Expectations may have been tempered when Merck KGaA, Darmstadt, Germany, a 350-year-old, global pharmaceutical and chemical company, and its EMD Millipore division acquired Sigma-Aldrich in 2015 for $17 billion. After all, the business landscape is littered with the remains of “transformational” deals that fail to deliver.
Not so, in this case. Four years after the deal closing, the merged entity, MilliporeSigma, as it is known in Canada and the United States, has established its place as a leader in the life-science-tools market. The parent company gained the critical e-commerce capabilities and geographic reach it needed to grow, and the merged entity is now reaching more customers than ever.
In this conversation with McKinsey’s Roberta Fusaro, MilliporeSigma CEO Udit Batra describes the strategy that motivated the deal, the customer-centric focus that animated the integration process, and the ways in which he and his colleagues approached myriad operational, organizational, and cultural challenges.
The Quarterly: Let’s start by helping readers understand MilliporeSigma’s business. What products do you provide to customers?
Udit Batra: We have a portfolio of more than 300,000 products that we market to researchers, regulated laboratories, and manufacturers. We sell filters, pipettes, high-grade research chemicals: essentially, all the products you’d need in a lab to conduct experiments. We also offer what we call “process solutions”: the devices, systems, and compounds required in manufacturing environments to make and then purify small molecules and biologics that then become drugs. These range from bioreactor systems to chromatography equipment to filtration equipment to needles and filling equipment. The third part of our business is applied solutions, which is a mix of both segments.
The Quarterly: How has your industry been changing?
Udit Batra: Technology is dramatically changing the way drugs are discovered and developed. Take toxicology testing as an example. Traditionally, discovery teams have spent roughly $300 million to $400 million on toxicology studies before a drug gets into early-stage clinical studies. Now, we have technologies where you can do screenings in in vitro settings with genetically modified cell lines that often mimic what’s happening in the human body—in many cases, better than rodent or primate models. Imagine the amount of savings you could generate and how much you could speed up drug discovery and development if you were to substitute toxicology studies on animals with in vitro tests.
The Quarterly: What other big changes are under way beyond technology?
Udit Batra: Researchers’ expectations have also changed. In the old days, scientists would order the compounds, equipment, and any materials they needed over the phone or through a catalog. They’d get their order probably five or ten days later. Now, researchers expect the same fast service and delivery they receive when they order retail products from online sites like Amazon: with a deep and easily searchable list of product categories and delivery 24 to 48 hours from the time they initially thought of the experiment.
Finally, you don’t have this dichotomy of emerging and developed life-science markets as much as you used to. More cell-therapy trials are going on in China than in any other country in the world. Many CDMOs [contract development and manufacturing organizations] and CMOs [contract manufacturing organizations] are using our products in China, much more so than in the developed world. So we’re learning how technology is developing in China and adapting that and bringing it back to developed markets.
The Quarterly: What was the strategic rationale for the merger between EMD Millipore and Sigma-Aldrich?
Udit Batra: The previous chairman of EMD Millipore and leaders in the Merck family saw the impact of emerging technologies, connectivity, and globalization in the marketplace, and they wanted to stand up a successful scale player in the life-science-tools industry. EMD Millipore was already strong in the process-solutions segment, with a broad portfolio of products to serve early-stage biotech customers. We had also built up expertise in regulatory and quality-control domains, both of which are key success factors in the process-solutions space.
Think of going to a retail store: If products are not well organized on the shelves, how will you find what you need? Here, we saw ourselves falling short.
The story was quite different in the research-solutions space, however. To succeed there, you needed a wide portfolio of small lab products, as we had, but our portfolio was not broad enough to include certain chemicals and reagents. You also needed to be able to share this portfolio with customers in a very simple way. Think of going to a retail store: If products are not well organized on the shelves, how will you find what you need? Here, we saw ourselves falling short.
Sigma-Aldrich’s e-commerce platform gave us a simple interface with customers. We wanted to provide customers—especially small biotech companies that are often able to do experiments but not scale them up—with a one-stop shop. EMD Millipore could sell you what you needed to purify a protein; Sigma-Aldrich had the cell-culture media you needed to actually make the protein. We wanted upstream and downstream processing to come together with this integration and to load legacy EMD Millipore products on SigmaAldrich.com. Finally, we wanted to expand our presence in North America—where Sigma-Aldrich already had a toehold in research and applied solutions—and build on EMD Millipore’s existing reach in Europe and Asia.
