Integration Strategies in M&A Part 1

Types of Integration Strategies

Chris Evans: It really starts with the business strategy. Business strategy drives everything. From an integration perspective, you have a spectrum of how integrated a company should be. At one end, you have a standalone business, which will run separately with specific tie-ins. At the other end, you fully integrate the company. 

But like most strategies, you often land somewhere in the middle, integrating some aspects and leaving others standalone. Integration is a spectrum from full integration to standalone business, primarily defined by the deal rationale and how you're looking to extract value from the transaction.

There's a notable variance between full integration and not touching anything. Even when you don't touch anything, it's never absolute. Over time, we've worked on numerous transactions which maintained a high level of autonomy, like with Amazon. Independence is not the right word; it implies unlimited freedom. 

These entities are still part of a larger company, but they do possess significant decision-making autonomy. However, there should still be key integrated actions, such as business governance, managing the business, information security, and a few other pivotal areas.

Even when an acquisition appears standalone, for instance when Amazon acquired Zappos, there's often more integration beneath the surface. Amazon integrated Zappos' warehouse and fulfillment business, capitalizing on Amazon's expertise in those areas. The trick is being deliberate about what you integrate and what you don't to preserve the business's value.

Scott Boyd: I couldn't agree more. A common misconception in acquisition integration is the notion of an all-consuming playbook. Instead of a single, universal playbook, think of it more as a toolbox. This toolbox contains various modules and approaches that you tailor to the needs of a specific business rationale for an acquisition.

For instance, in the past, we've chosen to keep sales teams completely separate or to deeply integrate them to enhance cross-selling. The approach should align with the business rationale and the prevailing circumstances.

The best thing an integration function can do is to remain flexible while being robust in its practices and documentation. When it's time to take action, it's crucial to know how to execute efficiently.

Transformative Integration

Chris Evans: Transformative integration is somewhere on that spectrum, and this spectrum is fairly all-encompassing. Having a bespoke integration strategy, as Scott mentioned, is vital. That's where you extract true value from the transaction. If you rigidly follow a few archetypes, a company might question the decisions being made. 

For instance, the company might question why their sales team is being integrated when there is no value in doing that. And simply responding that it's because the integration strategy number 4 is the wrong answer. Flexibility is essential. 

Sometimes business sponsors may think they can execute using a playbook. While it's crucial to have a playbook and know its plays, the real value comes from a team discerning when to follow it and when to deviate. That's how integration teams truly add value to deals. Flexibility is key.

Scott Boyd: I agree. To illustrate with examples, there's a marked difference between a vertical integration, where you're integrating a supplier, and a growth strategy-based integration. With vertical integration, the sources of value are typically threefold:

1. You obtain the margin your supplier once had, resulting in cost savings.
2. You gain control, ensuring certainty of supply and no interference from other customers.
3. You can drive innovation deeper in the stack by closely working with the now-integrated supplier, where previously there were boundaries between supplier and consumer.

Conversely, for a growth strategy, the focus isn't primarily on back-office synergy, but on enabling the sales force to generate significant revenue. The approach differs based on the acquisition rationale. It's less about having a universal approach and more about being prepared to execute the most suitable strategy.

Deals Easy to Integrate

Chris Evans: I'd prefer to say 'easier' because every deal has its quirks. If I ever got to a point where I believed that acquiring a particular company would be a breeze, that’s the time I should resign because I've lost touch with reality. 

There's no such thing as 'easy' in acquisitions; each one has unique challenges. However, there are clearer paths. Fully integrating or maintaining a strong standalone status are two well-defined ends of the spectrum. 

These are scenarios where expectations are clearer because there's less ambiguity. The challenges mostly arise when decisions fall somewhere in between these two extremes. So, while the extremes might be 'easier', none are truly easy.

Scott Boyd: I totally agree. To delve deeper into one end of the spectrum, acquisitions primarily for talent or 'aqua hires' offer more simplicity. Especially when a CEO, a pivotal figure in any transaction, is passionate about their product, the engineering, and the innovations they're driving. 

Such a CEO often adapts better to the changes during integration compared to someone who relishes the role and control of being a CEO. Post-acquisition, that comprehensive control fades. The ease of integration also often hinges on the team's culture, the nature of the executives, and the business's maturity and state.

