The art of integration at ADP (Corporate Dealmaker)

The art of integration at ADP

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More than a few corporate development leaders have tried to strengthen their companies' post-merger integration capabilities in recent years. For some, the impetus came from a failed deal. For others, it was pressure from Wall Street, the board or both. For G. Harry Durity, corporate vice president for worldwide business development at Automatic Data Processing Inc., the spur was, of all things, Y2K.

ADP has long relied upon acquisitions to help build its four basic businesses: human resources and benefits services, securities processing for brokers, applications services for car and truck retailers and vehicle collision claims processing for insurance companies. The best deals, Durity knows, often involve targets the units have identified themselves - and all deals must be sponsored by a business unit. But Y2K preparations greatly dampened dealmaking in the second half of 1999, and the turn of the millennium failed to restore the line executives' confidence. "People had lost their appetites for acquisitions," Durity says. "They'd been off the road too long."

They're back on it now, though. Supported by a more systematic and efficient approach to post-merger integration, ADP resumed its historic pace of 10 to 12 acquisitions per year, most of them companies with revenues between $50 million and $100 million. ADP (which itself had fiscal 2003 revenue of $7.2 billion) continues to rely on acquisitions for about 3 percentage points of growth annually, with more and more of that growth coming from outside the U.S. Most significantly, the emphasis on integration has yielded clear financial benefits. This year, Durity's office measured ADP's return on investment on more than 100 transactions over the past decade. "Those deals that have gone through our formal integration process are substantially more successful," he says.

Of course, most acquisitive companies say that a systematic approach to post-merger integration is important. In a late 2002 survey of dealmaking executives by consulting firm Bain & Co., for example, almost two-thirds of respondents said a comprehensive integration program is necessary for a successful deal. And in the aftermath of Enron Corp. and WorldCom Inc., boards of directors increasingly demand accountability for mergers. This often means hitting specific financial and operational milestones. "Boards of directors have basically said to the management, 'If you're going to spend this much capital, we want to make sure you get the results, and the way you get the returns is to make sure you have the right kind of integration,' " Durity says.

But integration templates are a challenge in their own right - both to develop and to apply. Finding the proper integration leader, the most pressing integration issues, the most efficient systems, all require an approach that can combine flexibility with structure. "A playbook provides general guidelines," suggests Sam Rovit, the head of global M&A at Bain. "But it's not something you can paint by the numbers."

Applying integration expertise, meanwhile, means that companies must readjust (or at least re-examine) the always-delicate balance of resources and control between the central corporate development team and the business units. Some big, highly acquisitive companies such as Cisco Systems Inc. have a full-time integration staff at the corporate level. But most companies are more like ADP, which has full-time integration staff ("1-1/2" individuals) only at its vehicle dealer division, a buyer of many smaller companies. Integration is the responsibility of the individual business units, so Durity can't dictate a system; he can only guide and suggest. "I'm not accountable for integration," he says. "It's not my job."

All of which makes ADP's success in this realm worth a look. Diane Harris, the president of Rochester, N.Y.-based consulting firm Hypotenuse Enterprises Inc., observes that business development and operating units at many companies are learning to work more effectively together. So ADP is emblematic of an important trend. As Bain's Rovit puts it, "People have realized that if you do a deal and then lob it over the wall to someone else, it's a recipe for disaster."

The ability to combine central support with local responsibility is important for ADP, an increasingly far-flung company. ADP got its start as a provider of payroll services and is still best known for processing your paycheck. It's run from an airy but otherwise nondescript corporate headquarters in a northern New Jersey office park, where Durity and other top executives are based. But as ADP has expanded services, its operations have become more decentralized. The company's claims services division is headquartered in San Ramon, Calif., while the division that specializes in automotive and truck dealer services is based in Hoffman Estates, Ill. In the past decade, international business has gone from less than 5% of revenue to about 20%, largely through acquisitions. Much of that business is supervised by an operation located outside Paris.

It was during the dog days of 2000 that Durity began to work on a post-merger integration model. A 57-year-old business development veteran whose résumé includes two years at Revlon Inc. and 12 years at RJR Nabisco (when Ross Johnson was CEO), he heads a business development team of 10, including two based in Europe. For his post-merger integration research he visited such acquisition machines as General Electric Co. and Cisco before determining ADP required its own unique plan. It needed to be a standardized process but nothing overly rigid. "Think of it as fine-tuning the dials," Durity says, "to turn up or turn down different aspects of the integration depending on the company being acquired."

Durity's initial integration product was a 100-page "process map." That was the result of a study ADP commissioned from a small Boston-based consulting firm, subsequently acquired by Keane Inc. The map morphed into what Durity calls an integration playbook. It's a Web-based project management system, with thousands of steps that can either be applied or skipped, as appropriate.