The Quarterly: What was the state of play when you arrived at EMD Millipore?
Udit Batra: When I joined EMD Millipore as CEO in 2014, I didn’t know about the proposed deal. At that time, it wasn’t absolutely clear which approach would be best: organic or inorganic growth. The chairman and family said, “Here’s what we’re thinking: go explore, come back in six weeks, and tell us what you think.” I got together with my team, and we considered the options. We estimated that if EMD Millipore went it alone, it would take five to ten years to get into the research-solutions market. We’d need to build an e-commerce platform and set up an organization that could manage all this complexity. Acquiring Sigma-Aldrich could accelerate everything. We proposed it to senior leadership after the six-week exploration period. Six weeks after that, in July 2014, we developed the financial case and presented it to the Merck family. In September 2014, we announced the acquisition.
I had been told when I joined the company, ‘Well, we’re very fast.’ I responded, ‘Right. There are four different boards in the company where you have to present quarterly results. How can we be that fast?’
The Quarterly: The relative speed of that decision seems counterintuitive when you think about this being a 350-year-old company.
Udit Batra: I had been told when I joined the company, “Well, we’re very fast.” I responded, “Right. There are four different boards in the company where you have to present quarterly results. How can we be that fast?” But being more than 70 percent family owned puts the company in a unique position. I’ll give you an example: There was a point when a very small group of us were negotiating the final deal. We had gone to the limit that had been approved by our board as a premium, and the other side was asking us to go higher. Our chairman went into another room, picked up the phone, and got permission from the head of the Merck family to increase the premium just a little bit. Waiting for another board meeting, another month, maybe even another quarter to get the permission we needed could have delayed the momentum we already had in the deal. Instead, we were able to get to terms quickly.
The Quarterly: How did you go about bringing these two companies and cultures together? What were your first steps?
Udit Batra: We started by explicitly defining what needed to happen in the period between when the deal was announced, in September 2014, to when it would close, which turned out to be November 2015. Rakesh Sachdev, the CEO of Sigma-Aldrich, and I had to balance our respective teams’ enthusiasm for the change with the need to keep them doing their day jobs. There were a lot of good ideas coming from both sides. We heard a lot of “we could do this together, we could do that together.” But we had to follow a careful process because we didn’t have regulatory approvals yet. And during this interim period, we wanted to ensure that teams remained focused on existing customers. We convened a small planning team comprising leaders from both organizations to build a fact base on the joint portfolio, the financials, the organization, the customers—everything. This team worked independently; the process was kept entirely separate from the existing management and existing operations so as not to disrupt what was already working.
The Quarterly: How did you organize and govern the merged company?
Udit Batra: We established several core teams. My team, the life-science executive team, would meet monthly to make decisions on administrative topics. We also set up several oversight committees. One focused on identifying, monitoring, and managing innovation efforts across the merged organization. Another committee focused on operations—for instance, ensuring that we were managing our joint supply chain properly and harmonizing processes. These committees were created specifically for the integration, but we’ve maintained the ones that still make sense in the postintegration world—like supply chain.
We set it up so that most of our functions and systems radiated out from our parent company. That included HR systems, compensation systems, procurement systems—the only exception was IT. One of the biggest value drivers for the deal was the e-commerce platform. EMD Millipore did not have a great e-commerce platform, so we did not know what “great” looked like. We thought it best to let the Sigma-Aldrich team do what it was already doing best while we observed, so we kept the e-commerce, digital, and even IT-infrastructure teams separate at the beginning.
We made sure to share as much information as we could with employees; transparency was crucial to the integration.
The Quarterly: How did you track your progress?
Udit Batra: We established something we called the integration-steering committee to make sure that integration efforts writ large were being managed and examined day in and day out and that we were on target with our goals. It included me, our CFO, and the CEO of Sigma-Aldrich.
