Maximising value: post-merger integration in the ‘new normal’

February 2021  |  COVER STORY  |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

February 2021 Issue

Under normal circumstances, the integration of a new business following an acquisition or merger is a daunting and risky endeavour. Done poorly, it can result in considerable failure, damaged reputations and, ultimately, a loss of enterprise value.

Indeed, studies conducted over the decades clearly show that the rate of M&A failure is at least 50 percent. Other analyses put the figure as high as 90. Whatever the true figure, a significant number of M&A transactions result in companies failing to integrate and reaping no rewards.

Always one of the most challenging aspects of an M&A transaction, post-merger integration has grown in complexity in recent times as a result of the coronavirus (COVID-19) crisis. The pandemic has caused significant disruption to the mechanics of the M&A lifecycle.

Prior to the onset of COVID-19, the main challenges surrounding post-merger integration concerned how the acquired company’s organisation, enabling technologies and business processes were integrated with long term operational and financial objectives. However, according to Trenegy Incorporated, while acquiring companies typically expend a great deal of effort performing target identification, due diligence and synergy assessment, post-merger integration is often overlooked, or at least underestimated.

“Our experience shows the greatest improvement opportunity for companies during the M&A lifecycle is to increase the focus on planning for post-merger integration activities,” notes Trenegy. “This includes creating a robust integration playbook that provides a holistic strategy and approach for performing integration activities. “An integration playbook should align with the long-term strategy for the newly combined company. Without one, integration teams are unprepared to address the realities they will encounter.”

So what exactly are these hidden integration realities that companies will run into, and how should they be addressed? “An integration is typically a transformative process for an organisation, one which requires a lot of collaboration and coordination,” says Alan J. Castillo, a transaction advisory services principal at BDO. “In-person meetings can be an important facilitator in that process, but holding in-person meetings can be difficult during a pandemic.

“Now more than ever, it is critical for an integration to have a well-defined governance structure and process to enable cross-functional communications, decision making and issue resolution,” he continues. “It is also very important for integration teams to leverage digital communications, as well as tools and platforms for collaboration and project management.”

In the view of Duncan Reid, a partner at Weightmans LLP, the pandemic has forced the integration process to change, in some ways for the better. “As most parties and advisers to a transaction are working remotely, more due diligence is being completed virtually in data rooms. This assists the integration process, as following completion the information is readily available in an electronic format.

“One impact that leaders should be conscious of is that new relationships must be built in a virtual environment, which makes integrating organisational cultures much more challenging,” he continues. “However, the recent boom in video calling has made meeting new colleagues, where previously travel arrangements would have to be made, more time and cost efficient for all.”

Certainly, the ‘new normal’ remote working environment presents numerous challenges as far as cultural integration is concerned. “It is more difficult to educate teams about integration processes when most integration meetings are online and not in person,” adds Joe Aberger, executive vice president at Pritchett LP. “During the pandemic, building relationships and trust with the other company takes more time.”

Planning and execution

Amid ongoing pandemic uncertainty, acquiring companies need to plan and execute their post-merger integration strategy carefully, determining value drivers and guiding principles while ensuring the right leaders and governance structure are in place.

In its ‘Nine steps to setting up an M&A integration program’, EY recommends key points of focus to help acquirers maximise value creation from transactions.

First, 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 leaders’ priorities from the beginning promotes programme alignment throughout the integration.

Second, integration leaders 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, 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. This is enabled by establishing an integration management office (IMO).

Fourth, 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, the integration leader must determine 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. The integration leader is also responsible for reviewing and validating alignment to the goals of the organisation.

Sixth, 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 – a planning document created by each function with integration milestones, tasks, due dates, owners and interdependencies with other functions.

Seventh, to operationalise and execute the strategy set forth for the combined company, integration leaders will leverage integration work plans and other previously discussed documents. These will establish the major milestones of the programme and allow the functional leads, IMO and executives to track against its status.

Eighth, 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 versus an offline tracking mechanism.

Finally, 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.

“In any transaction, the buyer’s integration strategy and priorities should be aligned with the deal rationale and focused on deal value drivers,” says Mr Castillo. “Since the onset of the pandemic, buyers have needed to consider the impact of COVID-19 on their target’s operations, such as how much 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 transaction value drivers and therefore have implications on integration priorities and plans,” he continues. “Buyers that ignore the impact of COVID-19 during the M&A process may risk deal failure.”

