JumpStart Your Merger

Merging companies have a choice. They can waste the time between the merger announcement and the deal's close by sitting around waiting for regulatory approvals and the official change of control. Or they can use their time wisely to identify synergies and plan operational integration—giving the merger a JumpStart by predefining the new company's post-merger identity.

Anyone who has been through a merger or acquisition understands the need to begin integration planning as soon as the merger is announced. But pre-merger planning alone does not guarantee success. That's because premerger planning usually means forming integration teams that work in a "black box" environment. The teams have access to a one-way, incoming flow of information during the integration process, but can provide only limited feedback—just enough to comply with either regulatory or self-imposed information-sharing constraints. Then on day one, after the official change of control, the shroud of secrecy is lifted and the integration teams reveal their execution plans to the various corporate departments.

Managers charged with the actual implementation of these plans and the realization of their benefits often have had nothing to do with creating them. Yet they must scramble to develop ways to implement recommendations while dealing with the general confusion surrounding the organizational changes that accompany a merger.

This chaotic situation can jeopardize the newly merged company. Wall Street may react unfavorably to a company that fails to post immediate, tangible and substantial postmerger gains. Negative analyst assessments can drive down share price, creating a selffulfilling prophecy in which the appearance of an unsuccessful merger leads to the reality of a weak post-merger company.

Averting the Nightmare
Preventing a merger nightmare requires making smarter use of the pre-merger period when details and regulatory approvals are being finalized (see figure 1). We developed the JumpStart approach to help companies exchange information and prepare integration opportunities while also remaining compliant with legal and regulatory constraints. Even companies that are restricted from interactions in the pre-merger phase can use a JumpStart "clean room" to strengthen and accelerate their integration planning. The approach is based on three main tenets:

Promote greater organizational engagement. Integration teams should not simply crunch numbers in the isolation of an ivory tower, but host members of both organizations at small synergy summits to build relationships and plot integration strategies.

Realize the best of all possible worlds. The search for synergies should go beyond existing frameworks and basic cost comparisons to explore best practices of leading companies in the industry and to create new, out-of-the-box ideas.

Transform the abstract into action. There are protocols and confidentiality constraints that integration teams must follow, particularly in the context of a clean room. Nevertheless, integration teams can manage the flow of aggregate information to appropriate divisions so that preparations can be made for immediate post-merger actions. In cases where companies are required to implement clean room procedures, a third party can facilitate the information exchange.

The following describes how to achieve merger goals in five areas—growth, sales, supply chain, procurement and IT.

JumpStarting Growth
It might seem redundant to discuss how to JumpStart growth, since growth is typically one of the main reasons underlying a merger. Yet companies often lose focus on growth targets as they scramble to deal with more practical and procedural issues. Although the temptation in all mergers is to look for bottom-line "quick wins" through cost-cutting, a preoccupation with cutting costs not only harms joint growth opportunities but also endangers each company's individual growth initiatives.

To keep the focus on growth, we recommend a series of separate but similar growth workshops at each company. The workshops involve managers and select employees from a variety of functional backgrounds who are charged with mapping out their own company's growth initiatives and identifying potential new joint growth opportunities. Participants are asked to consider the most appropriate growth mechanisms given their industry and company size. For established companies in mature industries, the workshops typically focus on organic growth and removing growth barriers. For fast-growing companies in volatile industries, the focus is primarily on developing new business and new partnerships.

Take, as an example, the recent merger of two high-profile consumer products companies. From the beginning, executives at both firms agreed to invest in growing their operations. Their plan was to use the enhanced packaging capabilities of the combined organization to develop new retail offerings and promotions. The executives coordinated their data on packaging materials, aligned planning processes, and linked their production and distribution scheduling systems. On the first day after the merger closed, the company was in position to create a full-fledged packaging and promotions plan, which was launched within weeks.

In a typical merger, this promotion-based growth plan might have been obscured by a short-term focus on cutting costs—rationalizing packaging facilities rather than leveraging expanded packaging capabilities. These executives kept their eyes on the prize and prepared their post-merger company for growth.