Most difficult thing to Integrate

Chris Evans: The real challenge arises when navigating new markets, countries, and scales. Overtime at Amazon, we kept progressing towards more complex transactions. Initially, we focused on smaller U.S.-based companies, and we honed our skills around those. Then came larger acquisitions like Zappos, followed by various e-commerce endeavors in Europe and global sales forces with some AWS deals. 

The purchase of Whole Foods marked another milestone. Each new, unique challenge added to the complexity. But as we took on these incremental transactions, we expanded our integration team and developed a global network of experts familiar with acquisitions. While these were challenging, they were also some of the most rewarding experiences.

Timeline of integration planning 

Scott Boyd: It's never too early to think about change management. Businesses consist of humans, and these individuals will face changes after an acquisition. I would suggest deal leads and corp dev professionals begin considering culture even before the letter of intent or term sheet. It's crucial for sponsors to envision how the acquired team might fit within their organization. If there's difficulty in visualizing this, it could be an early red flag.

Once you're in formal due diligence, post letter of intent or term sheet, consider bringing in a change management expert. At Amazon, we were able to have these experts in-house, often aligned with the vision for the integration team. They focus on the implications of change for stakeholders, employees, customers, and even vendors. It's ideal to have a clear change plan written up, possibly before sign or during due diligence.

After day one of the acquisition, it's about setting clear expectations. People will have many questions. While not all answers will be available immediately, clear communication about potential changes is essential. It's about being honest, transparent, and setting clear timelines.

Chris Evans: Yeah, from an integration team's involvement as you lead up to a term sheet signing, many transactions fall by the wayside just before the term sheet. We typically get involved when the term sheet is signed because there's a commitment from the company, and we're on the clock. 

At that point, we're running. Before then, one of the benefits of having business-specific integration such as AWS was that Scott was more involved in the pre-term sheet than most of us, helping guide and direct integration considerations.

Many deal professionals and others around the company didn't fully grasp the practicalities of what happens post-close and the implications of the major decisions being made upfront. So, having an integration person who understands the business involved pre-term sheet is beneficial. 

However, it's under the understanding that it shouldn't consume a significant amount of time since the likelihood of those transactions coming to fruition is fairly low. But once you sign a term sheet, it's all systems go. Over time, our integration team took over more of the due diligence.

It's a general best practice for the integration team to be involved during the due diligence process and then manage post-close or post-sign. We took it a step further by overseeing the transaction process in tight coordination with the transaction lead. 

We deeply understood the companies, which enabled us to make sound integration decisions. Going deeper made us a stronger team. We could establish relationships early on, allowing us to move swiftly post-sign and close, working closely with the company.

Scott Boyd: Yeah, just to build on that. It's essential to be aware of the general profiles drawn towards a corp dev negotiation and sourcing role versus an integration role. Those in integration roles naturally possess more cross-functional leadership, especially at Amazon. 

It was beneficial during the due diligence process to collaborate closely with our cross-functional leads from every corporate, product, and engineering function. This collaboration throughout the due diligence process establishes a level of familiarity that pays significant dividends throughout the integration life cycle

Benefits of Integration teams running diligence

Chris Evans: You need direct and active engagement with the business sponsor, the CEO of the company, and the senior leadership. Execution is critical. Through the due diligence process, you gain the trust of key parties, facilitating the rollout of significant changes more smoothly. By the time you're introducing change, they already know you, and trust has been established, which makes the entire process more manageable.

Stakeholder management is paramount. There were people on our team who became incredibly familiar and understood the ins and outs of the companies we acquired. Early on in due diligence, my role was passive. 

However, when leading and running it, it's active. You're in the details because you're accountable for it. If you genuinely understand the business, you make better integration decisions. The transaction leads have partnered with business sponsors for extended periods, even years, knowing CEOs on and off. They have built strong relationships. 

Through the due diligence process, there's a transfer of trust from the deal lead to the integration lead. This transition becomes smoother, rather than suddenly introducing a new integration lead post-deal.

Scott Boyd: Due diligence is exhaustive. Having the integration team lead this process eliminates redundancy post-close. It spares the target executive teams from repeating themselves about their business details, both for informing the transaction decision and the integration approach. It's vital for newly acquired executives to have a positive first experience with their new parent company. Repetition can strain this relationship.

There's a significant advantage in having integration professionals run due diligence. Apart from building relationships, it's an opportunity to establish a reputation with the target management team. 

