Integration – The Most Important Part of the Acquisition Process

If you read papers on mergers and acquisitions as I do, one statistic pops up all the time. 70% of all acquisitions deals done fail to return a proper rate of return to the buyer. My guess is that intelligent buyers are probably looking for a minimum of 20% rate of return on deals. That is just the buyer’s position. My bet a full 70% of sellers would say that their business not handled properly after the deal was done meaning most likely the integration process was not done right.

It constantly amazes me how much time buyers and sellers spend poring over relatively insignificant terms on their deal before closing and how cavalier both parties are with the integration after closing. If you want a deal to pay you back you simply have to do the integration properly.

I have tons of examples of the havoc that bad integrations can cause. I have purposely kept the individual company names out of this:

• The owner of a security company sold to one of the major Canadian fire and security companies had no chance of making the earn-out on the deal mainly because of the bad integration done on the deal by the buyer. The mistakes appeared to me to be basic.
• Another owner who sold his integration business to another large integration business quit his 2 year work contract with the buyer because the buyer had made such a mess of the integration. He could not stand it any longer.
• Another owner I know smartly negotiated keeping his accounts at his existing monitoring station while the buyer in the deal had his holdback. He lost virtually no accounts during that 2 year hold back period. 2-3 years after the accounts were moved to the buyer’s station there are hardly any accounts left. Unbelievable.
• A friend of mine sold his company (not a security company) to a very large international retailer. 5 years later he was able to buy it back for a fraction of his original selling price because the buyer had messed up the integration and management of the company after so badly they had to sell it.
• Although many of the larger alarm account buyers don’t publish their attrition numbers on acquisitions, I have seen some of these numbers and can tell you that generally attrition increases by at least 25% in the first couple of years after acquisition- probably more.
• Even before I got into the security industry career, my family company, Harding Carpets, did a lousy job integrating a very big acquisition they did in 1976. All the key people left in this case because they could not work for the key Harding executive.

I could go on and on. Although some of my past bosses won’t like to hear this, I don’t think any of the companies that I worked for did as good a job integrating the alarm accounts they bought as they could have. It appeared to me to be all about the buying of the RMR. Nor since I went independent 10 years ago have I seen any one buyer on the security field take the care with integration that I would like to see. I constantly warn my sellers about the integration process

How important is integration. I have heard that it was customary at GE when Jack Welch was running it and when GE was becoming a conglomerate and acquiring lots of companies to start thinking about the integration process even before a Letter of Intent had been signed with the Seller. Based on what I have read Jack Welch and GE were able to successfully buy a lot of different companies. Think of this way. If you want to determine whether you should buy a company, besides the price and other terms, imagine the integration process for the target company and see whether it can work.

Integration is a big topic with lost written about it but for purposes here lets divide the integration process down into 2 main parts:

1. Handling the transference of the Basic Customer Functions to the buyer properly. In the case of an alarm company, this would be the billing, monitoring and customer service functions.
2. Handling the cultural/buyer people issues properly.

For security companies here are the main parts of the Basic Customer Function transfer.

• Billing - Imagine how a customer feels after receiving a nice letter explaining that a deal has taken place and a new company is now billing your account and when you get the first invoice, you don’t recognize the charges, or maybe the charges are wrong or you get your invoice one or two months later than usual. Not a great start to the relationship. Not enough care is taken with the transfer of the billing function.
• Customer service- To make matters worse you call the new customer service line to clarify your bill ( a pain in itself) and the new customer service person has no clue what you are talking about. a simple basic step here is for the buyer to inform all their customer service staff that a deal has been done on a new block of accounts from Company A and to take special care with them. In fact I advocate that given that the buyer is often paying up to $1,000 per account and more, that customer service in the buyer’s company be tasked with calling each and every customer to make sure that the customer got the letter explaining the deal, to check that the buyer has all the correct info on the account (call list, panel info, zones) and just generally ensure the customer is happy with his service. Here is rule of thumb for buyers. Try to make the first invoice to newly bought accounts look as much the same as the old one as you can. Send the invoice out in the same billing rotation and make sure your pricing stays the same. For Sellers to those buyers that tell you they simply have to start billing your accounts immediately after the deal closes, tell them that is nonsense and that you will not accept any attrition from a rushed billing process.
• Monitoring- Talk to anybody that does deals for monitored accounts and they will tell you if you want to minimize attrition don’t move the accounts. They are right. Remember the example above of the owner that purposely made sure his accounts stayed at the same station until the holdback was up. Every station I have seen has different practices. Some call on cancel codes. Some do not. Some call on low batteries at any time. Some are more discriminating. Real trouble emerges with more complicated monitored accounts. New stations often just don’t get the call practices right. A company I did some work for in the Maritimes tried to move their accounts to another much better station but had to move them back because the customers were complained to the owner.

Some of you will know and have other steps that can be taken on doing the Basic Customer integration process properly.

Regarding the cultural/people issues, in my opinion this is where some big mistakes can be made. (If the buyer is not taking on people from the seller then most of the comments to follow do not apply)

Some examples of cultural /people related problems are:

• One large Canadian alarm company bought another large Canadian company and hoped to maintain most of the seller’s key staff. Unfortunately most of the key staff left after the required period of time to stay. Could this have been prevented? Perhaps if more time had been taken understanding each of these key staff members. My sense in this case is that the buyer should have tried to leave more of the Seller practices, offices etc in place.
• Another very large alarm Canadian company buys a large Canadian company and amongst other things instead of learning how the target company managed to keep its attrition so low - a principal reason they bought the company in the first place - nothing was done to learn about attrition and the buyer proceeded to do things that only dramatically increased attrition.
• In the case of the security company above in section 1 being bought by the much larger integration company in an earn-out, the buyer inflicted their overly bureaucratic rules and regulations on the bought company whose employees who had grown up in a very entrepreneurial atmosphere. It was like oil and water.

Mainly the cultural/people integration mistakes stem from the buyer’s attitude and failing to take into consideration that the bought company has its own culture and key people which have made it successful. It is how the buyer does things that is important now. No credence is given to the fact that what made the Seller financially successful in the first place was how their key people ran the business. How many of us have talked to very capable people who have told us they had to leave the company they worked for after many years of service a year or two after the company was bought because the new team don’t know what they are doing and don’t listen.

I understand the need and benefit to fully integrate back office systems like billing to take advantage of efficiencies but do that carefully and take a great deal of care with all the people you are absorbing to make sure keep them motivated to do as good a job for you as they did for the seller.

When all is said and done Integration is very basic stuff. But I will suggest to you that the prime reason why 70% of all acquisitions fail to deliver the required rate of return for the buyer is that the integration process was not done properly.

Victor Harding

Harding Security Services Inc

victor@hardingsecurity.ca