A Phased Approach to Merger and Acquisition Integration: Tapping Experiential Learning
David R. King
A merger and acquisition (M&A) is not a strategy, but a means to pursue one. Although there are multiple reasons to pursue an acquisition, the primary challenge in doing so is that M&A consistently fails to improve firm performance.1 Poor integration between the acquiring and target firms provides an explanation for M&A performance falling short of expectations, because integration is pivotal in creating value from M&A. Without integration there is little justification for paying premiums for targets that average 40 percent.2 Integration, however, is difficult to execute, and existing frameworks describing M&A integration and its impact on performance have limited usefulness.
The shortage of definitive guidance on integration is consistent with the focus of M&A research in general. The variable most commonly examined in M&A research is relatedness, or the degree of similarity between an acquirer and target.3 Despite expectations that a relationship exists, research has not found empirical evidence that relatedness between an acquirer and target influences M&A performance.4 Although multiple explanations for this exist, two are most relevant to the current chapter. First, research generally examines simple relationships that fail to consider what relatedness means for the integration of an acquirer and a target's resources and operations. Emerging research suggests a complex relationship exists whereby related acquisitions perform well when there is enough difference between firms and resource combinations to create value, but performance of unrelated acquisitions falls when differences become too great.5 Second, whereas different acquisitions may require unique integration approaches, research largely groups all M&A activity together. Specific types of acquisitions, such as those involving high-technology targets or those that involve diversification, may exhibit important differences.
Given lackluster M&A outcomes, a need for integration to improve performance, and limited available guidance on integration, improving M&A integration is an urgent and compelling management challenge.6 A key to responding to this problem is to recognize that M&A is not an event but a process. One approach to viewing M&A in this light is to look at decisions made during each phase of an acquisition, and outlining practices that can be expected to improve results. This chapter applies this approach to the acquisition of smaller firms in related industries, an M&A scenario generally considered to have more potential for improved M&A performance. Integration is an important factor in related acquisitions as it is needed to transfer resources and skills. Similarly, relative size between an acquirer and target is a key variable, as research suggests that a target needs to be small enough to be easily integrated yet large enough to influence an acquirer's performance.7 Using a phased approach in examining a specific type of acquisition can offer guidance that will help in identifying other circumstances where positive M&A outcomes can be achieved. It also offers acquirers the opportunity to unlock the power of experiential learning.
Instead of merely thinking about a problem, experiential learning involves a direct encounter with a problem and active attempts at finding a solution. Viewed this way, learning then involves reflecting on cumulative experience to guide behavior.8 The implication is that ideas are not fixed and immutable, but are formed and reformed through experience where early decisions have implications for later performance. Tension between expected and actual experience is inherent in Kolb's iterative model of learning.9 This model consists of four stages: (1) concrete experience, (2) reflective observation, (3) abstract conceptualization, and (4) active experimentation. Although experiential learning follows a continuous spiral that can be entered at any stage, learning generally begins with an actual experience where a particular action is taken and the effects of the action are observed. The next two stages relate to reflection on these effects, and the transformation of the experience into a sense of order using a set of guiding principles. Plans are then made to test developed models, leading to a continuing cycle of improvement as resulting observations are made.
Applied to M&A integration, experiential learning suggests that early consideration of issues leads to better results, as there will be a smaller gap between desired and actual results. Broadly speaking, the M&A process can be segmented into three phases: target selection and deal structuring, integration planning, and integration implementation. Prior experience and available knowledge guide target selection, whereas deal structuring relates to reflective observation. Integration planning involves the conceptualization of the desired combination of target and acquirer, and the development of blueprints for making it reality. As implementation of the developed M&A plans progresses, outcomes inconsistent with expectations help to refine actions, leading to active experimentation in pursuit of the M&A goals. In the next section, principles of M&A are integrated with those of experiential learning to develop suggestions for M&A integration across the phases of M&A.