Central to everything was a relentless focus on the customers. To that end, we created a war room, where we monitored things like order-fill rates, delivery rates, customer-satisfaction scores, and other detailed customer-oriented metrics. Looking at revenue synergies, we wanted to put all EMD Millipore products on to the Sigma-Aldrich e-commerce platform, and we wanted to make sure customers in Asia and Latin America had quick and easy access to Sigma-Aldrich products. On the cost side, we set detailed spending targets that were cascaded down into the organization, and we looked at them every month. We made sure to share as much information as we could with employees; transparency was crucial to the integration.
The Quarterly: How did you manage the integration of talent?
Udit Batra: We were worried about losing critical skills and institutional knowledge, particularly in IT and e-commerce; we felt like we didn’t have enough expertise in this area to make critical staffing decisions. This is partly why we kept IT and digital functions separate. We were quite deliberate about giving them freedom, letting them maintain their culture, and observing what worked and what didn’t. In the end, that proved to be the right approach.
We also knew that in any such integration, we would lose the top layer—because you can’t have two CEOs, two CFOs, and so on. In this case, many of the Sigma-Aldrich executives took on different roles in the merged company. Initially, there were two integration heads, one from Sigma-Aldrich and one from EMD Millipore. After closing, there was only one. At the next level, on my team, we spent a lot of time considering how and where to place people. Everyone was evaluated based on merit and fit for available positions. I would say we had about a 50-50 split between EMD Millipore and Sigma-Aldrich people on my team, and over time, the best of the best have thrived. At the research level, if you’re a scientist, you’re less concerned about bureaucratic processes and more concerned about having the freedom to pursue experiments. So from the scientists’ perspective, things in the lab weren’t changing that much.
We used an approach we call ‘logic and love.’ This was our language for change management.
The Quarterly: Was there an overarching philosophy behind everything, something you could articulate to employees?
Udit Batra: The overarching principle in all this was to simplify. We used an approach we call “logic and love.” This was our language for change management. It refers to the balance we try to achieve between the hard aspects of transformation—like defining a clear strategy, metrics, and governance—and softer aspects, like encouraging brand unity and a sense of passion and purpose in our work. We reiterated to all involved that our purpose was to solve the toughest problems in life science in collaboration with the global scientific community. We were already working in a dynamic culture, full of curiosity, and we wanted our strategy, our brand, and our talent to reflect that. We didn’t want employees at Sigma-Aldrich perceiving us as the big company in Germany coming in and imposing our processes.
The Quarterly: Can you share examples of any tensions that emerged during the integration and how you alleviated them?
Udit Batra: Well, when you acquire a publicly traded company, the center of its universe is wherever its headquarters is. St. Louis was the center of the world for Sigma-Aldrich, and suddenly, all decisions were being made in either Boston or Germany. We had to combat that perception directly. From the time I was announced as life-science CEO, I was going back and forth to St. Louis every week. Eventually, I was going every two weeks, and now I go once a quarter or even twice a year. And it wasn’t just me: members of my team visited with employees at more than 20 different sites within a 72-hour period just before the deal closed. We wanted to make sure that people understood that decisions were not being made in a vacuum.
There was tension initially with our IT organizations and the need to reconcile technology systems. This function had traditionally resided at our headquarters in Germany. But now, there were two IT departments, and both wanted to showcase and maintain their own best practices. Keeping them separate initially helped to diffuse the tension, or at least it bought some time to take inventory of systems and capabilities and how those supported our new strategy. In all decisions, we followed the principle of first among equals—whoever had the better idea, the better system, the better process won the day. To that end, we convened working groups drawn from both IT organizations and from other functional groups in both companies to identify particular infrastructure requirements and issues. And by the middle of 2017, we were able to combine teams and address many of those pain points.
The Quarterly: How do you think the integration looked through the eyes of your customers?
Udit Batra: We waited to bring the sales forces together until the end because we wanted to get ourselves organized internally before doing anything to alter customer interactions or perceptions. We acknowledged that we would have a bit more head count for a while, but we deemed it a priority and found ways to cut costs in other areas. We said, “The focus has to be on preserving sales and customer service.” We really didn’t want to experience a decrease in either area. For the most part, customer-satisfaction scores showed that people were staying with us throughout the transformation.
