AFTER THE ACQUISITION: The Art of Integration

It's given that you'll have financial and structural issues. But the key to success will be in how well you manage the cultural challenges.

YOUR COMPANY HAS JUST ACQUIRED a small, promising outfit, and as group vice president, it's your job to make the integration succeed. What to do first? You need to combine central services to hit the mandated 10 percent cost reductions. Their IT operation is prehistoric. Their financial reporting procedures are different from yours, and the fiscal years need to be aligned. You suspect that they're a bit top-heavy with managers, but the job titles are so ambiguous it's hard to identify the keepers. But most of all, you want to instill your corporate culture: growth oriented, opportunistic, committed to being number-one in every market you serve. Will they adapt to change? After all, you bought them, not the other way around.

YOU HAVE JUST BEEN ACQUIRED by an ever-expanding conglomerate. The o ices of several colleague are suddenly empty. Th new top managers are in own and have summoned the employees to a company. any wide meeting. You're already feeling like an outsider in your own company, and there, at the podium, your new group vice president is telling you that it's useless to resist--those who embrace the new culture will succeed, while those who don't aren't going to make it.

Welcome to the age of consolidation, nineties style. In the eighties, dealmaking focused on the financial. "The model of the eighties was to buy magazines to spread your overhead costs," says Richard D.W. Mead, a managing director of the Jordan Edmiston Group, a New York City-based investment bank. "It was a financial imperative, not a marketing imperative."

Nowadays, though, the rush to conglomerate has taken on a more strategic aspect. The focus is on the concept of clusters. Companies choose markets they want to serve and acquire or build out all the links in the chains--the shows, the newsletters, the databases.

And because of this increasingly strategic focus, both buyer and seller are spending a lot more time on integration. Managers need to know when to be firm and when to give ground, how to meld differing accounting procedures, and what the pro forma objectives should be. They need to adjust to new markets where they don't have the depth of contacts, and decide whether to relocate people. They need to establish benefits and bonus policies and, above all, they need to set the right tone.

"Everybody does due diligence, and it's basically a numbers game," says Frank Anton, president of Hanley-Wood Inc., the Washington, D.C.-based publisher of 11 magazines and a custom-publishing unit. "But based on experience with three acquisitions, I would spend more time on cultural due diligence--who they are and what makes them tick." HW in recent years has bought the custom publisher The Wells Group, the Home Planners magazines, Old House Journal and the Aberdeen Group, which publishes three concrete and masonry trade titles and was acquired in October 1998. "I think you need to be very, very clear about your objectives," Anton adds. "The company is a platform. And from that platform you're going to add on."

The success of newly created platforms requires the rapid and efficient assimilation of the seller's culture into the buyer's. And that can be difficult, since under the uncertainty of new ownership, teamwork often suffers a meltdown. "The first word in 'merger' is 'me,'" notes Thomas Kemp, CEO of Cleveland-based Penton Media, which acquired the bulk of Westport, Connecticut-based Mecklermedia last year for $274 million. "Everyone's wondering, 'What does it mean to me? Am I going to have a job or not?'"

It's a reasonable worry, since executives experienced in acquisitions say that a 10 percent reduction in costs is the rule of thumb for acquired properties. Those cuts typically come in staffing, although they are also found in renegotiated paper, printing, fulfillment and distribution contracts. "We can up to double the operating profit margin [on acquired properties]; 10 percent can go up to 20 percent," says Charles McCurdy, president of the New York City-based trade and consumer publisher Primedia. "The efficiencies are more in the process-oriented areas; you can't really get them in ad sales or editorial."

Adds Gerry Hogan, chairman and CEO of St. Petersburg, Florida-based Cygnus Publishing, "We have to date done smaller acquisitions and the efficiencies there are obvious: We've centralized certain functions like accounting, circulation, telemarketing, exhibitions, production and MIS." Hogan notes, however, that for the kinds of smaller trade magazines Cygnus buys, that doesn't automatically translate into headcount reductions. "In a couple of cases we've increased the staff, since smaller companies' employees are often doing three jobs and they may be outsourcing some jobs."

Unlike the financial model of the eighties, however, the focus of the cluster buyer is less on cost cutting than on revenue growth. Jeffrey Stevenson, president and managing general partner of New York City-based VS&A Communication Partners' three equity funds, says, "Aggregating like-kind assets drives accelerated profit growth. Ultimately, the real objective is to create value through scale by having a larger business that is more coherent."

It also means that the groups being unified under one owner are more likely to speak the same business language and share understandings about their markets. But even if, as McCurdy observes, "the odds of success go up with how closely the acquisition is related to the fields you're in," the integration process is bound to be difficult.

According to veterans, however, there are four tactics that will improve the odds:

BE WARY OF PROBLEM CASES

Hogan says that eschewing sick properties in need of triage ups the odds of satisfactory integration. "We've bought things we like," says Hogan, who now oversees 430 employees, "and so we try not to make dramatic changes. We don't buy anything that's broken; we don't buy anything that's not making money. We feel good that we haven't lost any key players [after the sale]."

Because the magazine industry has seen an influx of capital from financial players (Cygnus, for example, got its start-up money from the New York City-based private equity fund Kelso), sales multiples are higher than ever. That means more properties are on the block, which is why buyers like Hogan can choose to avoid problem titles.

Anton says Hanley-Wood's approach has been to be cautious with potential acquisitions that might present cultural conflicts. "It would probably make us depress the price that we were going to offer," he says. "We're now of the mind that where you see something in the company's culture that is to the detriment of its growth, you have to act or you compromise the investment."

MOVE QUICKLY

Not only do you have to act, you have to act fast. First, the acquiring company should make its personnel changes decisively. Says Kemp, "You should spend the first 90 to 120 days working with the new people to decide who's going to stick around and who isn't. You don't have access to employees until due diligence or maybe even until after the deal closes, so you need to get in quickly and talk to and listen to everyone to identify the strong people and the weak people right away. You want to implement your plan as fast as possible. Otherwise, the organization becomes paralyzed."

Hogan agrees with Kemp's advice. Cygnus was founded in June 1997 with the acquisition of the Melville, New York-based PTN Publishing, and since then has made six more small acquisitions of trade magazines. "On day one," says Hogan, "we're in the [acquired company's] offices with our financial people and the human resources people to calm their fears and set up systems. We spend the balance of the day and meet one on one with people. Then we start pulling people into our orbit."

SHARE YOUR PLANS

A third element of success, Hogan believes, is simply letting people know what you as the buyer will be expecting of them, and what the strategic impetus of the acquisition was. "Don't take for granted that the new people know what you're talking about," says Hogan. "It's easy to underestimate how overwhelmed the acquired management can be. I've found it very effective to have the former owners agree with us on a written job description."

Adds Kemp: "You need to have common goals. And you need to structure compensation to achieve those goals."

Anton says that as part of a 100-day plan after an acquisition, the two sides collaborate on a list of opportunities and obstacles. "Because of this process, employees know that these are things that the senior managements of both companies want," Anton says.

He also advocates full disclosure: "With the Aberdeen Group, we promised that no one in the company would be hurt in terms of total compensation," Anton says. "Then, when we got in there, we found out that their bonuses were different from ours and some people were going to get hurt. So we said we had made a promise, but it ended up costing us $200,000."

Bruce Barnet, president and CEO of Newton, Massachusetts-based Cahners Business Information, credits the successful integration of Radnor, Pennsylvania-based Chilton Publications, which Cahners bought in September 1997, to "respect for our mutual properties." He acknowledges, however, that large acquisitions--especially one requiring the assimilation of 39 new titles, as did the Chilton purchase--are challenging and mean a full-scale examination of organizational systems.

"By far the more difficult piece of the [Chilton] integration has been the internal structural issues," says Barnet. "You attempt to identify 'best practices' for organizational integration, hut that means you're asking very good people to learn new ways of doing things."

DON'T MAKE ANY SUDDEN MOVES

The final factor, which is new to the equation, is attributable to technology. Rather than racing to consolidate everything in one office, companies are now more often leaving acquired properties in their existing locations and bringing them into the fold electronically. "I tell people that I had to move from San Francisco to Cleveland, and I don't expect that sacrifice from anyone else," jokes Kemp. "They're immensely relieved when they hear that." Penton has left all its acquisitions in their original locations, leading to a total of 19 offices around the country representing 43 magazines, 105 trade shows and 35 Web sites.

The trade-off for companies growing by acquisition is increasingly dispersed operations, but executives now believe that what is lost in the efficiency of a physically unified operation is gained in stability and proximity to markets, although Barnet does admit that Cahners would eventually like to eliminate a few of its 61 offices. "[Relocating] frequently makes no business sense from a customer point of view," says Kemp. "Moving a business away from the nexus of the industry means you lose a lot of good people. There are so many disruptive things in a merger or acquisition that whatever you can do to minimize disruption makes sense."

With a whopping 75 U.S. locations, Primedia tops even Cahners. Nonetheless, McCurdy says, "Eight or nine years ago we tended to want to keep everything under one roof. Now anything that is market-specific we leave in place. We can operate very efficiently from any place."

Hogan, whose office in St. Petersburg, Florida, is company headquarters, but not home to any of Cygnus' magazines or exhibitions, concedes that having employees in 35 locations is at times inconvenient, but for the reasons Kemp and McCurdy identify--staff stability and market access--Hogan believes that it's worth the trouble. "We're investing an enormous amount building a very sophisticated technical infrastructure--a companywide intranet," the former CEO of the Home Shopping Network says. As for himself, Hogan says, "I travel an awful lot. That's part of life."

It may not look like it takes a lot of brains to write a check--and it doesn't. But that's just where the challenge begins. As Kemp says, "Frankly, any idiot with enough money can make an acquisition. The tricky part is making it work."

7 Tips for a Successful Integration

Hanley-Wood Inc. has grown rapidly through acquisition, buying three multi-title companies and one well-established consumer magazine, Old House Journal, in recent years. Here, HW president Frank Anton offers insights on making the integration work.

* DECIDE HOW MUCH INTEGRATION YOU WANT

Are you willing to be arm's length? The mechanical processes you can figure out. It's the spiritual stuff where problems are stickiest--groups of reasonable people can disagree. One of our drives is to he a world-class company. "World class" means something to people. But when we used that phrase, it backfired. They saw us as using buzzwords.

* AVOID ARROGANCE

If you're the acquirer, you have to try to avoid arrogance: Avoid the attitude that we're bigger, we're better and our way must be the right way.

* DIG DEEPER

We've tended to focus on working with top management. But if we're going to do it again, I'd go further into the organization right after the acquisition. You really need to understand immediately what the depth of resistance is to what you want to do.

* DON'T LET IT FESTER

In the end, it's your way or no way. If you let things tester, it's destructive. It's not a question of being a jerk, it's a business decision.

* DON'T PROMISE NOT TO CUT STAFF

We went into the first two acquisitions promising no staff cuts. We would never make that promise again. It depends on whether you measure success through turnover or lack of it. If you need turnover, you have turnover.

* MEASURE SUCCESS

How do you measure the success of an integration? If they're doing X amount in profits, we think they can do X times two-and-a-half. That's one way to gauge your success.

* SOME ADVICE FOR THE ACQUIRED

You can state your case and take your chances, or you can roll your eyes and act sullen. If you do that, then you're wrong.

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