In each deal, the playbook must be customized to reflect the rationale for a particular acquisition - the "business case," in ADP's parlance. "That will be a set of financial projections, a description of how we're going to manage the business, a description of how we're going to integrate the business and any particular issues we think need to be resolved as we go through the acquisition process," Durity says. This will go through several permutations as due diligence progresses. But in the end, this is the plan presented to senior management for final approval.

That document begins the integration process. Using the business case as a framework, the company forms a transaction team. The team includes someone from corporate development, specialists in such areas as legal, human resources and technology and a senior operating executive from the business unit that would host the target.

At the later stages of due diligence, the business unit sponsoring the acquisition appoints an integration manager (see chart). The manager isn't necessarily part of the transaction team. (In one case, the manager actually came from the target company. But that's not ideal, Durity says, since a newcomer will lack an institutional knowledge of ADP.)

Criteria for an integration manager at ADP will vary from acquisition to acquisition, Durity says. Sometimes in a smaller or simpler deal, a full-time integration manager is deemed unnecessary. If one is needed, who might be available? And - nearly as important - what particular challenges are likely to become most pressing? Each acquisition presents its own unique set of problems, which range from incompatible back-office systems to sales force rivalries. Financial challenges would dictate one kind of individual, sales and marketing issues another.

Beginning the integration process as early as possible is essential, managers and consultants agree. The longer the lead time, the less likely companies will be blind-sided by unexpected problems and expenses. Companies not adept at the process, for example, routinely underestimate the costs of integration. They find it difficult, once under way, to get their hands on a big enough budget to pay for everything from layoffs to computer upgrades.

"In the deal continuum, integration planning must be seen as part of diligence," says Joseph McConville, a PricewaterhouseCoopers LLP partner who specializes in post-merger integration planning.

But the ability to shift gears from due diligence to actual integration varies from case to case. Private targets naturally permit quicker action by ADP than public ones; substantive regulatory issues naturally hold things up. Even in an ideal world, Durity says, nitty-gritty integration begins only four to six weeks before a deal closes. "What we try to do is make sure we have continuity," the ADP executive says. "Some of the people who did business diligence stay on to become involved in integration."

Once the deal closes, it's a different matter. Like other managers, Durity believes in the need for integration speed. The first year, he says, is key. "That's when you have to start hitting your targets. ... Once you miss the first year, it's unlikely you're going to hit the five-year target." So ADP initiated a 100-day review. Managers report against the integration playbook to a group of top executives and detail what percentage of various integration tasks are completed.

Durity cites a 2001 acquisition as a model in integration. Avert Inc., based in Fort Collins, Colo., supplies employment screening and selection services. Durity's team identified Avert as a potential target in the late 1990s. But Avert went public and its stock soared, making an acquisition difficult to justify.

Instead, ADP fashioned what Durity calls a "distribution alliance" with Avert. This allowed ADP time to assess whether its customers were interested in pre-employment background verification. According to Durity, it took two years "before we got it right, before we felt convinced that we had a product that sold, that we knew how to distribute it."

ADP decided to make an offer for the company in June 2001, after learning that Avert was attracting other potential acquirers. It ended up getting the company for $81 million. ADP appointed as full-time integration manager a human resources executive from the benefit services unit of the employer services division. He stayed with the integration for about eight months. Although ADP paid what Durity says was a "pretty fancy premium" for Avert, its revenue growth and business fit justified the acquisition.

Working with the company for so long before a deal is struck is ideal, Durity says, but acknowledges that such arrangements are hard to come by. "We would love to be able to do more of those," he says.

While ADP's acquisition record may be good, it isn't perfect. When the company examined its M&A failures as part of its ROI study, integration again proved key. Durity ticks off the problems: ADP took too long to integrate. Or it didn't spend enough on technology. Or it didn't move an acquired company's product into ADP's distribution channel fast enough.

As Durity can attest, it's no longer enough to wheel and deal from one acquisition to another. Proper integration helps minimize the possibility that mergers end up as divestitures. - Matt Miller

Fastening the bolts
How Automatic Data Processing integrates its acquisitions
Integration manager appointment	Integration plan development	Deal announcement	Integration execution	Management feedback
Significant commitment from a senior manager for an extended period of time Starts after signing but before closing	Focus on corporate integration (payroll, etc.), value drivers, revenue generation and core hypotheses developed in the business case	Tightly coordinated effort with strategic business unit, sellers and corporate	Typically, a weekly meeting run by Integration Manager May extend for 24 months or more	100 Day Review with top ADP management, target leadership, and SBU "Post mortem" acquisition reviews with ADP Board
Source: ADP