JumpStarting Sales
Mergers are highly public events. Two companies stand before the world to announce they are joining forces, and within hours, the news cascades through the ranks of both companies' customers, often planting seeds of nervousness and uncertainty. Will I have the same sales representative? Will service levels remain high or nosedive? Will my trade and pricing arrangements change?

Good mergers keep customers in mind at all times, particularly when assessing new go-to-market strategies. The integration teams must make customer satisfaction a priority as they go through the mundane task of analyzing differences between the sales forces and their sales strategies. Both parties in the merger have to move toward a shared view of an end-state business model that includes the future sales force, segmentation strategies and the new company's market coverage (and conflicts). They must build consensus on the opportunities in underpenetrated markets and the policies and procedures that affect customers, while also defining a new go-to-market approach and projecting the likely financial impact—without ever disclosing customer or brand-specific details.

We can use another example (albeit anonymous) of how this is done. Without making any final decisions until after the merger closed, executives at these two companies agreed in principle to eliminate 88 percent of their direct accounts. What seemed to be a pretty drastic decision at the time was proposed following research conducted in the clean room that confirmed the wisdom of focusing the new company's growth plan around key accounts. As the merger was still being negotiated, the leadership team mapped out the account redirection strategy and then drafted a letter communicating these changes to customers. Immediately after the close, the new strategy was put in place, letters were mailed, and customers knew where they stood within a few weeks (rather than months). This decisive move helped the company retain its most profitable customers.

Two other merging companies used their pre-merger moments to make sales staffing decisions and within three weeks of the close announced a consolidated sales organization; four weeks later the new company held its first national sales meeting.

Merger clean rooms are equally valuable when applied to manufacturers' and buyers' trade terms. As customers anticipate a change in the status quo, a clean room can help evaluate terms and assess the benefits and implications of synchronizing policies. In some cases, the terms of one party will be extended across the entire post-merger company; in others, the parties decide to develop new terms that are better than those offered by either party. Either way, at close, the new company is able to communicate new trade terms to all of its customers.

JumpStarting the Supply Chain
From a supply chain perspective, mergers are opportunities to rationalize manufacturing and distribution footprints, cut costs, improve service, and benefit from economies of scale. Whether manufacturing assets are part of the deal or not, mergers force both parties to reevaluate their production strategies and determine the best new strategy for the combined organization.

Bridging the differences in manufacturing strategies is not easy, as businesses typically take very different approaches to producing their products, including the extent to which they outsource manufacturing processes to lowcost countries and how they allocate costs along their supply chains.

Integration teams are charged with assessing all ongoing capital and productivity improvement initiatives, and determining the degree to which supply chains are vertically integrated. If the parties have outsourced manufacturing to low-cost countries, the assessment includes discussions with contract manufacturers. And if manufacturing assets are part of the deal, there are decisions on whether to close factories and how to aggregate production volume and leverage contract manufacturers. Although analyzing unit cost comparisons can be difficult, designing the new supply chain months in advance delivers an enormous payoff to the post-merger organization.

The beauty of a supply chain analysis is that it can reveal additional value-creating opportunities. In one recent merger, for example, our clients focused their analysis on formulations, packaging and the merits of vertical integration. Integration teams discovered new, lower-cost alternatives for developing formulations that would allow the new company to retain its current product and brand attributes. They then chose an optimal package design after taking into account manufacturing complexity, overall costs and consumer preference.

These teams were also equipped to evaluate the merits of both upstream and downstream vertical integration: Should product canisters be purchased or assembled in-house? Does it make more sense to assemble special packs at the end of the assembly line or off site?

Distribution was subjected to similar analysis, with the teams mapping the combined distribution center (DC) networks and discussing storage space, automation, staffing, throughput and systems. The teams also scrutinized customer and ship-to locations, inbound points of origin, order profile and picking requirements.

By the time the deal closed, the company knew the shape of the intended DC network and had identified $30 million in potential supply chain savings.

