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 / Fall 2005 / Issue 40(originally published by Booz & Company)


Making Acquisitions Work

By adhering to four operational principles of integration, companies can maximize their chances for M&A success.

The continuing enthusiasm for mergers and acquisitions appears to be the triumph of hope over experience. Will the combinations of Procter & Gamble and Gillette, SBC and AT&T, Sears and Kmart — and other megamergers that are sure to transpire — flourish? Success won’t come easily. About two-thirds of mergers and acquisitions fail to live up to expectations. My experiences at Quest Diagnostics Inc. show that successful acquisitions are distinguished by three strategic principles that apply before the acquisition, and four operational principles that apply afterward.

Quest Diagnostics, the nation’s leading medical testing company, was founded as MetPath in the late 1960s. In 1982, the company was acquired by Corning Glass, and subsequently renamed Corning Clinical Laboratories. At the end of 1996, it was spun off to the public as Quest Diagnostics. Throughout its iterations, Quest Diagnostics has been largely built through hundreds of acquisitions. Some, like that of SmithKline Beecham Clinical Labs in 1999, have been triumphs. Many prior to that were not.

What’s the difference? There are some general rules of thumb that can in most cases separate good from bad acquisitions. Don’t do the deal for the deal’s sake. Dreams of headlines in the Wall Street Journal and the unstinting attention of the business press for one day are an insufficient basis for an acquisition. Never make more deals than your company can fully digest or integrate at one time. And be certain that you can create shareholder value from the acquisition within the first year.

When I arrived at Corning Clinical Laboratories in 1995, the company had grown from $150 million to $1.6 billion in revenues in 13 years, primarily through acquisitions. But the result of all of these deals — including four major acquisitions in the prior 18 months — was that Corning Clinical had become a loose confederation of operations with very limited central oversight. The mantra was “do a deal, squeeze out the synergies ASAP, do the next deal, repeat.”

Unfortunately, the singular pursuit of synergy, which often meant eliminating staff (or the ongoing threat of eliminations) and cutting costs regardless of the impact on the ability to serve customers, led to widespread customer and employee dissatisfaction. And with so many moving parts at the company — each of them operating semi-autonomously — there was very little information at the top to oversee the performance of the company as a whole. The response to the question, “How many employees do we have?” was “We don’t know. Give us a week or so, we’ll call around to the business units and come back with a number.”

Although I knew that major acquisitions were the only way for Quest to eventually take leadership in a service industry with thousands of local competitors, I froze acquisitions. Only after we had completed the hard work of fully integrating and learning to run the businesses we had already acquired did we again test the waters.

In 1997, we were ready to try again. We set three ground rules — our strategic principles — for all acquisitions. First, the company had to have a record of full regulatory and legal compliance. Second, it had to be reasonably well run — you can’t change a company’s condition simply by changing its name. Third, it had to add to earnings per share within a year. Armed with these ground rules, in 1999, we were ready to pursue the acquisition of the biggest company in the industry, SmithKline Beecham Clinical Laboratories (SBCL).

After the purchase of SBCL was completed, the real work began: integration. We applied four simple operational principles of integration that we could rely upon in subsequent acquisitions:

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