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Andy Kach
Principal
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Brian Chapman
Principal
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When the Elephant Eats You

Posted by Matt Scheitlin on September 9, 2015



iStock_000019161928_SmallOrganizations face many challenges when trying to capitalize on commercial synergies during an acquisition, as my colleague Brian Chapman discussed in a recent blog post.His thought-provoking piece, entitled “Eating the Elephant of Commercial Integration,“ resonated with me, in particular the portfolio aspect of synergy (see table in Brian’s post). This is one area where I’ve often seen organizations fail to exploit the value.

One recent example of this type of failure was with a global wound-care company. Through a game-changing advanced product, the company had deeply penetrated hospitals in most developed global markets (e.g., United States, Germany, France, Japan). But its success wasn’t only about the product technology. Instead, the company paired the significant innovation advantage with a rental business model and service organization that made it nearly impossible for a competitor to copy. This strategy led it to incredible revenue, profits heights and global domination that I haven’t seen since.

However, like all good things, the success was not meant to last forever. Within 10 years, the company found itself in quite a predicament: With limited remaining upside in developed markets and a lack of first-mover advantage in many developing countries, executives knew they had to find a new way to grow.

Smartly, they focused on trying to expand the portfolio offering through an acquisition. Since the company’s innovative technology was used to heal high-acuity wounds, there was significant potential to supplement its technology with a more robust portfolio that could support treatment of all types of wounds. Fairly quickly in the process, executives identified a target that had fulfilled this requirement and they quickly made an acquisition.

We got involved early in the European integration phase of the acquisition. At first glance, this seemed like a match made in synergy heaven. The clinical buyers were the same both in the hospital and outside. The portfolio value story to the economic buyers made sense as well. The company could sell them on the appropriate use story, create patient-outcome-based contracts or even own the wound-care treatment continuum in a setting. It was perfect. Now, all we needed to do was ensure that the organization could capitalize on this synergy by creating the right commercial structure.

Initially, the European organization was aligned on creating a single business unit (BU) with responsibility across the portfolio. This BU would be supported by:

  • A single sales force that could leverage the entire portfolio in their clinical and nonclinical conversations
  • A single cross-portfolio marketing team that could focus on patient management protocols and a combined value proposition

However, due in part to political inertia, the organization soon began to move into a different direction. The European team opted for three global BUs focusing on:

  1. The original innovative technology
  2. A high-priority launch product
  3. The newly acquired organization

Not surprisingly, when separate P&Ls are at stake, these European business units quickly began acting in their own self-interests. Separate sales and marketing organizations were built to support each BU and all semblance of commercial synergy was quickly lost. In addition, the cultures of the two companies were never integrated and customers never even realized that the two teams were part of the same organization.

Now, rather than having a robust portfolio to build out growth in developed markets this organization has been decimated by lower-priced competitors that are better able to leverage the entirety of their portfolios.

I share this story only as a warning sign. Even if you are able to find a synergistic commercial counterpart during an M&A process, it is critical that perspective be continued through implementation. Otherwise, you may find the elephant eating you.

Topics: medical devices, Matt Scheitlin, medical products and services, medtech, commercial integration, m&a, integration, synergy

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AUTHORS
Brian_Chapman_thumbnail
Brian Chapman
Principal,
ZS Associates
Tobi_Laczkowski_thumbnail
Tobi Laczkowski
Principal,
ZS Associates
Will_Randall_thumbnail
Will Randall
Manager,
ZS Associates
Matt-Scheitlin-London_thumbnail
Matt Scheitlin
Associate Principal,
ZS Associates
Andy-kach_thumbnail
Andy Kach
Associate Principal,
ZS Associates
Bhargav_Mantha_thumbnail
Bhargav Mantha
Associate Principal,
ZS Associates
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