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Making Acquisitions Work

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

(originally published by Booz & Company)

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:

• 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.

Author profile:

Kenneth W. Freeman ( is managing director at the private equity firm Kohlberg Kravis Roberts & Co., where he focuses on health-care investments. Formerly, he was chairman and chief executive of Quest Diagnostics Incorporated.
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