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


Making Acquisitions Work

• Serve all customers without disruption. Typically, when a lab company was purchased, some 15 to 20 percent of revenues from the acquired company would disappear within the first year because the buyer treated the acquisition’s customers poorly. Labs would be consolidated and systems and courier routes would be changed in an already logistically complex business. Customers, upset at the disarray and the poor service, quickly got fed up. With the SBCL purchase, though, we made customer satisfaction our primary responsibility. Instead of sending thousands of customers, mostly physicians, an impersonal letter announcing changes in how we would work with them, we communicated with practices individually, face-to-face. And we solicited their advice. Of course this took time, but the payoff in customer retention was significant: Continued sales growth from the acquisition throughout the integration process versus the industry norm of double-digit losses in revenues.

• Treat every employee with fairness, dignity, and respect. In most lab acquisitions, redundant testing facilities had been closed and about half of the people fired — most of them from the acquired company. Such tactics erased the connections that customers had with the acquired company, embittered the remaining employees, and impeded integration. Under our new operational principles, we maintained open and frequent communication during integration and involved employees in developing strategic plans and timetables. This dramatically reduced the fear of the unknown and created a forum for widespread engagement among employees. There were no mass dismissals; we let voluntary attrition take its course, and offered “stay bonuses” to rank-and-file employees of both companies to retain them at least through the transition. For those who were ultimately released, we provided comprehensive severance and outplacement services.

• Move with deliberate speed. Go too slowly and you sink into torpor as employees wait interminably — and unproductively — for the ax to fall or things to change. But if you go too fast in, say, converting the computer systems or assimilating the two cultures, you’re likely to botch the acquisition. Ironically, undue haste delays the benefits of the acquisition. Usually, companies go too fast. Wall Street wants immediate results, the hard work of integration often bores executives, and many CEOs seek the glamour of the next deal. At Quest Diagnostics, by emphasizing customer and employee satisfaction, and moving at a pace that enabled customers and employees to keep up and feel comfortable with the changes we were making, we achieved our projected performance gains and improved morale at the same time. Remember, synergies are realized only once, whereas satisfied customers and employees are a recurring long-term source of value.

• Learn from each other. When we acquired SBCL, we could have been tempted to say we won and they lost. The SmithKline people could have replied that they could just as easily have bought us. To forestall these attitudes, we established integration teams, with members of equal standing from both companies. We staffed the senior leadership through a methodical process based on past performance and an assessment of whether managers met the standards that we set for top executives. We set the stage for mutual learning in the difficult job of integrating systems, laboratories, and sales forces.

By following these four operational principles, we more than doubled the size of Quest Diagnostics and created tremendous shareholder value. Between Quest Diagnostics’ 1996 spin-off and the end of 2004, market capitalization increased from $350 million to more than $9 billion, and the SBCL acquisition was the linchpin.

Ultimately, the hard work of acquisitions is a bit like romance: It’s not the courtship that’s important, but the continuing relationship called marriage. In acquisitions, what follows courtship too often looks more like divorce. It doesn’t have to.

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