M&A integration: mergence amid maladies

March 2022  |  FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

March 2022 Issue

Any corporate transformation – be it launching a major operational phase, executing a breakthrough business strategy or integrating a pivotal acquisition – is fraught with challenges.

In an M&A context, such challenges are especially acute, given that the overriding aim is to integrate two entities, in some cases disparate, into a unified whole and derive maximum value from the combination.

Among many integration challenges are the timebound nature of M&A deals, the significant and far-reaching changes that face employees, customers and other constituencies, as well as abundant opportunities for organisational and personal conflict – all of which lie in wait to test the mettle of even the most experienced acquirers.

To drill down further, according to Pritchett LP, merging entities can encounter a number of key pitfalls as they seek to meet their integration milestones and achieve the synergies they promised investors.

First, a lack of pre-planning. When merger integrations fall short of their objectives, inadequate pre-close planning contributes to the failures in more than half of all transactions.

Second, lack of a formal M&A integration strategy. Acquirers should define a clear integration strategy early in the M&A process and ideally before their transaction teams begin to develop their plans.

Third, a failure to prioritise workstreams. Without prioritisation, every workstream will be considered as important as the next, thus making it difficult to maintain the required focus on actions that will deliver the most transaction value.

Fourth, a senior leadership void. Despite utilising an Integration Management Office (IMO) overseen by a steering committee of C-level executives, merging companies’ integration work often fails to receive due attention from senior levels, with unresolved issues left without a defined escalation path.

Fifth, weak communication planning. Communication is usually the worst managed aspect of integrations, with people often left out of the loop or given mixed messages.

Sixth, poor synergy programme management. Synergies should be validated, and then rigorously tracked and reported.

Seventh, inadequate resourcing. Poorly resourced integrations take longer, cost more and delay synergy realisation.

Finally, no end-state transition. The process for handing off integration work is generally ill-defined.

“An integration is typically a transformative process, one which requires a lot of collaboration and coordination between merging organisations to be successful,” says Alan J. Castillo, a transaction advisory services principal at BDO. “Now more than ever, it is critical for an integration to have a well-defined governance structure and processes that enable cross-functional communications, decision-making and issue resolution.

“It is also very important for integration teams to leverage digital communications, including tools and platforms for collaboration and project management,” he continues. “Using these tools properly can help support connection between two merging entities and ultimately lead to a more successful integration.”

That said, when the disruptive impacts of coronavirus (COVID-19) are added to the mix, merging parties need to adapt quickly in order to preserve the operation of their companies, safeguard the health and wellbeing of their employees, maintain liquidity levels and sources of funding, and balance the interests of their stakeholders.

“The buyer’s integration strategy and priorities need to be aligned with the deal rationale and focused on deal value drivers,” advises Mr Castillo. “This will dictate the pace at which the integration will need to be executed. Since the onset of the pandemic, buyers have needed to consider its impact on their target’s operations, such as how much of a manufacturing company’s supply chain relies on international vendors or how working remotely may impact a technology company’s culture.

“These considerations may significantly affect the transaction value drivers and therefore have implications for the integration priorities, plans and timeline,” he continues. “Currently, buyers that ignore the impact of COVID-19 during the M&A process may risk deal failure. Taking the time to identify risk areas and address them will contribute to greater long-term success.”

Merger integration best practice

Against a challenging, pandemic-shaped backdrop, merging companies need to plan and implement an integration with speed and efficiency while ensuring synergies are captured and customers are retained.

According to EY’s 2021 guidance ‘Nine steps to setting up an M&A integration program’ a typical M&A timeline should include nine phases, as outlined below.

First, vision and M&A integration strategy. The initial responsibility in an M&A integration is to define and determine the value drivers and guiding principles of the deal that supports the vision and integration strategy. A strong grasp of executive leadership’s priorities from the beginning promotes programme alignment throughout the integration.

Second, M&A integration programme and governance. Integration leaders will need to work with their general counsel, and, if necessary, outside counsel, to understand the legal guidelines of the deal, as well as regulatory considerations. While some legal risks and issues may have been raised in the diligence phase, the integration will have its own set of legal guidelines.

Third, setting up the programme, integration management office (IMO) and functional workstreams. Integration leaders are responsible for standing up a programme with a structure to allow the workstream leads to enable integration planning and execution within their functions. Integration leaders enable this by establishing an IMO.

