The integration fallacy: put away your integration playbook
As an equity analyst, one of the strategic errors I used to pounce on was failure to integrate. At the time, it implied to me that management had not sought to maximise the potential of the business combination and was storing up trouble for the future. The caveat to that is that I was a technology analyst. Buying technology businesses with the aim of building an integrated solution and then just not really bothering did seem like a failure.
Even in that case however, I can definitely see now that I was wrong. Integration is not always a signifier of value preserved and created. It is sometimes entirely the opposite. I had mixed up cause and effect. Businesses that had bought a lot of other companies and had not integrated them were failing, not because of that fact, but because they were a bit confused about their core competence, were probably overpaying and were overstretching themselves. In other words, the problem was upstream.
Today, I would definitely advise investor and strategists to think very carefully about the value of integration in a much more rounded way. Most times when you acquire a business, you are doing so at a premium. You hope to offset some of this financial pain by making 2+2=5 and you start with the bias that it is the right thing to do, as you justify it to your bankers, investors and Board. You’re on the hook for a quarterly update about ‘how the integration is going.’ It’s going really well, totally on track, even better than expected!
But when you really think about it, perhaps integration should be the exception more than the rule. Let’s take revenue synergies (cross-selling). It is hard enough to get salespeople to sell the stuff they’re used to selling; now they’ve got to help someone else with their quota — or the buying centres are totally different. Cost synergies: it’s a rare business that runs with an excess of costs just for the fun of it. If you start slashing costs, things fall over for reasons you don’t understand until too late. Business models clash, operating models clash, cultures clash. Perhaps it is not so bad if instead of trying to chop things up and reassemble them like Frankenstein, you focus on conserving value and enabling, not integrating. You might consider that a better return on investment and return on the (finite) energy of your employees.
So, instead of whipping out the integration playbook as your first act, start from a different place: from the assumption that you should not integrate and make the positive case for it. And perhaps it is OK to tell your investors that you are paying a premium because it is the right thing to do — because this asset is so strategic you cannot thrive without it. If you cannot make that case then possibly go back to the drawing board.