The first part of this comment, "Acquisition Just Starts the Job of Making a Merger Work," appeared in Wednesday's issue.

Once the integration task force has amassed data on how business is conducted as well as any operational assumptions, the information should be incorporated into the development of a "target environment."

This target should consider, for example, how the combined entity should be structured, how its operations as a combined entity will differ from the operations of the separate entities, whether there are previously unidentified opportunities to leverage the businesses, and in what instances it would be more beneficial to leave the operations autonomous.

Factors to consider when developing the target environment model include the long-term strategy for the combined entity, the short- and long-term impact of various strategies on service levels, volumes, quality, and speed of delivery, systems limitations, human resource issues, corporate cultures, and competitive factors.

To the extent possible, brainstorm target environment configurations without being limited to examples in the mortgage banking industry. Consider current best practices in the mortgage industry, then look beyond how mortgages are originated and serviced today, to how this process could evolve. Ideally, integration should be an opportunity to restructure and alter processes to maximize performance.

A successful target environment will integrate the best practices of both entities to create a win-win situation that will facilitate the realization of corporate goals.

For production, this could result in consolidating some existing retail branches, creating two or more regional processing sites, or centralizing other channels of business such as correspondent and telemarketing-affinity group lending. For servicing, the target environment could be based on a centralized servicing operation with customer service teams, or two sites with nonoverlapping functions.

The next step is developing a step-by-step integration plan, noting the responsible party for each action and the appropriate time line. Where possible, you should determine the measurement tools to be used in establishing the effectiveness of each action. To maximize success, identify and isolate a core team dedicated to the integration project.

The team should not have additional daily operating responsibilities. Use consultants as an external resource to provide objective input and assist in overall project management and temporary help, if necessary, to keep your resources focused on the project. The resources required will be dictated by time requirements and the developed target environment.

Various subplans will exist within the framework of the implementation plan, including human resource issues, internal and external communication, physical relocation, and systems conversion, if necessary.

For example, communications to the employee base on the consolidation of certain locations and jobs and the reshuffling of management must be planned and carefully executed. Stay-put agreements should be established early in the process for key personnel.

Finally, create a realistic pro forma of operational and financial results that will monitor the progress of integration and that projects when management will realize the full benefits of the acquisition. It should incorporate the initial assumptions used in the acquisition, the results of the benchmarking review, and the time line laid out in the action plan. It should also estimate shutdown expenses, including severance and relocation costs, if applicable.

Even though opportunities for a successful integration exist, the cost of a less-than-successful integration is significant, usually resulting in performance below planned levels.

The cost to operate (including the cost to originate and service a loan) may be above planned levels if the acquired operation is not leveraged appropriately and consolidation does not take place in a timely manner.

Dollars for further investments may be curtailed because of higher operating expenses. Volume may decrease because of poor market perception, loss of key salespeople, and unfocused operations. Marketing efforts may grind to a halt because management's focus is internal - on putting out fires, not on the market.

The sooner the combined entity can resume a business-as-usual attitude - the result of a timely, well-planned integration - the greater the acquisition's success.

Mr. Horn and Mr. Oliver are partners of KPMG Peat Marwick and co- directors of its national mortgage finance group in Washington. Ms. Reed is senior manager of the group.

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