by Lauren Dever
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Research studies cited by Deloitte suggest that one of every two post-merger integration (PMI) attempts is categorized as “poor” or failing, which is quite concerning given post-merger integration is paramount to realizing deal value. This statistic obviously correlates to the often quoted statistic that approximately 70% of deals fail to reach their full potential. The difficulty with PMI stems from multiple factors, and while there is no one-size fits all approach to successful post-merger integration, there are PMI best practices that can lead to smoother integration and the successful capture of synergies, both of which maximize deal value.
It is important to note the First 100 Days actions will bear huge consequences on the value created by an M&A deal. Management of this sensitive time is a fundamental contributing factor to deal success or failure. The First 100 Days is a time of anxiety and uncertainty for Buyer and Target alike. It is a time of change and provides management with the opportunity to create the right first impression, capture synergies, maximize deal value and establish the direction for the future. It is also the time of greatest potential loss of value.
Why Do PMIs Fail?
The most common reasons post-merger integrations fail are:
- Culture clashes
- Poor planning during due diligence
- Communication problems/lack of transparency
- Loss of momentum
- Poor employee and customer engagement
How Should Companies Build a Post-Merger Integration Checklist?
“Closing” refers to the date when the SPA (Sale/Share Purchase Agreement) comes into force and ownership of the Target transfers from Target to Buyer. This is commonly called “Day One” since it’s the first day the Buyer is the owner of the acquired operation, or that the operations work as one legal entity in the context of a merger of equals. This is when the integration of the companies commences.
There are four key concepts on any post-merger integration checklist, and work-streams must focus on these during this critical period:
- Operative structure
- Systems & controls
What Are The Best Practices of Post-Merger Integration?
1. Move quickly - Speed is of the essence when it comes to PMI. Investors typically expect to see synergies captured and cost savings realized within 12-24 months of deal close. The longer the PMI process is drawn out, the more likely potential synergies will be lost, cost savings and economies of scale will not be realized, management will become disillusioned, and key staff will leave.
PMI is not a core attribute for most companies. Rather, it is a process that will be encountered once (or perhaps a handful of times in the instance of a serial acquirer). PMI requires a different skill set than is required for usual business operations, with the approach taken dependent on the strategic rationale behind the deal and the future intended strategy of the new organization.
2. Focus on guiding principles - The PMI process should be set against the backdrop of the deal rationale and aligned with the strategy driving the deal. Areas which may be considered include (i) what the underlying logic of the deal is (ii) if the deal is to involve the Buyer absorbing the Target into its operations or a “merger of equals” (iii) which areas of the Buyer and Target are to be integrated and which are to remain as standalone (iv) which systems will be adopted – those of the Buyer or a combination of the best from both entities and (v) what are the expectations of investors – for instance, how soon post-deal do they expect a return and are their expectations realistic given knowledge of the challenges which lie ahead.
3. Give culture and change management their due respect - People and culture are at the heart of the new organization’s success. It is therefore critical to retain key people (particularly leaders), pay attention to cultural sensitivities, and identify the type of culture that will be accepted by the Buyer and Target
The two organizations coming together will have their own unique cultures, norms, values and rules; therefore, one of the most significant challenges of the PMI process lies in determining which culture to adopt. Typically, the Buyer will intend to maintain its culture; however, it is important the desired culture is discussed from the outset and put into practice as soon as possible. The CEO downwards must manage and encourage the adoption of the chosen culture. Everything from compensation/benefits systems to reward behaviors fitting with the chosen culture may be considered. Furthermore, new organizational core competencies may be mapped out in order to harmonize culture. Carefully selected leadership, spanning line managers to executives, will facilitate making the vision a reality and foster the ideal culture for the new organization. In the context of M&A, people are a sensitive issue and may be resistant to change. Therefore, a culture gap assessment/diagnostic could be carried out (such as a survey covering cultural and social matters).
Ideally, the Buyer would have a change management expert on board to meet with the Target’s employees, carry out surveys, and conduct training. This person would also observe the Target’s culture and norms during the early stages of the deal to begin integration planning and predict possible culture clashes and integration roadblocks.
4. Clear-cut communication - Good communication is critical to building trust, developing motivation and sharing important information. Well-planned and well-implemented communication enables work-streams to effectively lead a PMI project and can prevent the negative impact of rumors while helping to unify different parts of the new organization.
Key communication areas include:
- What needs to be communicated on Day One?
- What remains the same?
- What changes immediately (redundancies, closures, mode of operations, etc.)?
- What changes in the near future?
- Where can more information be found?
Who answers any questions?
5. Systems and controls - Continuation of financial and sales reporting is crucial for management to be able to control the operations of the Target and the progress of integration. It is recommended to have clear and detailed instructions with ready-made forms and templates available to the acquired entity’s financial team on Day One. Systems may be different, but the new business, market and service areas need to be clearly briefed on the desired format of reporting. If operational structures are not finalized at this point, temporary management systems and controls need to be established. These may include comprehensive reporting and systematic management practices, such as regular management team meetings, thus reinforcing strong communication.
6. Operative structures established for Day 1 - Clear communication about the new management and operative structure/reporting procedures is required from Day One. If this information is not available, or is poorly communicated, there may be a tendency for personnel to follow their familiar habits, making initiating change later on very difficult.
When personnel changes are planned, HR should play an important role. Consequently, HR must have a comprehensive understanding of future strategy. With this knowledge in hand, HR can properly support management in structural planning, manager and team selections, and future staffing,
Decisions about the new operative structure and systems should be made when the new organization’s strategy and goals have been agreed upon. Typically, the legacy organizational structure continues until that point. How quickly the new structure can be finalized depends on the size and complexity of the deal. Unless there has been a decision to keep operations separate, a joint operating structure is normally decided upon and communicated within three months (approx. 100 days). Once the Target and its personnel are better understood, modifications are normally made to the structure after six to twelve months. If a large M&A deal involves multiple markets, entities may need to be integrated in each of the locations.
While perhaps daunting at the outset, post-merger integration is a powerful tool in realizing the full value of an M&A deal. To be most effective, post-merger integration should be broken down into its component parts and given significant attention early in the deal process. In fact, many organizations, particularly serial acquirers, create their own post-merger integration plan template that they can customize and apply to deals on a continuing basis.
For more information read our comprehensive guide to post-merger integration.