• Adequate similarities in operations of merging companies in order to effectively leverage efficiencies
• Identify and integrate best practices of both organizations

• Customer contact management
• Managing economies of scale
• Clearly defined and communicated corporate culture of new organization

A key issue that companies expanding into new markets through acquisition are forced to deal with is the management of consistent quality across the entire organization. Each organization will have different business processes for sales, product delivery and service delivery. Unless the target's processes are standardized to mirror those of the acquirer's, there will not be consistent delivery of products and services across the merged organization. In some cases these issues are so drastic that they dull, dilute or even negate the acquiring company's growth strategy.

• Leverage Operational Efficiencies: Acquiring an organization with an efficiency ratio inferior to yours creates an immediate opportunity to increase the customer base and enhance revenue while realizing cost savings. By transferring the best practices of the acquiring organization to the target, the target's efficiency ratio can be lowered to the level of its new owner, resulting in a more efficient, more valuable addition to the parent company.

Transferring best practices between combining organizations to achieve maximum efficiency should be a natural part of any merger integration plan. However, there are issues related to the transfer of these processes that appear both before and after the merger takes place. First, companies that are considering a merger and that plan to leverage operational efficiencies need to examine each other's operations before a deal is struck to be certain that adequate similarities exist between their business processes and that a smooth integration is possible. If there are sufficient similarities in their operations and the two organizations agree to merge, the acquiring company must be careful to identify the best practices of both organizations, not just their own. While it is likely that the majority of the target's business practices will be adapted to those of its acquirer, the target will often operate more efficiently in some areas than its new parent. The parent needs to identify the areas in which its subsidiary's operations are superior to its own, and adopt and implement those processes across the entire organization.

• Strengthen Product Offering: A good strategic growth plan will identify the products and distribution channels to be utilized in the pursuit of new markets. When acquiring a company with desirable or superior products, a purchasing organization typically decides to adopt its new subsidiary's product line rather than create a new one from scratch or improve upon an existing product line of its own. The purchase of another organization's line of products is often less expensive and time consuming than the internal development of its own, current line, which may require heavy investment in technology, human resources, physical plants, management processes or capital market access.

Although developing or redeveloping a line of products internally may prove costlier than purchasing one from another organization, looking to outside companies for new products does not guarantee an inexpensive way to strengthen a product offering. If a company is acquiring a target because of its superior products and delivery, the selling organization will likely understand the motivation for the purchase and will price the acquisition accordingly. The cost of the acquisition will be set much higher and will have a greater, immediate impact on the acquiring company's costs than would the gradual development of new products.

Another issue that combining companies will be forced to face is the compatibility of product lines. As two companies must examine each other's operations before agreeing to merge to make certain that their business processes are compatible and can be suitably adapted to one another, these companies' product mixes must be examined in much the same way. This examination is crucial to the successful combination of product lines to make sure that they complement one another and that there is not excessive overlap.

• Expand Product and Customer Mix: Recently, different types of financial services providers have combined to take advantage of a diversified customer base and product mix. Deals such as the Travelers Group/Citicorp merger will provide each of the combining organizations with the opportunity to cross-sell products to new customers acquired as a result of the merger and the combination of their customer databases. Typically, implementation of this type of merger involves varying degrees of three principal, effective avenues: first, individual distribution channels can be applied to an increased number of products while maintaining the original customer base; second, the individual distribution channels can be made accessible to an increased customer base while maintaining current product offerings; and third, multiple distribution channels can be combined into one single channel, offering a consolidated product line to a consolidated customer base.

The tactical aspect of this type of marriage, however, is a complex one with lots of pitfalls to avoid, particularly in the sales process: the sales force may be overwhelmed with the expanded product line; multiple distribution channels selling the same product may contact the same customers multiple times; the excitement of new products may distract the sales force from selling their old products; or new products may be ignored due to comfort with old products. It will be the responsibility of sales management to prevent any of these operational fallouts from occurring.

• Become the Largest: Running a large operation greatly appeals to many organizations due to the associations that come along with size. Being the biggest is often analogous with being the best. Customers like doing business with large companies because there is an implied market approval of their products. Large companies tend to achieve economies of scale and operate efficiently, which allows them to process transactions at a lower cost than their smaller rivals and leverage operational efficiencies in extremely competitive markets. Additionally, career opportunities are often better within large organizations, at both the staff and executive levels, which allows them to attract better, more talented employees.

While there are clear benefits to creating a large, efficient organization, this strategy also poses challenges that have to be addressed in order to achieve successful merger integration:

• Customer Contact: Large organizations must manage their contact with customers and avoid becoming insensitive to their needs. With size comes increased complexity in company-customer communications. This applies to the need to listen to customers' views of the marketplace for financial services and the organization's products, as well as the way the organization reaches out to the customer; whether it be by mail, VRUs, telemarketing calls or in person. Large organizations must mitigate the risk of losing focus on the customer in order to minimize attrition.
• Economies of Scale: Management functions can become unfocused and even forgotten in an organization whose strategy is to achieve large economies of scale. The ability to coordinate work effectively between different functional departments can diminish and decision criteria can become muddled. Managers must be careful not to become preoccupied with the cost of operations at the expense of quality.
• People: Combining the corporate cultures of merging companies is often the most challenging and crucial aspect of merger integration. Management must carefully address and clearly convey the reason behind the decision to merge and the vision of the newly formed entity. It is vital to the success of merger integration that an organization's people are made to feel that the role they play in the integration process is key to its ultimate success. Large acquiring organizations often find themselves with discouraged employees who are unaware of how they fit in to the corporate culture of their new, bigger parent company. And as history has shown, employees who are uncertain of their role in a newly merged organization will perform as such. Their productivity will fizzle alongside their morale.

Whatever an organization's strategy to enhance revenue, profitability, or shareholder value, the organization must be ready to face the many challenges that come along with growth. In order to prepare itself for these challenges and help assure the successful execution of its strategic growth plan, an organization should carefully examine the motive behind its desire to increase its size before deciding to merge. To ensure successful integration, management needs to link its strategy to a tactical implementation plan. If this process is carried out in a thoughtful, cautious manner, the potential benefits that the organization has to reap can create a competitive advantage that will allow the organization to continue its successful growth and expansion into new markets with new products and services.

© 1998, LoBue Associates Inc. All Rights Reserved

return