They recognize you as a person who can facilitate processes, someone knowledgeable about the company. You can guide and advise them, even on how to respond to extensive due diligence questions, and lead newly acquired teams through the transaction life cycle. 

Also, it's natural for the acquired executive team to know how things are going to be post close, and there is no one better position to answer those questions then the integration lead. 

Chris Evans: People often ask me how I took over due diligence. It didn't happen overnight; it was a gradual process spanning several years. We began by leaning in more heavily, especially when a new deal lead came in unfamiliar with Amazon's procedures. 

As we delved deeper, we documented our methods so the team could learn and refine the process. Over time, we built a reputation within Corp Dev as effective leaders of due diligence. It wasn't instantaneous; consistent strong execution was key to achieving this. Eventually, it became the norm for the integration team to lead the due diligence process, leaving no question about who was best suited for that role.

Integration teams’s Diligence Execution 

Chris Evans: Deal leads would typically use their own approach, leading to variability in the methods. While the deal leads were seasoned professionals with backgrounds in other companies, private equity, and venture capital, there wasn't a consistent approach to executing deals within Amazon. 

This inconsistency meant that the cross-functional team had to constantly adapt to different lead styles, which could be challenging. Over time, they came to appreciate a more uniform approach.

By having the integration team handle some of the due diligence, it allowed the deal leads to concentrate on areas where they excelled, such as addressing issues that surfaced during due diligence, negotiating share purchase agreements, and understanding financial models.

Scott Boyd: I believe that since integration, by its nature, is cross-functional, so should due diligence. The integration team, skilled in managing such cross-functional projects, should lead due diligence. This approach strengthens relationships both internally and with the target.

I recall countless times I had discussions with my HR M&A integration partner during the due diligence processes. These weren't necessarily about deal risks, which a CorpDev negotiation lead might focus on, but more about the downstream implications of decisions made pre-acquisition.

Integration leaders are more than just promise makers; they ensure these promises are kept. Having these individuals involved early on is crucial to a successful integration.

Structuring the M&A Function

Chris Evans: There are critical milestones in an M&A transaction, and it's important to consider how you want to approach each milestone. For instance, once a term sheet is signed, what's the next step? We emphasized consistency from the kickoff to the due diligence process. There are many M&A lawyers who can offer comprehensive due diligence lists, which can then be tailored to business-specific areas.

So, what does a diligence write-up entail? How do you conclude diligence? What information should be shared with senior management? Furthermore, how do you decide whether to acquire the company when reaching the point of finalizing the transaction? Building consistency around these milestones is vital. This clarity provides the team with clear goalposts to aim for, ensuring a smoother process from start to finish.

Scott Boyd: It's essential to acknowledge that integration work is a full-time role. One of the major cautionary tales I've encountered with smaller companies is the attempt to spread integration tasks as a 10 to 20 percent duty across every functional team, both from the business sponsor's side and the newly acquired company, which is still operating its daily business. 

It's crucial to ensure these costs are incorporated into the deal model and understood in the decision-making process. Maturing companies transitioning from 0 to 1 shouldn't rush to hire an experienced integration professional due to its niche nature. 

Instead, having a dedicated project or program manager, who possesses the organizational skills and is respected as a leader driving change within the company, is essential. This is especially true when looking to complete an acquisition or establish an integration leader, whether for the first time or during early acquisitions. 

The goal is to build experience among regular members across various functional teams. One approach we took at Amazon during its early days, which I've also noticed in other smaller companies, is categorizing M&A integration roles, whether functional or central, under a strategic projects team. This team has built-in variability in its model. 

Often, M&A teams can align with global expansion due to the similarities in challenges faced when entering new regions or countries. This strategy is an effective way to centralize and ensure consistency in the integration experience, particularly for growing companies that can't allocate a full corp dev headcount.

Chris Evans: Dedicated headcount evolves over time. When I initially took the role, it was just me, and I was fortunate to have an HR M&A person dedicated to the job. They managed other projects, but there was also representation in HR, legal, and tax. With these four people, we had a consistent team even when working on roughly two deals a year. 

The challenge then becomes, which other teams do you add over time? Fast forward 15 years, and we had 16 cross-functional teams with dedicated people. Some were still just one person, while others were larger teams. Over time, we incrementally built out our teams. 

