Integrating Acquisitions: Keys to Unlocking the Value of Synergy
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li*0 Integrating Acquisitions: Keys to Unlocking the Value of Synergy by Albert K. Killen and Kevin P. Lawlor Ph.D. Aerospace Engineering B.S. Accounting Mississippi State University Fairfield University (1994) (1979) SUBMITTED TO THE ALFRED P. SLOAN SCHOOL OF MANAGEMENT IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION at the MASSACHUSETTS INSTITUTE OF TECHNOLOGY June 1999 © 1999 Albert K. Killen and Kevin P. Lawlor. All rights reserved. The authors hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part. Signature of Author: _ __ . ief-P. Sloan School of Management May 5, 1999 Signature of Author * ] Alfred P. Sloan School of Management May 5, 1999 Certified by: Arnoldo C. Hax Thesis Supervisor Accepted by: Toby W. Woll NZASSAC USETTS INSTiTUTE OF TECiiO LOG Director, Sloan Fellows Program JUN 1.6 j9q LJ173 3 A ES EmII-irr Integrating Acquisitions: Keys to Unlocking the Value of Synergy by Albert K. Killen and Kevin P. Lawlor Submitted to the Alfred P. Sloan School of Management on May 5, 1999 in Partial Fulfillment of the Requirements for the Degree of Master of Business Administration ABSTRACT The ability of mergers and acquisition transactions to generate enhanced shareholder value often hinges on successful integration. Our thesis examines this critical phase of merger activity. Through six discrete case studies and interviews with the individuals who led those transactions, we identify the important discriminators that differentiate success from failure. In addition, we highlight the firms and processes that are emerging as benchmarks in this area. Thesis Supervisor: Arnoldo C. Hax Title: Alfred P. Sloan Professor of Management I~ TABLE OF CONTENTS Page CHAPTER 1 INTRODUCTION ............................................................................ 7 CHAPTER 2 STRATEGIC POSITIONING: DEFINING THE VALUE PROPOSITION ............................................................................... 10 CHAPTER 3 STRATEGIC RATIONALE FOR ACQUISITIONS .................. 15 A. Growth and Scale ................................................................. 17 B . Vertical Integration ................................................................. 19 C . D iversification ....................................................................... 20 D. Product Line/Geographic Expansion ....................................... 20 E . G ap Fillers ................................................................................ 21 F. Portfolio A dditions ...................................................................... 21 G. Market Inefficiencies............................................................. 22 CHAPTER 4 PRE-TRANSACTION STEPS .............................. 24 A. Establish a Screening Process .............................................. 26 B. Prioritize Potential Candidates ............................................. 28 C. Contact with Candidates........................................................ 29 D. Approach Candidates ................................................................ 30 E. Make a Go/No-Go Decision.................................................. 30 F. Form an Acquisition Team................................. .............. 31 G . D ue D iligence........................................................................ 31 H. Valuation and Structure. ................................................... 32 I. Execution .......................................................................... ........... 32 CHAPTER 5 INTEGRATION ......................................................... 34 A. Phase I: Integration Planning .............................................. 36 B. Phase II: Implementation ..................................... ............ 40 C . Phase III: R eview ................................................................... 44 PREFACE TO CASE STUDIES .................................................... 46 CHAPTER 6 CASE STUDY NO. 1: AMERICAN STANDARD & WINDSOR CONTROLS CORP............................................... A. Competitive Environment ................................................ B . Strategic R ationale .................................................................. C. Executing the Deal ....................................... ................. D . D ue D iligence........................................................................ _I___ __~ __s~____ _ : TABLE OF CONTENTS (continued) Page E. Operation Commence and Integration Issues............................ 1. Operational Issues ...................................... .............. 2. System Issues ........................................................ 3. Engineering/Development Issues ....................................... 4. C ultural Issues .............................................................. 5. Financial Issues ...................................................... F. Post-M ortem ............................................. ................................. CHAPTER 7 CASE STUDY NO. 2: GENERAL DYNAMICS & BATH IRON WORKS ............................................................... 58 A . Strategic Rationale ....................................... ................. 59 B . T ransition ............................................................................ 60 C. Critical Issues ....................................................... 62 D . R esults .......................................................... ......................... 62 CHAPTER 8 CASE STUDY NO. 3: AT&T & TELEPORT COMMUNICATIONS GROUP .................................................. 64 A. Transaction Rationale............................................. 64 B. Competitive Environment ..................................... .......... 65 C . Transaction Execution .................................... ....................... 67 D. Transaction Approach ...................................... .............. 67 E . R esults ........................................ .................... 70 CHAPTER 9 CASE STUDY NO. 4: TRAVELERS GROUP & CITICORP ............................................................. 72 A. Competitive Environment ................................................... 73 B. The Deal .......................................................... 74 C. Integration Issues.............................. ................... 75 1. Corporate Governance and Decision-Making Architecture.. 75 2. Corporate Culture and Style .................................................. 76 3. Systems and Processes ............................................... 77 4. Compensation.............................................. 78 5. Regulatory ........................................................ 78 D. Transaction Outlook ...................................... ................ 79 CHAPTER 10 CASE STUDY NO. 5: IBM & LOTUS ........................ 80 A. Transaction Rationale............................................. 80 B. Competitive Environment ................................................... 82 C. Transaction Execution ............................................................. 83 D. Transaction Approach ...................................... .............. 85 E . R esults ........................................................ .................... 86 _ _j~_l_ _~ __j~l ___ TABLE OF CONTENTS (continued) Page CHAPTER 11 CASE STUDY NO. 6: LOCKHEED & MARTIN MARIETTA ...................................... ................. 89 A. Transaction Rationale........................... ................. 89 B. Competitive Environment ................................................ 92 C. Transaction Execution ................................................. 95 D . Results ............................................................ 97 CHAPTER 12 LESSONS LEARNED ................................................................. 100 A. Experience: Integration as a Core Competency ....................... 102 B. A Value-Driven Approach ............................................... 105 C. Leadership and Aligning the Leadership Team ....................... 106 D. Speed and Critical First Steps ..................................... ........ 108 E. People and Culture ....................................... ................. 109 F. Com munications ........................................ .................. 111 G. The Special Challenges of Cross-Border Transactions ............... 112 H. Best Practices ...................................................... 116 CHAPTER 13 CONCLUSIONS ................................................................................ 120 References 122 Appendix: Baseline Interview Questions ........ ..................................................... 127 ACKNOWLEDGEMENTS We would like to acknowledge our wives and families whose love, support, and tolerance during this thesis process were so critical. To Arnoldo Hax for his wisdom and guidance throughout the process. And to the following individuals who shared their real life experiences in interviews with us which gave this subject its context: Michael Mancuso Peter Teets Phil Dukes Dick Burrell Jerry King Dino D'Eppeligrini Jack Welch Lois Hedgepeth John Reed Michael Zisman Lawrence DeMonaco Al Hanson __._ __ CHAPTER ONE INTRODUCTION The next wave is on! For the first time in history the value of merger and acquisition activities will top $1.3 trillion (U.S.) in 1998. Surging like the tides of the ocean, this fifth wave (there have