JumpStarting Procurement
Procurement is the source of significant cost synergies in a merger. Determining purchasing synergies in the pre-merger phase will result in savings much sooner after the merger is completed (see figure 2).

In a typical merger, a procurement analysis focuses narrowly on the economies of scale made possible by acquired spend. Companies presume that more volume automatically equals better price. In a JumpStart merger, integration teams look at best practices and negotiation strategies that lead to better prices. For example, if both pre-merger companies purchase a key product component from a domestic supplier, the traditional analysis often assumes that the larger company had the best terms and expect the combined company to improve on these slightly.

This is not necessarily the case, however. We might find that the larger company should adopt the procurement terms of the smaller company, or that both companies' procurement terms should be overhauled to imitate best practices of industry leaders such as sourcing a similar quality, lower-cost component from China. The procurement savings can be significantly higher than those achieved by blindly trusting in economies of scale.

In another recent merger, hundreds of buyers from around the globe were brought together to attend synergy "summits." These workshops, which took place in dozens of locations, served a dual purpose—allowing executives and managers to meet with their counterparts, and also providing an opportunity for them to build consensus on procurement priorities. The workshops were instrumental in enabling the new company to take action on day one and exceed its procurement savings targets by 30 percent.

Discussing such issues within the confines of information-sharing regulations, integration teams are prepared to execute the strategies immediately following the merger's completion. In the case of price differentials, letters to suppliers can be drafted in advance. And where it makes sense to bundle the procurement volume and go to market together, requests for proposals (RFPs) from both companies can be ready to go on day one.

In fact, in one of the largest mergers in the consumer goods industry, both parties used JumpStart not only to achieve twice the amount of savings targeted from procurement, but also to realize the savings one year ahead of schedule. Part of this success is attributed to rooting out global best practices. Company A was purchasing laptops for $1,000 each and company B was paying $900 for the same laptops. Rather than settling for the $900 price, we isolated a source for the same laptops for $820. Do this in every category and pretty soon you're talking about real savings.

JumpStarting IT
Immediately after the merger, the combined company can expect its IT department to be deluged with requests. Call centers and help desks will likely be working at full capacity just to maintain stability and keep operations functioning properly. There will be no time after the merger to make integration plans, therefore it is vital for companies to have plans already in place well before the merger is finalized.

A pre-merger IT diagnostic will help identify the IT tools, technologies and practices that will best enable post-merger activities and reduce integration risks. It is a roadmap of sorts for maintaining stability amid organizational change while also pointing out the joint capabilities and strengths of the combined organization.

Again, the large CPG companies discussed earlier can help illustrate this. During their merger, key IT managers and staff from both firms met in planning workshops to share the results of the pre-merger IT diagnostic and software analyses. Team members participated in the workshops not only as a way to start forging personal relationships they would need later on, but also to plan strategies for pursuing IT integration and prioritizing systems and software projects.

The pre-merger diagnostic can also be used to scout potential risks associated with integrating intranets, payroll systems, customer call centers and messaging applications. Disaster recovery procedures will ascertain whether current safeguards and systems will be able to handle increased network volume in the event of an emergency.

JumpStarting Success
Mergers often inject energy into the combined organization. The most successful mergers manage to channel this energy into the crucial task of capturing synergies, and into remaking their sales, supply chain and procurement relationships. By increasing both the quality and the speed of integration planning, companies have an opportunity not only to achieve their maximum post-merger potential, but also to reap the financial rewards months earlier than if they had used a conventional mergerplanning process. In laying the groundwork for change, and JumpStarting the merger, both companies are in a position to capture more than they had hoped to achieve from the merger, and faster.

Consulting Authors
Kenneth Lee is a partner in the firm's organization and transformation practice, and is based in the Cambridge office.

Daniel Mahler is a partner in the firm's consumer industries and retail practice and is A.T. Kearney's global coordinator for sustainability. He is based in the New York office.

Joy Peters is a principal in the firm's consumer industries and retail practice, and is based in the New York office.

The authors wish to acknowledge the contributions of their colleagues Gillis Jonk, Sumit Chandra and Venkat Tummalapalli in writing this article.