As leaders of the central integration team, we felt deeply responsible for that cross-functional team. I believed it was my duty to ensure their success and set them up for it. This meant understanding which teams were struggling and helping them argue for more headcount with their senior leaders.

CorpDev often has a significant voice in many companies, including Amazon. So, when CorpDev supported a team's case to add dedicated headcount or other resources, it carried weight. Our aim was to support these teams and help them grow over time. 

For instance, if there weren't deals in the pipeline, what other projects could they work on? Global expansions are a good example. Thoughtful planning in these areas is incredibly beneficial. Over time, this approach helps establish an M&A community within the organization, enhancing deal quality and increasing the likelihood of deal success across the company.

Consistency vs. agility

Chris Evans: Over time, as we implemented more significant documents or milestones, people would mention a playbook. However, we didn't want a traditional playbook where someone just pulls it off the shelf and starts from the top. Building a process with both consistency and flexibility was always the challenge. 

It's essential to add steps in a process that genuinely help the team, rather than just becoming an added burden. On a deal, with so much happening, any added administrative function must assist the team, rather than just benefiting a few individuals.

There are many large consulting companies with playbooks. These basic playbooks can be beneficial for those unfamiliar with acquisitions, as they offer a sense of confidence that no significant step is being overlooked. They act as a backstop and risk mitigation tool. However, over time, building something more flexible is crucial.

Scott Boyd: One thing I've emphasized, both with sponsors and newly acquired leaders, is clarity regarding the expected integration end state—both from a business and cross-functional perspective. However, the journey to that end state requires flexibility and a keen awareness of ongoing business activities, both on the target and sponsoring sides. 

For example, while many companies eventually require all acquisitions to adopt their financial systems, the timing of this integration is crucial. If the newly acquired company is gearing up for a significant launch 90 days post-close, it's not wise to start financial integration immediately.

Adjusting your integration approach, from timelines to processes and even leadership, is essential. I've often tapped into underutilized employees from the acquisition, giving them leadership roles in integration efforts. 

This not only offers them a deeper understanding of, say, Amazon but also promotes genuine, self-motivated change within the acquired company. In sum, be transparent about the necessary changes and remain adaptable in achieving them.

Chris Evans: It's fair to say that, for instance, a CFO at a company plays a central role during an acquisition, especially during due diligence. They often work diligently throughout the transaction. 

However, post-acquisition, individual playbooks might become overwhelming. You might have the treasury team insisting on moving bank accounts immediately, the insurance needing revisions, and the accounting team demanding a monthly close among other tasks. While each of these requests is valid on its own, they can be overwhelming when presented all at once.

A well-orchestrated central integration team is crucial to decide the priorities. Do we need to shift bank accounts immediately, or can it wait a few months if we have clear visibility into the accounts? A strategic approach to integration is vital.

Most acquired companies aim to be good corporate citizens. They're often pleased about the acquisition and want to make a good impression on their new colleagues and superiors. This can make it difficult for them to decline certain demands. Thus, a significant role of the integration team is to mediate, ensuring a balanced transition and occasionally stepping in to say 'no' or suggest alternative timelines.

Understanding culture pre LOI

Scott Boyd:  Your business sponsor is likely the best judge of how well a newly acquired target will fit into their organization. Referring to Chris's point, there's a significant difference in the volume of discussions pre-LOI versus the transactions that make it past an LOI. It's essential to keep the process light. Over-documentation can deter its usage.

It's crucial to engage intentionally with your sponsor. Questions like, "Can you see yourself managing this team?" or "How do you anticipate managing that CEO?" are vital. The sponsor should be confident about a positive path forward with the acquired organization within the acquiring entity.

Chris Evans: Glassdoor can be incredibly helpful. However, during early interactions, you're primarily dealing with a small number of the leadership team, so you must draw conclusions based on those limited interactions. 

It's also crucial to recognize that while many companies claim or document a certain culture, their actions may differ. One must understand a company's perspective on its culture and check if they truly act according to the values they've set. Then, consider how that aligns with the acquiring company and identify potential clashes. Every company operates differently, with its advantages and challenges.