Fourth, functional charters and Day One vision. Once the integration programme is defined, the IMO should turn its focus to designing the newly combined company and determining what it will take to get there. The integration leader will guide the functional teams to determine the workstreams’ charters and the critical requirements that need to be met on or shortly after Day One.

Fifth, operating model and organisation design. Another key focus of the integration leader is determining how the new organisation will operate by designing the operating model of the combined company. The operating model on Day One will likely look very different from the end-state model. While this phase takes time and has a cost to execute, it raises questions on what the best long-term approach will be.

Sixth, business and functional integration. Once the workstream integration charters are defined and the target operating model is designed, the integration leader will coordinate the creation of a holistic integration work plan, which articulates the who, what, when, where and how of the integration.

Seventh, driving M&A integration execution and maintaining momentum. To operationalise and execute upon the strategy set forth for the combined company, integration leaders will leverage the integration work plans and other relevant documents to establish the major milestones of the programme and allow the functional leads, IMO and executives to track progression.

Eighth, M&A value creation and synergies. A major requirement for deal success is delivering upon the value drivers of the transaction and hitting synergy targets. This can best be accomplished by building the synergy capture targets into the performance goals of the executives and by validating that the goals are embedded into the annual budgeting process vs. an offline tracking mechanism.

Finally, change management and communications. An M&A integration will encompass a diverse set of stakeholders. It is essential for the IMO to confidently and tactically manage upward, knowing when to escalate issues and potential risks to the executive level, when to delegate authority down and when to make decisions as an executive proxy.

“Project management is key to managing the integration process,” suggests Russell Clarkson, a management advisory services managing director at BDO. “Its effectiveness is built on the governance structure that is put in place to guide the overall integration effort. During the shift from diligence to integration planning and execution, it is critical that a formal IMO is established that will report into a steering committee of operational executives who can facilitate collaboration across operating and functional teams, define roles and responsibilities, and enable transparency and communication.

“The IMO provides the structure and tracking to help ensure the investment thesis is being met and any risks are elevated to the steering committee,” he continues. “Strong governance helps ensure that any issues impacting integration are identified early in the process and allows for adjustments to timelines and resources, while limiting the impact on integration costs and synergy capture.”

Leveraging a playbook

Of course, no merger integration strategy is foolproof, and a wealth of potential pitfalls lie in wait for merging companies as processes and structures are unified and business units consolidated.

“Merger integration can be a chaotic process and any number of mistakes can be made, from not appointing a management team to oversee the integration to losing key talent or failing to connect deal value drivers to success metrics,” observes Mr Castillo. “It is important for companies that plan to grow inorganically and pursue multiple acquisitions to develop M&A capabilities as a core competency.

“Serial acquirers typically have an M&A integration playbook that helps organise and institutionalise their integration methodology, which can help organisations avoid common integration mistakes,” he continues. “An integration playbook helps ensure that the deal value drivers are sufficiently analysed, planned for, measured and executed for every transaction that is pursued.”

Ultimately, the most successful merger integrations involve companies that appreciate what their organisations do well, while also being aware of what roles might be better outsourced. In this respect, integration consultants can prove a helpful, cost-efficient and flexible option to help accelerate and effectively execute an integration.

Contemplating future integrations

Whether it be a smaller scope deal or a complicated transaction, the merger integration process involves a series of complex and critical decisions that have the capacity to make or break deal value. Thus, and particularly in challenging times, merging companies need to manage every complexity and utilise all resources, as they endeavour to deliver a successful post-merger integration.

“The pandemic has created an environment of remote work and has accelerated the ability to bring together a team of experienced integration experts on short notice,” reflects Mr Clarkson. “This trend will likely remain, especially if the pace of deal activity continues to accelerate.

“Cloud-based project management tools that facilitate a team’s ability to coordinate across regions and time zones will likely become further entrenched in integration processes,” he concludes. “Looking ahead, we expect to see decisions around onshoring versus offshoring play a more important role in determining overall deal value as continued supply chain disruption will likely force acquiring firms to consider how raw materials and products are sourced.”

As economies slowly recover from the impact of the pandemic and a semblance of ‘normality’ ensues, M&A practitioners will have time to reflect and redefine their strategies – actions that have been accelerated by COVID-19 or those already being implemented – and contemplate their future integration options amid a new reality that continues to be redefined.

© Financier Worldwide

BY

Fraser Tennant