How do you integrate startups?

Integration is an essential investment in long-term value when acquiring startups.

M&A has always been a way for established corporates to accelerate growth, expand into new markets or explore different business models. As data-driven technology and novel business models take off, many startups have reached a critical size and maturity to attract big players – and their big money. But while closing the deal secures innovation for the buyer, it’s appropriate integration that will safeguard long-term success for target and buyer alike. This means acknowledging that differences between the two companies are not limited to size. An effective integration strategy aligns the two companies in a way that reflects the original question: why buy? EY’s study “How do you integrate startups” explores integration challenges – and ways to invest in shared success.

The definition of successful integration depends on the objectives and cultural mix of target and buyer. The right approach is one that effectively strikes a balance between the impulse to gain control, the benefits of sharing resources, processes and systems and the need to sustain the agility and innovation capabilities that made the target attractive in the first place. Buyers should ensure they allocate adequate financial and time resources to the integration phase – both of which are often underestimated, especially if the size of the deal is apparently insignificant for buyer.

In the study, EY Switzerland’s Transaction Strategy & Integration team identified three levels of integration depending on the original deal rationale:

Smaller, less mature targets can feel stifled by the demands of a large organization, especially if they are not adequately considered during negotiations. Both parties can benefit from the support of an external advisor like EY to navigate potential sticking points.

Whatever the deal rationale, buyers should translate the objectives into quantifiable targets. They should seek to understand what levels of autonomy and integration are needed to achieve desired outcomes: for example, what level of IT rollout is needed to enable the sales team to include the target’s portfolio in their offer? Which processes – like compliance – should be prioritized now and which can be addressed further down the line? Are key people at the startup a help or a hindrance? In other words, do the benefits of innovation, cultural consistency and stability at the target outweigh the risk of resistance to change? Ideally, these are considerations that will already be made pre-acquisition, and certainly during negotiations, where target and buyer may discover that an exit package for figureheads is the best approach to support integration. Regardless of the decision, the acquirer should be transparent about the benefits but also the needs and constraints of being part of a large, often listed, company.

Returning to the why-buy question, the strategic objectives need to be translated into value targets, which are then broken down into functional tasks and roadmaps. An integration team with representatives and resources from both companies should oversee the process. The buyer also needs to be mindful of the potential for overwhelm when an up-and-coming organization is thrown into the deep waters of a global company. It can help to appoint a senior employee within the acquiring company as integration champion – someone to liaise with management on both sides and maintain a results-focused attitude. Acquirers should also note that a little willing goes a long way in helping the new acquisition embrace the new parent’s processes. For example, the buyer could change ways of working, where appropriate, to demonstrate that integration is not a one-sided game but an exercise in finding the best common route forward.

EY has helped many large clients integrate startups or small entrepreneur-led companies into their existing organizations. Drawing on expertise and tools, we help them turn their strategic objectives into sustainable success. Every acquisition is unique, here are some general tips for successful integration:

• Know why you buy, and keep that strategy in mind – from scouting to signing and beyond
• Communicate clearly at every stage of the transaction and integration process to mitigate cultural clash
• Align integration must-dos to deal rationale and then focus on key value drivers
• Prepare a plan of actionable items with interim deadlines that will take you from day one to long-term value
• Create touchpoints between buyer and target through shared responsibilities, platforms and resources

EY’s study offers additional insights into how integration helps turn innovation into long-term value: