Alliance Integration

Outlook Special Edition, October 1999

Our global study of 100 acquisitions, each of which was valued at more than $500 million, shows that integration is the most important stage of mergers and acquisitions. Integration—the act of combining the assets or other resources of separate companies—is also a major issue for alliances, but for entirely different reasons.

Post-merger integration is about speed. It's done fast and is a onetime event. Merging companies must be quick to rationalize staff, eliminate redundant assets and take advantage of their newfound scale, knowing that financial markets expect to see real gains within a year.

If done well, most post-merger integration work is finished within six months and rarely extends beyond a year. In fact, world-class companies are consumed with tracking and rewarding the speed of the integration process. These companies tend to be driven by top-down management structures that encourage fast decision making. Many of the best companies now appoint a "chief integration officer" to oversee the full integration process.

Post-merger integration also demands that a company immediately begin to build the communications infrastructure to transfer best practices between the once-separate pre-merger entities. And world-class companies continuously monitor detailed operational results to understand exactly where they are in the integration process and to ensure it stays on track.

The Highest Cards
Some alliances also demand fast integration. For instance, consolidation joint ventures share many of the integration needs common to classic mergers and acquisitions: clarifying decision-making authority, setting venture strategy, reaching out to the key managers and mapping the first 100 days.

However, most alliances are not like this. Rather than focus on speed, most successful efforts to integrate alliances need to concentrate on understanding the impact a company's own contribution can have on its potential bargaining power within the alliance. For those companies with the most to offer, the effect may be profound; they are the most likely to gain maximum value from their participation in an alliance and also the most likely to hold the highest cards when bargaining with their alliance partners.

Our work shows that more than 90 percent of today's alliances are what we term "continuous integration" models, which require resource contributions from the corporate parents throughout the life of the venture. In these cases, integration often occurs in two phases:

Phase One is the immediate post-deal integration period. During this phase the two firms combine their resources, including the capital and staff required to launch the venture. Phase Two integration occurs when the corporate parents inject (or extract) elements over time, such as technology licenses or staff.

The collaboration between Delta Air Lines and Sabena is an example of a successful continuous integration alliance. Since forming the alliance in 1993, the companies have needed to continuously integrate various resources to achieve the expected value. Indeed, the nature of these resources has shifted in unanticipated ways over time. In Phase One, the alliance focused on the integration of brands and customers. As the companies looked to increase value, they began to integrate other resources, including staff, systems and–once antitrust immunity permitted–competitive intelligence, such as pricing and revenue data.

Continuous integration alliances change the entire notion of control. Since the resource contributions of each corporate parent exert so much influence on the direction of the venture, no single parent has total control. Which resource contributions have the greatest influence? In short, those that are integral to the success of the alliance are hard for others to replicate, cost little to contribute (that is, have low transaction, implementation or opportunity costs), provide valuable information during the integration process (for example, performance details, technical know-how, contacts) and are easy for the contributor to withdraw.

Getting Maximum Leverage
But resource contributions are only part of what allows one partner to gain the best advantage. We have observed some best practices among companies that are particularly skilled at leveraging their contributions to alliances for maximum advantage:

1. Don't Count on Capital. Capital is usually the most undifferentiated—therefore, the least influential—contribution to an alliance over the long term. In oil exploration, minority nonoperating partners who bring only capital to the table have found it virtually impossible to affect the behavior of an operating partner, short of termination for outright negligence. By contrast, leading companies in other industries may wield substantial influence as minority nonoperating partners because they offer contributions in addition to cash, such as market intelligence and technology.

2. Protect Key Contacts. Contacts with regulators, suppliers, distributors and customers may be a powerful key to maintaining influence throughout the operation of the alliance. If not protected during the integration process, however, their power may decline in importance. Successful companies tend to safeguard the ongoing value of these contacts through specific practices. Some prevent their partners from ever interacting with their contacts. Others, as is common in marketing alliances in the computer services business, insist on joint customer calls.

3. Focus on Know-How. Know-how, such as McDonald's skills in retail site selection or General Electric's skills in financial management, makes for extremely powerful contributions. The process of transferring know-how into an alliance often provides a valuable window into alliance operations, furnishing information that the corporate parent can use in other areas of its business. As a result, know-how generally is the most influential lever of influence, and companies that contribute a disproportionate share of it should expect to exert commensurate influence over the alliance.

4. Strive for Bundled Inputs. Where possible, companies should offer bundled contributions to an alliance. Examples might include Toyota's competence in total quality manufacturing and Citicorp's skills in delivering electronic-banking products to retail customers. The advantage of bundled contributions? They are extremely hard to replicate.

A few companies understand how to use the integration process—and the power of various inputs—to increase their influence within alliances. One large multinational consumer-goods company, for instance, formed a market-entry alliance with a local Chinese manufacturer. The joint venture relied on the local partner's physical assets and workforce, and on the foreign partner's brand and marketing expertise. Over time the multinational company was able to extract substantial value from its partner because its own contribution was hard to replicate and easy to remove, whereas its partner faced enormous costs if it chose to leave the alliance.

In short, alliance integration is not post-merger integration. It is prolonged and intermittent. It demands a set of skills far broader than the post-merger need for speed. And it requires a new understanding of how each company's contribution translates into bargaining power over its alliance partners.

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