Mergers and Acquisitions (M&A) global deal volume has been on fire in recent years, with high volumes of transactions and record-setting valuations. Academic studies show 50-80% of deals never achieve the intended value for the acquirer. While no amount of excellent integration can salvage a deal with a faulty rationale, poor integration planning and implementation is one root cause of many deal failures. Here are some key learnings from over 60 M&A integrations the CORTAC Group team worked on.
Strategic Integration Planning Considerations
- Establishing and using critical learnings from past acquisitions is especially important for serial acquirers or when there has been executive leadership turnover since prior acquisitions. Even when there is internal M&A integration expertise, the acquiring business executive leadership may not have M&A experience. Executives considering an acquisition can benefit greatly from connecting with a peer executive who has lived through the entire pre- and post-merger deal cycle on a prior deal.
- Co-creating the integration strategy and planning with acquired company leadership to achieve the desired outcomes. There are many factors for buyers to consider when planning how much and when to integrate the target company and increase the likelihood of acquisition success. For example, is the target business complementary and familiar or completely new? Is the target early-stage with minimal or no revenue and customers, or a well-established business? What are critical cultural differences between the buying and selling companies?
- Different integration approaches suit different circumstances and can range significantly – from full and rapid integration to only limited controls/compliance/reporting integration of what becomes a wholly owned and independently operated business. More successful buyers go through these considerations to first draft a proposed integration approach to support the deal rationale. They then engage the target leadership team to dialogue, pressure test, edit, and ultimately co-create an M&A integration plan.
- Resourcing the post-merger integration appropriately – acquiring business, internal M&A team, and corporate functions. The best strategy and integration plan can fail without the right people with sufficient expertise and bandwidth to implement the plan. The people in the acquiring business and corporate G&A functions almost always have full day jobs and significant integration workload cannot just be layered on and expect success. Adding expertise and capacity can take various forms, from surge resourcing with internal people who have M&A integration experience or want to gain it via special project assignment to hiring consultants.
People
Some or all of the talented people who built the company being acquired are almost always critical to post-merger success. The talented people in the buying company built that business to a level of success where acquiring other companies is possible. It is vital to:
- Communicate deal rationale and expected outcomes clearly and broadly. Create a shared understanding of why the deal makes sense for both companies and the vision for moving forward together. When this is done well, people in both companies have a framework for making ongoing decisions aligned with the combined vision.
- Answer the WIFM (What’s in it for me?) question for every impacted employee at the acquired and acquiring organizations. Answering this question can be challenging. When there are synergies as part of the deal rationale, it is common to consolidate redundant roles. These decisions will impact people. When growth companies acquire growth companies, employee messaging may be easier as there are expected to be opportunities for all employees in the future. This is an area where company culture and levels of trust are either strengthened or damaged. Change management and employee communication experts understand and advise that it is best to be as open and honest as possible about what is known and what is not as a deal and integration unfold.
- Acquiring and selling executives are often under pressure to give answers to questions that have not been figured out at the time a deal is announced. It is much better to say, “We are working on that important question and will provide either an answer or a further update by xx date.” No leader wants to be in a situation where they need to unwind promises that that they can no longer keep.
- Communicate regularly and via multiple channels, based on acquired and acquiring company practices. Excellent communications take precise planning and execution. The larger the number of people involved in a deal, the more time and effort required to nail key messages, audiences, delivery channels, and cadence. This effort done well requires a focused workstream.
Product and Operations
- Plan and share legal entity structure early. Entity structure impacts tax, IP, people, product and other functional integration plans. When deals involve acquiring all or parts of multiple legal entities deal complexity increases significantly. Impacts are felt from deal structuring through integration planning and implementation. The initial legal entity plan is typically set early so definitive agreements can be drafted and finalized. It is essential to share legal entity structure early, given the broad impacts on functional M&A integration plans.
- Identify and plan for third party IP and contractors critical to business continuity. In today’s business world, every business has a suite of technology – often as part of their product offering and always to run their internal business tools and operational environment. How well a company tracks its use of third-party services and IP varies greatly, and the same goes for contractor staff performing critical functions. Excellent due diligence and integration planning identifies post-merger business continuity and potential surprise costs associated with IP or contractors that do not automatically transfer upon an acquired company change of control.
- Beware of overly optimistic product engineering plans and new talent hiring ramps. Time to market acceleration is a common deal value rationale. Every quarter post-merger that a promised newly combined or modified product is not on the market is lost revenue and market share that is often never recovered. Product release schedules slide out when the amount of engineering effort is underestimated and/or hiring and onboarding additional engineers takes longer than estimated.
- Communicate clearly with customers and partners – acquired and existing. Similar to communicating with employees, customers and partners in the buying and selling company ecosystem need to be informed clearly and regularly. The WIFM question should also be addressed.
This is a sampling of some of the hard-earned lessons from deals worked by professionals on the CORTAC team. Subsequent blogs will address these and other M&A integration topics further.
Please contact me at barney.kinzer@cortacgroup.com to discuss any of these topics and any M&A integration related challenges you might be facing.