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 / Second Quarter 2000 / Issue 19(originally published by Booz & Company)


Strategic Rollups: Overhauling the Multi-Merger Machine

Solution: Get expertise out into the field to help local management design and implement the change. That does not mean hosting a one-day, off-site meeting to lay out a plan. It means weeks of working together closely until the changes are made, improved performance is evident, and a monitoring system has been put in place to reinforce the change.

Beating the Odds

Even when rollups don't go well, they can be turned around. Clearly, there's hope for beating the odds and improving the record of this fundamentally solid merger-and-acquisition strategy. How do you start turning around an ailing rollup? First, step back. Recognize that reversing its course requires taking the organization through three tightly managed steps.

Start by getting the real facts, diagnosing the problems, and determining what the key fixes are—know what your priorities are and what solutions will best fix the problems. You'll need to understand what the true performance drivers are by area, by product, by segment. Zero in on the key changes that will provide most of the turnaround. Get focused, and stay focused.

Then stabilize the business. Once you have the right priorities, the job is to focus the organization on adopting the fixes in those areas. That won't come about merely by telling the field managers what to do and setting their budgets. Rather, it means providing real resources—experts who will roll their sleeves up and work with the field management to implement the changes at the local level. These expert resources can help the field management understand and enact new pricing practices, or new distribution and delivery models, or new sales force deployment tools.

Remember, these field managers used to run small businesses. If there were an easy way to improve performance they would have done it and gotten the benefits themselves. Most changes required in a rollup aren't easy; they are beyond the experience of most local field management.

Finally, with the business stabilized, focus on a growth strategy—leveraging your newfound economic strength. In our view, if they can make it through the minefields, strategic rollups continue to offer significant opportunities for value creation. And for the most successful, there is the promise of reinventing an industry.

Focus: Quest Diagnostics

A veterans' four rules for successful merger integration

by Kenneth W. Freeman

In December 1996, after more than 70 acquisitions of testing laboratories had left it with indigestion, Corning Clinical Laboratories was spun off by Corning Inc. and renamed Quest Diagnostics. Kenneth W. Freeman, chairman and CEO, initiated changes that created a platform for dramatic growth, culminating last August in the $1.3 billion acquisition of SmithKline Beecham Clinical Labs (SBCL), Quest's largest competitor. That deal made Quest Diagnostics the largest player in the medical-laboratory testing industry, with an 8 percent share of the $35 billion medical-testing market. Strategy+business asked Mr. Freeman for his view of what makes for successful multimergers—and what leads to failure:

We intend to grow our company, through traditional lab acquisitions and by acquiring capabilities to broaden our product offering in areas related to laboratory services. In this environment you need a team with the breadth of talent and experience to get the complete job done. You need talent scouts in the field to identify targets, and strategic leaders who can size up whether the targets fit your vision. Putting companies together takes special skills, and not all managers can do it effectively. You need to plan the integration of acquisitions, because without successful integration you get disintegration. You need leaders who know how to generate growth, leaders who know how to drive down costs, and leaders who can drive organizational alignment. When you buy smaller labs, you're basically buying from owner-operators who live in the community and have built their businesses with blood, sweat, and tears. These folks bring an incredible intensity and a passion for the customer. Every company needs people like that— and somebody in my job, particularly, needs to hear the voice of the customer all the time.

Integration planning needs to be under way even as you start identifying targets, or you will always be behind. Your team must be able to close deals and integrate operations without disrupting the continuing business. With the SBCL transaction, we used a very deliberate process and had the appropriate plans in place before the deal was completed. That acquisition was driven by me. I worked directly with our CFO, our executive running strategy and business development, our chief counsel, a few other financial and legal people, and our external advisors. That was our team. I did not involve the people running sales or operations. I didn't want to distract them from the day-to-day core business.

There are four rules we follow for a successful integration:

Rule 1: The customer must be served with no disruptions. When we analyzed the failed rollups in the medical-testing industry, we found numerous instances where a company would change systems or approaches, but not keep the customer appropriately informed. Surprising a customer leads to a lost customer, or at least a very unhappy one.

Rule 2: Make sure all employees are treated fairly. Nervous employees make for nervous customers. Any time you do an integration you're going to be letting some staff go. We do what we can to let our employees know what's happening, and how decisions will be made. We strive to use voluntary attrition, wherever possible, as our form of downsizing.

Rule 3: Go with deliberate speed. Lots of folks suggest that you've got to go so fast your tires wear out—if you don't, everything is going to fade away. I don't agree. You cannot go so fast that the wheels fall off, or you go off the highway and crash. It's virtually impossible to recover from that. Still, you cannot move so slowly that you can't feel the intensity, and see the changes take hold. So a delicate balance is required.

Rule 4: Go first for the high-value, low-risk opportunities. Save some of the most complicated changes for later. For example, Quest Diagnostics has done well in reducing bad-debt expense to set the industry benchmark at around 5 percent, with no hiccups. At SBCL, about 10 percent of sales was bad debt. The flip side is that SBCL, which had been standardizing its processes for almost 10 years, had lab operating costs lower than ours. So both companies had special capabilities that we are now deploying across our new, combined company. Another high-value, low-risk example: If we're going to consolidate labs, we start by consolidating small labs into much larger labs, instead of putting two very large labs under one roof somewhere else. We will not, to cite another example, dramatically move everybody everywhere in the United States to the same computer system on the same day. That's been tried before in our industry, and it's been a dismal failure, because you haven't taken care of your customers' needs up front.

Along with all our integration planning, we've also worked hard to put in place appropriate tracking mechanisms. Getting to a common vocabulary and a common way of tracking our performance on financial indicators and non-financial measures like service-delivery effectiveness are vitally important in helping to ensure that we deliver what we have promised to our shareholders.

You've also got to create a common culture, especially when you're acquiring many small companies in a tight time frame, and each company has a culture all its own. Otherwise, you'll wind up with a loose confederation whose members are going in different directions. When I joined Quest Diagnostics, a significant rollup had already begun. Four acquisitions had doubled the size of the company in the previous year. The opportunity was vast—as was the clash between the cultures of the acquired companies and the existing culture. Immediately, we set out to communicate to all parties: "Here's our common vision; here are our common values; here are our common critical success factors, and here are the common actions we're going to take to satisfy our employees, customers, and shareholders." At the same time, I decided to stop the acquisition process, so we could digest our acquisitions and ensure profitability. Together, these actions ultimately allowed us to go forward, three years later, and acquire our largest competitor from a strong footing.

We may be the industry leader in size, but we're not going to sit here and say, "That's enough."

Reprint No. 00205

Paul F. Kocourek, [email protected] is a senior vice president with Booz Allen Hamilton in New York. He focuses on strategic transformation of companies facing changes in the competitive landscape or the regulatory environment.
Steven Y. Chung, [email protected]
Steven Y. Chung is a principal in Booz-Allen & Hamilton's New York office who specializes in strategy-based transformations and value-chain restructuring for consumer products, distribution-intensive, and engineering- and manufacturing-intensive clients.

Matthew G. McKenna, [email protected]
Matthew G. McKenna is a vice president in Booz-Allen & Hamilton's Houston office. His work addresses a broad range of business performance improvement challenges faced by clients across different industries. Before joining Booz-Allen, Mr. McKenna worked in the software industry.
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  1. Keith Bradsher, “A Breakdown on the Sales Lot,” The New York Times, December 15, 1999
  2. Peter Elkind, “Waste Management: Who’s Driving the Rig?” Fortune, September 27, 1999
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