In addition, it is important that parties do not use the pandemic as an excuse for moving slowly during the integration. “The conservative, slow, methodical approach typically does not cut it in M&A integration,” asserts Mr Aberger. “The honeymoon ends soon after close and the excitement can quickly wear off. The longer the integration goes on, the harder it is for employees to be upbeat about the merged company’s prospects.”

Communications

Good communication is a key tool in building trust, developing motivation and sharing important information throughout the M&A lifecycle, especially during the post-merger integration phase.

Indeed, a well-planned and well-implemented communication strategy enables managers to lead more effectively, negate the rumour mill and unify the merging companies. Furthermore, should there be any delay between the original transaction announcement and the closing of the deal, robust communications can help disseminate potentially crucial information to personnel and other stakeholders.

However, according to Mr Aberger, communication is often one of the worst managed aspects of M&A integration. “It is commonplace for an acquirer to assume that it has done a satisfactory job of communicating to people who is in charge, who reports to whom, and what is expected of everyone,” he opines. “But people constantly complain about confusing lines of authority and an ill-defined power structure.

“Employees feel they are operating in too much of a fog,” he continues. “The situation breeds frustration and tangled relationships, with the result being a blow to employee motivation. During a pandemic, the likelihood of misunderstandings is even greater because more communication is online.”

At the same time, while it may be tempting for acquirers to focus on business continuity as the sole outcome of a post-merger integration, they should also remain aware of the long-term aspirations that drove the transaction in the first place.

“Too many M&A deals fail to deliver the expected returns because the management team spends time focusing on the detail and loses sight of the strategic imperative behind the deal,” contends Mr Reid. “In addition, the deal process itself is often too focused on testing the value of the target business and managing perceived legal and financial risks, rather than focusing on developing a meaningful integration plan to be rigorously implemented post-deal.”

Building a playbook

The fast pace of change being seen in most sectors, not to mention the major disruption caused by COVID-19, is forcing acquirers to rethink their M&A integration strategies. One key consideration is the extent to which integration expertise should be available in-house.

“It is important for companies that plan to grow inorganically and pursue multiple acquisitions to develop M&A capabilities as a core competency,” suggests Mr Castillo. “Serial acquirers typically have an M&A integration playbook that helps organise and institutionalise their integration methodology.

“An integration playbook can help ensure that deal value drivers are sufficiently analysed, planned for, measured and executed for pursued transactions,” he continues. “However, it is also important for companies to understand what their organisations do well and what roles should be outsourced. Integration consultants can be a very helpful, cost-efficient and flexible option to help accelerate and effectively execute a transaction.”

In the view of Mr Aberger, serial acquirers should develop in-house integration expertise. “The ability to integrate efficiently and effectively is a competitive differentiator,” he says. “However, when employees have limited bandwidth to work on the integration or if they lack integration experience, the right consultants can provide much-needed valuable assistance. Unfortunately, the approach of some consultants is so overcomplicated and overengineered, that it actually fosters dependence on consultants.”

End of the beginning

Post-merger integration, which is challenging at the best of times, is now even more so due to the emergence of COVID-19, which has made in-person interactions limited or impossible. The companies most likely to emerge strongest from the pandemic will be those agile enough to adapt and pivot their M&A activities amid the ‘new normal’.

“Completion of an M&A transaction is just the end of the beginning,” believes Mr Reid. “The temptation facing deal teams is to treat completion as the end and move on to the next deal so it becomes someone else’s problem to deal with integration. The integration process needs to be factored into the overall deal process and timetable, with some continuity and overlap between the deal team and the integration team.

“Crucially, this allows relationships and trust to be developed between key personnel, which makes it easier for any necessary integration changes to be implemented,” he continues. “The overlap also means the integration team was involved in the original decision to proceed with the acquisition and so are invested in delivering successful integration.”

In Mr Aberger’s experience, acquirers should not jump into integration planning without first achieving their executive’s team agreement on strategy, objectives, timelines and resources. “Without front-end executive alignment, integration teams tend to spin their wheels, veer off on tangents, operate with different assumptions, and pursue conflicting agendas,” he asserts. “Teams need clear direction from above in order for integration efforts to be aligned.”

Ultimately, clarity of purpose and strategy is key to a successful post-merger integration. “It will be increasingly important to bring clarity in any integration plan and provide effective communication of the integration steps required to be taken, especially if a workforce is working remotely,” concludes Mr Reid. “Without that clarity of plan and communication, integration in a COVID-19 world will be extremely challenging.”

© Financier Worldwide

BY

Fraser Tennant