If you’re a business owner and are considering partnering with another firm through a merger or acquisition (M&A), you’ve probably heard the word “integration” brought up a lot. This term can be confusing and even scary as “integration” may mean the loss of identity, legacy, and staff. But what does integration actually mean?
Integration is a broad term that means different things to different people, especially between buyers and sellers. In general, integration refers to the process of bringing together two separate companies after a merger or acquisition. It involves combining their operations, systems, cultures, and strategies to create a unified and efficient entity. But there’s more than one way to blend companies, and every successful integration starts with identifying the goals of the merger.
Why is integration important in M&A?
Simply put, integration is an important component of building shareholder value for all stakeholders. If you buy a company and don’t make any changes (such as improving the acquired company), you will only benefit from the price difference (arbitrage) if value can be obtained without further action. On the other hand, many private equity firms tend to take the “buy it and improve it” approach.
In many cases, smaller firms employ a more autonomous acquisition strategy. But as they grow, they are forced to evolve their business models to incorporate higher levels of integration. In recent years, there has been a trend amongst brokers who reach the $1bn revenue range towards more regional or centralized infrastructure and consolidated leadership models.
Illustrative of this trend, Acrisure, having traditionally operated for many years with a decentralized, standalone acquisition strategy, announced in 2023 the initiation of a process to unify operations under a single brand and adopt structures for regional consolidation and a standard operating platform structure.
Buyers who do not have an integration strategy are occasionally less competitive in the marketplace in terms of pricing and valuation when calculating (and achieving) expected ROI. Conversely, buyers who have an integration strategy are generally able to pay higher multiples as they can reap the benefits of the synergy and scale (whatever that ends up looking like) created through integration. And, after all, the entire purpose of integration is to achieve the intended synergies — and maximize value for all stakeholders.
Different types and degrees of integration
Buyers are facing an increasingly challenging operating environment with slowing growth and rising capital costs. More integration in a shorter time frame will allow them to realize higher margins on their investments and provide a more attractive growth profile for potential investors. While integration is an important component of maximizing shareholder value, it does not come without risk. The level of risk is a product of the type and degree of the integration strategy. Here are some common methods of integration in M&A (including non-integration):
- Standalone or non-integration: When this occurs, the buyer and seller have decided that the acquired business will retain full autonomy and not be integrated. The buyer only gains control of the profits and will require the seller to report results up through the parent company. The seller retains its culture and operates in the same manner that it did pre-transaction. There is little risk with continuing to operate as a standalone. However, the upside is also limited if potential synergies are left unrealized.
- Targeted integration: This approach allows the buyer and seller to capture some synergies without disrupting the client-facing operations of the business. In this scenario, the acquirer integrates specific functions that it deems necessary to capture synergies (and eliminate overlaps) without touching other parts of the business. The most commonly integrated functions relate to back-office functions such as HR, IT, and accounting.
- Full integration: In this scenario, the target company is absorbed completely into the acquirer’s organization and loses its individual identity. This level of integration poses the highest risk for disruption.
While some firms pursue a full integration model and others prefer to maintain a higher level of post-M&A autonomy, all strategic partnerships require some level of combination in order for the selling firm to gain access to the tools and resources of the buyer.
Selecting a buyer
As a business owner evaluating strategic partners, it is important that you consider your own goals for the transaction, which will help you determine what type of buyer will most likely help you achieve those goals. There are basically two categories of buyers. The first, a strategic buyer, purchases companies that fit strategically with its own business within the same industry in order to capture synergies, drive long-term value, expand product lines, or branch out into new markets. Strategic buyers recognize that increased levels of scale and a wide variety of synergies can be achieved through integration, thus maximizing shareholder value. The second type of buyer, a financial buyer, often seeks to purchase a business for future profit, not to align the target company with its existing operations, so keep that in mind as you identify the best integration method for your business.
Integration can start as early as Letter of Intent (LOI), so it’s imperative that you educate yourself on the different degrees and types of integration, along with the strategy behind each. This can help you make an informed decision when the time comes to select the right partner in the M&A process. This process is about working together to ensure a smooth transition and fulfill the strategic objectives that motivated the M&A deal in the first place.
