M&A Integration Strategies: Holding Company vs. Full Integration– April 05, 2019 by Jim Boland

As noted in a prior post relating to critical steps in mastering an acquisition, a transaction’s deal thesis should drive the integration strategy. More and more companies lead with integration strategy as a way to identify targets and structure the pro forma financial models. While there are countless variations of integration models, the following represent both ends of the spectrum: 

  1. Building a holding company
  2. Fully integrating an acquisition 

These two common integration platforms create enterprise value via two distinct approaches in the areas of management practice, organization design and process/technology architecture.
 
First, let’s look at the definition of these integration models:
 
Holding Company
Demonstrated through years of increasing shareholder returns from companies like Danaher, Berkshire Hathaway and Park Ohio, the holding company model identifies acquisition targets that possess good brands and through improved management can improve performance and value. These companies do not try to extract deal value through revenue or cost synergies, instead, leaving the acquired business to operate independently and autonomously. Often, holding companies acquire diverse businesses to hedge market conditions and performance of individual companies or channels.
 
The most successful holding companies use a standard formula across their business, and, over time, the consolidated financials show a story of growth and margin improvement.
 
Full Integration
Alternately, a fully integrated acquisition loses its identity over time as the buyer moves them to a common culture, operating infrastructure and distribution channels. Global leaders like Cisco and The J.M. Smucker Company have internal integration teams who quickly consolidate people and operations into the corporate network infrastructure, shared services for transaction processing and a common chart of accounts. Merging processes and systems generates software and hardware cost savings, while enabling business activities to flow through the existing process models.
 
Every acquisition includes an understanding of synergies that support the deal valuation thesis, but the winners maintain a laser focus on synergy realization and hold their people accountable for achieving those revenue and cost saving targets. 

Management Practice

M&A integration is challenging. It disrupts business as usual, requires an incredible amount of planning and project management, and adds a layer of stress to the organization given the financial and strategic risk. Strong leadership and consistent management practices are a necessity.
 
Most buyers view acquisitions as a growth lever, but if they are new to the process it’s imperative to first consider integration. For example, below are examples of both integration models in which the buyer was successful due to well-defined management practices.
 
Holding Company Example: Danaher Business System
Danaher’s “Danaher Business System” (DBS) is a playbook that provides acquired management teams with a recipe for success. This is not optional; they must adopt DBS and are extensively trained in the capability model that reinforces leadership, continuous improvement and innovation. DBS does not tell management what its business strategy should be. Rather, similar to an entrepreneurial operating system (EOS) or other management frameworks, DBS gives executives a common toolbox of management practices with which to lead. They play a key role in defining the future and path forward, and then use metrics to set and measure improvement.
 
What metrics should they implement? Again, DBS provides a consistent set of performance measures: 

  • Financial: Growth, margin, working capital and return on invested capital
  • Operational/People: On-time delivery, quality, fill rate and people retention 

In this example, Danaher empowers acquired executives, giving them autonomy while having clear measures of success to incentivize business leaders. As the DBS metrics improve, financial value increases without having to invest in costly organizational, distribution and systems transformations.
 
Full Integration Example: The J.M. Smucker Company
Smucker’s growth over the past decade has been fun to watch. No longer just a jelly and jams producer, Smucker’s now owns some of the largest consumer packaged brands, selling coffee, dog food and various other goods in everyone’s grocery store.
 
Fueling this growth is an acquisition integration model that uses dedicated internal teams to identify synergy targets and develop an integration plan to realize that value. These synergies create value in several ways:
 
Revenue Growth

  • Increase market share and increase pricing power
  • Push products into existing distribution channels
  • Invest in product innovation and new product sales 

Cost Savings

  • Identify procurement and sourcing savings
  • Roll business activities onto core systems, eliminating software licensing costs and reducing headcount
  • Centralize transactional back-office processes and explore process automation opportunities 

Working Capital

  • Renegotiate customer and supplier terms to improve cash conversion cycle
  • Consolidate manufacturing and distribution locations 

Similar to Danaher, Smucker’s takes advantage of consistent management practices documented in an integration playbook to setup functional teams and roll the new business onto their data enterprise platform. Executives focus on integration synergies before and post-close on every deal.
 
 
Both of these very different integration strategies succeed in generating enterprise value. The fully integrated model offers greater potential synergies, even though they come at a much larger investment in terms of internal resources and external support costs. In upcoming posts we will address approaches for designing organizational structures and process/technology architectures in the fully integrated model, two areas that can offer tremendous value to the newly combined business. 
 
Please contact a member of your service team, or contact Jim Boland at jboland@cohenconsulting.com for further discussion. 
 

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.