It all starts with the top line, which sounds rather straightforward, but to get it done, you really need to make sure the processes are right. For instance, Sigma-Aldrich had a state-of-the-art e-commerce and distribution system. It used automation and had established centers that were shipping 15,000 to 20,000 small packages every day. EMD Millipore had built a system designed for shipping large products, like bioreactors and mixers, but had less success managing small products with fast turnarounds. We had to marry all these discrete EMD Millipore products to Sigma-Aldrich’s systems. As I mentioned, we established a war room, where our head of supply chain was monitoring performance numbers daily and then sharing them with me at least once a week. In the case of distribution, for instance, fill rates became very important. How fast can a product be shipped once it’s ordered? If a product or category of products could be shipped within 24 to 48 hours, it received a “1” score, and if not, it received a “0” score. Then we took a weighted average to calculate fill rates. Before the acquisition, EMD Millipore had achieved fill rates of roughly 80 percent. Sigma-Aldrich was getting to the 90 percent mark. After the acquisition, the fill rate for the combined entity was at 95 percent.
How the best acquirers excel at integration
The Quarterly: It’s been four years since the integration was finalized. What does MilliporeSigma look like today?
Udit Batra: We’ve essentially outpaced the market in terms of sales growth since we announced the deal. We are gradually realigning all our SKUs into just a handful of umbrella brands and providing simpler ways for customers to interact with MilliporeSigma. Our margins are now 400 to 500 basis points higher than the next competitor, and our innovation intensity is now twice what it was when we started this process. In 2014, roughly 2 percent of our sales were driven by innovation of products launched in the previous five years. Today, that number is slightly shy of 5 percent.
We’ve reorganized ourselves to emphasize this innovation. Two years ago, we formed three “promise ventures,” which are small, incubator-type businesses within MilliporeSigma. One is focused on gene editing and cell therapy, which are both hot areas in life science right now. The second promise venture is focused on building and selling end-to-end processing solutions for small biotech companies. We started off with three customers that wanted us to help them make their first processes to get their drugs into the clinic; within a year and half, we grew to about 15 customers, and we’ve established dedicated sites in Boston, France, and Shanghai to deal with the demand for these services. And the third promise venture is focused on digitizing the lab. It involves developing a platform where scientists can get data from their instruments, manage the inventory in the lab, and do it all remotely. It’s kind of like the thermostat-monitoring technology you have in your house but for the lab.
Each promise venture has its own P&L [profit and loss] and is led by its own CEO. They’ve been successful enough that we are now thinking about what the next promise ventures should be. Fifty percent of our capex [capital expenditures] go into these growth drivers.
You must be the ‘simplifier in chief.’ Provide tools and processes people can use to guide them through the integration.
The Quarterly: What advice would you offer to other companies that are undergoing integration or transforming themselves through M&A?
Udit Batra: First, you must spend time listening and learning. And it doesn’t have to be for an inordinately long time, but you need to get a comprehensive understanding of the situation. You can conduct deep, fact-based analyses; or you can read through analysts’ reports or other literature; or you can just talk to people, colleagues. Probably, it’s best to do all of those things.
Second, you must be the “simplifier in chief.” Provide tools and processes people can use to guide them through the integration. We used learning maps, for instance, and introduced problem-solving frameworks to help focus the organization and remove some of the fear of change.
Third, focus on the top line before you focus on costs. It can be tempting to quickly go after cost targets, but you run the risk of losing sight of what had made these companies so successful in the past.
Finally, build a personal connection to the culture. As a leader, you need to present a fact-based case for change, but you also need to appeal to employees’ desires to feel included in decision making and to be part of something bigger than themselves. When you walk around, people will know if you’re interested in the products or the company mission or not. You cannot fake it.
The Quarterly: How did your own personal-leadership style need to change?
Udit Batra: Well, I think I have become much more deliberate about decisions. By that I mean, I ask myself if the decision is mine to make or someone else’s, if it’s the right time to make the decision, and what the second-order effects might be. I have also come to learn the difference between motivation and inspiration. Motivation can be fear based, or it can be financial. But inspiration has to come from a personal connection, a place of authenticity. To lead an integration, you need a little of both. You must also personally feel inspired by the possibilities in acquisition and integration—because these are difficult, demanding business transformations.
