How can you master merger integration in the digital age?

Without this, businesses rely on a rigid initial integration plan and if the reality does not match the plan, they end up taking a ‘sticking plaster’ approach, trying to implement sporadic tactical fixes rather than addressing the overall strategy. And while there is no one-size-fits-all integration strategy, there are a number of strategic dimensions that need to be analyzed before developing a plan and then continuously reviewed while implementing it.

“Most integrations go wrong because people draft a plan, mobilize a team to execute, but rarely take time to fully understand the complexity and interdependencies within it. The team is then shocked when the associated synergies drift to the right,” says Roy Cornick, Transaction Advisory Services.

Vodafone — KDG: a case study in convergence

In October 2013, mobile telecoms operator Vodafone Group closed its €7.7 billion transformational acquisition of German cable company Kabel Deutschland (KDG). It was a classic convergence play, reflecting the wider industry trend of bringing together mobile, internet and television services as a single bundled service.

But integrating these two giants of the German telecoms landscape was a huge challenge. How do you make this “immediate-growth convergence” play a success without disrupting the existing businesses?

“When you looked at the value of the transaction, yes there were of course synergies, but the biggest value was the growth story of Kabel Deutschland,” says Dr. Andreas Siemen, Chief Financial Officer of Vodafone Germany. “So the biggest risk was that after the acquisition the standalone business would fall down because of interference, people leaving, or defocusing on the existing strategy.”

Dr. Siemen explains the management team decided the priority was to make sure the integration process would not hurt the standalone business. KDG would maintain its momentum, and then on top of that, management would take steps to bring in the synergies — the business initiatives, cost savings, overheads.

“I think the most interesting theme was the speed of the integration. How fast and how ruthless should the integration be happening? There was a debate and we decided to take a more considered stepwise integration approach. You can’t take for granted the business continuing as is after the merger but you have to do deep integration to end up with a new functional organization. So we deliberately gave ourselves time,” says Dr. Siemen.

This meant the merger process was not sequential — integration strategies could run in parallel. Those quick win synergies on costs, purchasing and revenues were addressed from the outset, but the pace would be slower for those areas that needed more time, such as mass processes that required reaching out to large numbers of people.

Dr. Siemen emphasizes the importance of explaining the merger process externally. “You also have to communicate everything to the customer. While inside the company you may think everything is clear, there needs to be a lot of communication outside to the consumers so that they understand what has happened. Similarly, we had to look at the branding side, how do we teach customers about the change. So again, we didn't choose a disruptive approach but a gradual approach,” says Dr. Siemen.

Ultimately, for Dr. Siemen, timing is everything when it comes to successful integration. “Looking back, if we had gone for a much faster approach, I think the result would have been that we would have lost a lot of talent and a lot of know-how on the Kabel Deutschland side. If you give yourself a bit more room to breathe and to work together, you enhance the opportunity to have the exchange of ideas from both sides,” says Dr. Siemen

Three approaches for successful merger integration

Evaluating the tone and pace of integration from the start is fundamental to achieving a successful long-term combination no matter what the deal rationale. The critical difference to keep in mind for convergence deals is that regardless of the goal you’re unlikely to get there without adopting important new business behaviors.

To achieve this, executives should shift their thinking and consider the following three approaches:

1. Identify value-driving businesses: The truly impactful difference-making behaviors are typically few, and unique to each deal. Kick start the merger process by pinpointing those behaviors that matter most in terms of driving value from the deal, and make them the core focus on your integration strategy.
2. Consider strategic operating model redesign before closing: In convergence deals, success often depends on operating model changes that promote the key business behaviors. It’s important to think these through before closing, because they often determine whether the deal meets expectations.
3. Consider modular integration: Convergence deals are not like traditional merger integrations in which you integrate everything fast to obtain synergies. Recognize that not everything needs to be integrated as quickly as possible — and perhaps some functions shouldn’t be integrated at all.

Disruption demands fresh thinking

Digital disruption and sector convergence have pushed companies to increasingly future proof themselves through M&A. But businesses need to have both foresight and flexibility in their integration strategy. With the landscape changing so quickly, this year’s brilliant deal may well become next year’s divestment.

Convergence deal buyers should therefore strive to avoid the “all-or-nothing” approach of traditional merger integration. As the merger of Vodafone and KDG has showed, integration can take place on a function-by-function basis, each with different time horizons based on their strategic importance.

And as companies move toward more convergence deals, the focus of merger integration may shift from operational synergies to talent or technology access, from revenue and income growth targets to innovation and technology maturity targets. Driving deal value therefore requires new thinking and new approaches to post-merger integration.