The facts are sobering, anywhere from 60 to 80 percent of mergers and acquisitions fail to create shareholder value. The most frequent reason why a deal fails is that the post-merger integration is poorly executed. Successful post-merger integration needs a structured process to capture all synergies, unlock value, and to manage the risks. Risks of a failed merger can include customer loss, not achieving desired cultural fit, lack of employee retention, and most importantly not hitting your goals and targets.
Every merger or acquisition, and the ensuing integration activities, must be guided by a clear and realistic vision of what the combined entity will look like. What are the sources of value creation? How will we integrate the organizations and the people? What values and culture should exist post-merger? In addition, M&A success depends on strong leadership, broad organizational buy-in, and a focus on change management. We must realize M&A is a strategic tool, not a strategy in and of itself. Few companies start out with M&A as a core competency, but handling M&A activities the right way can mean the difference between capturing value and destroying it. In this article, we discuss what steps need to be taken to ensure the integration is done well and delivers the value identified by the business strategy.
Step One: Due Diligence Planning with a Forward Looking View
Traditional due diligence exercises usually concentrate on the commercial and financial valuation of the intended target. These approaches place a lot of weight on the historical performance of the assets, and how those assets will perform in the future as an integrated entity. An historical view should not be ignored, but the analysis needs to include a realistic assessment of how the target will be organized and integrated once acquired. This includes not only looking at the revenue and cost synergies but focusing on all the aspects of post-merger integration from day one.
Our experience shows that the due diligence process needs to have a vision that focuses on how the acquired asset(s) will perform as part of a new organization based on the intended level of integration. Aspects such as Day 0 readiness, identifying quick wins, the strategic direction of the new company, and top management retention need to be explored. It’s equally important that this part of the due diligence process is not only led by a corporate development team, but also includes input from Finance, IT, Legal, HR, and the various Business Units. Getting these different views on the synergies and risks will help not only with preparation and buy-in, but also give a reality check to the valuation of the perspective target.
Step Two: Clearly Define the Internal Integration Office and Processes
Once the deal is in its final stages, what’s next? Up until this point the deal team (Corporate Development, Top Management, External Advisors) has been running the pre-integration process. Now it’s time for the company to develop a comprehensive plan to achieve the value outlined through the due diligence phase. The detailed planning should begin when the deal looks likely to go ahead, not when the deal is announced.
The acquiring organization must design the integration team to include the right resources from all relevant departments. This can be tricky as organizations need to be honest about the capacity and capability of their people. We may be tempted to put our high performers on the integration teams, but it comes with an opportunity cost. Most of these resources have other day jobs and can be distracted from the task at hand. For example, when Dollar Tree Inc. completed its 9-billion-dollar acquisition of Family Dollar Stores last summer, the two companies underestimated the integration effort and execution risks. As you can see by looking at the recent stock performance of these two very similar businesses, it seems that Dollar Tree management team has been distracted with the integration effort, while Dollar General has stayed focused and performed well.
Relative share price performance of Dollar Tree vs Dollar General in the last 6 months
Creating a Project Management Office (PMO) is critical to ensure the successful coordination of the integration and the right expertise is available. It also ensures that management does not get distracted from their core business, which is a common mistake in this process. The PMO should include the program structure and project team, procedures, cross-team communication roadmap, master work plan, and monitoring procedures. It is especially important for the process to include a decision making matrix, monitoring procedures, and clear accountability for results.
For example, in 2008, AkzoNobel N.V, a Dutch multinational company, specializing in coatings and specialty chemicals acquired ICI, another chemical company focused on the decorative paint market, for 8 billion pounds. Initially, AkzoNobel believed there would be 280 million of annual synergy savings by the end of 2010. This target was exceeded by the end of 2009. The main reasons for the success of Akzo were the presence of a well-planned integration office and the rapid implementation of that plan over a course of three years. Not only did they have the right people and processes, but they also placed heavy emphasis on the speed of implementation.
The well-defined PMO and the overall process will ensure that working relationships and tasks across the different roles and functional areas on the integration team are performing as they should be.
Step Three: Clear Communication to Ensure Cultural Alignment
Once the PMO is set up and the internal M&A processes are in place, it’s important to have a pro-active approach to communication. Mergers and Acquisitions make people on both sides of the transaction nervous. Internally, people will wonder whether – and how – they will fit into the new organization. The communication flow has to be managed all the time on two different levels: internally and externally. The deal team and the members of the integration team will know the overall strategic intent and value drivers, but frequently this is not communicated clearly to the organization or externally to customers, partners, and suppliers.
Many subjects and issues need to be handled with extreme care such as strategic rationale, customer and employee retention, culture, and other external messages to partners or suppliers. In the fast moving M&A environment, people need to know what lies ahead especially in times of constant change. A communication plan ensures management proactively addresses these issues rather than reactively when a potential disruptive situation appears. It also ensures that your messages are consistent. The plan needs to establish the appropriate communication channels and execute continuous communication. Change Management will be a critical factor to the long-term success of the integration. Town-Hall Meetings, formal and informal workshops, training sessions, supporting presentation material and documentation, and many other tools will need to be employed.
As important as effective communication, is the cultural alignment between the two companies. Cultural alignment, or lack thereof, can be attributed to the overall success or failure of the integration. Even if the decision is taken to have a low level of integration, leaving the target’s culture in place or forcing the dominant culture on the target organization can sometimes lead to problems. The acquiring organization needs to respect the values of the target and to decide which aspects are important to keep. If the acquisition includes a cross border element, it adds another element of complexity.
Consider, for instance, the task of melding two distinct ways of doing business. When Daimler-Benz acquired Chrysler, you had a bureaucratic and formal culture merging with a more informal, spontaneous culture. The integration team did not spend enough time looking at this issue, and preferred to leave it alone. This created a list of operational problems, which led to Chrysler losing a third of its market value three years after the acquisition.
This article covers only a few steps necessary to ensure a successful post-merger integration. Every merger is unique and requires a customized solution. There are various degrees of Post Merger Integration (PMI) from stand-alone to full integration. PMI is the critical step at which M&A value is realized or destroyed. If executed well, it creates a strategic skill in the company for future M&A activity. If you are in the early stages of an M&A process, Envision can provide deep operational, change management, and project management expertise to help integration teams realize the strategy and related synergies. We understand the complexities across regions, businesses, and distinct cultures.
About the Author
Peter Kahn is a Client Partner based out of our New York Office and part of the Strategy and Operations Practice. Peter has over 18 years of experience in corporate strategy, performance improvement, M&A including post-merger integration, and change management. Peter has helped clients on Post-Merger Integrations across various industries in the US, Europe, and Asia. Peter can be reached at email@example.com.