Before an LOI, having a clear deal rationale is crucial. Understand the primary goals of the transaction, why you're pursuing the acquisition, and where you see the value. It's also essential to acknowledge what you're unsure about and areas you'll focus on during due diligence. Informing leadership about your current assessments, potential risks, and focus areas for due diligence can foster buy-in and maintain momentum throughout the transaction

Scott Boyd: I agree. Outside of culture, one significant aspect to consider is the expected changes to a target company's operating model. Reflecting on my experience with AWS, one of the leading cloud providers, we sometimes acquired companies with on-premises offerings, like downloadable software. 

This is vastly different from the AWS business model and poses a substantial integration challenge. It's essential to understand the extent of changes to the operating model early on and to ensure that the organization and its executive team can navigate those changes.

I'd encourage deal leaders and sponsors to deeply consider these factors from the outset. Building on Chris's point, it's not just about doing the right thing but also about what to avoid. One crucial mistake is making open-ended promises. Discussions of 'independence', which can be vague and subject to interpretation, can become problematic and lead to prolonged complications.

Working with inexperienced business leaders

Chris Evans: It's common for business leaders to be inexperienced in M&A. We occasionally had repeat business sponsors, which is great, but often a person is experiencing this for the first time, especially with Amazon. 

Every company has its own M&A approach, so educating that individual on how deals are executed at the organization is essential. As Scott pointed out, the business sponsor plays a vital role throughout the transaction's lifecycle. They will be responsible for the deal for many years, so our job was to set them up for success.

We would do anything to support them in this role. Initially, we would sit with the sponsor to explain what to expect over the next few weeks or months. It wasn't just about outlining the process but equipping them with the right questions to ask at different stages. 

For instance, their perspective on the management team, among other considerations. We provided them with a document listing all these questions, and it was always rewarding to see some sponsors take this seriously, even pinning the questions on their wall. That showed commitment and alignment with our expectations."

Scott Boyd: I completely agree. Some of my most positive experiences with sponsors were actually with first-timers. It's crucial to approach an M&A scenario with genuine curiosity and dedicate intentional time for it rather than just squeezing it in.

On the flip side, some of the more challenging moments came from working with sponsors who had one or two deals under their belt. They often held rigid ideas about the process, not realizing that their past experiences were based on the specific nuances of those earlier transactions, which might not apply universally.

Questions to ask pre-LOI as an Integration leader

Chris Evans: Clarity of vision is key. Many businesses face challenges in growth, resource allocation, and other areas. Some believe that by making an acquisition, especially a significant one, they might solve a specific issue, thinking that the new acquisition will operate autonomously. However, in reality, when you acquire a company, you can expect to dedicate at least 30% of your time to that new part of your business for a considerable duration.

The core question is: why are they making the acquisition? Will the expected outcomes align with reality? That's the initial step for me. As we've processed numerous deals, we've gathered a wealth of lessons and experienced setbacks. It's about helping others benefit from our knowledge rather than relying on one-off experiences from past transactions. It's crucial to have a clear vision, assess its practicality, and determine whether that vision can truly deliver value."

Scott Boyd: I completely agree with Chris's comments regarding vision. As you delve deeper, one effective strategy I employed when focused on AWS was building a relationship with the negotiating leads. 

It's crucial to serve as a resource they can trust and call upon for integration support at any moment. One area where integration specialists often have greater insight is in understanding the non-negotiables within the parent company.

For instance, negotiation leads from corp dev focusing on AWS acquisitions would often inquire about various specifics. Questions like whether our sales team would back a particular strategy or if we could overcome certain security hurdles. They might ask about entering a new country due to an acquisition. 

Answering these specialized questions is where an integration leader excels. For example, explaining that the AWS sales organization won't support a given revenue figure or can't bypass standard procedures due to security concerns.

It's essential to grasp these specifics early on to gauge the potential success of an acquisition. The focus isn't so much on having a standard set of questions but rather being a dependable resource for the CorpDev professionals. Maintaining a strong relationship and offering seasoned integration insight whenever new challenges arise before a deal is paramount.

Chris Evans: Coaches can be challenging. You often learn a lot about culture during due diligence. Culture tends to be a broad topic pre-L.O.I., mainly gauged by interactions with individuals and observing their decision-making processes. 

However, as you engage with a more extensive team in due diligence and delve into cultural assessments, the insights become deeper. It's beneficial to have a change manager involved to approach it thoughtfully and deliberately. But before the LOI, the understanding remains relatively surface-level.