rewarding.
Given the speed of the development of new technologies, the unprecedented cultural gap between generations and the globalisation of the economy, most buyers have no other alternative than to embrace that model or lose market shares.
In conclusion, this high-level PMI Strategy framework gives a flavour of the complexity of an acquisition process. Buyers must understand that the perfect fit does not exist. As a result, the ideal PMI Strategy is likely to overlap 2 or more of the 4 strategies depicted above.
Therefore, when I receive requests for targets from investors telling me that they are interested in any sector, any location, in target’s revenue from €5m to €500m and do not need advisory services, I know that they have not done their homework and are not ready yet to close any transaction. And if they do, they will most certainly join the Club of the Biggest Acquisition Failures.
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