Insights & White Papers

Seven Deadly Sins of M&A

Mergers & Acquisitions

By

Even when a transaction makes sense strategically and is valued appropriately, poor merger execution can prevent a company from achieving success. Over the following pages, the “7 Deadly Sins” of merger integration will be explored, presenting the most common execution pitfalls and how your organization can mitigate the risk of M&A hell.

SIN 1:  PRESUMPTION

Description:

Too often, executives assume that once a deal is announced, functional leaders will simply know what they need to do next to successfully integrate the acquired company. The consequences of presuming and assuming have long been known: Such transactions are doomed for failure.  The main culprit is that these resources are being asked to absorb integration work in addition to their daily responsibilities. When acquiring companies choose to forgo setting up a strong, centralized program management office to coordinate integration work across functions, the results are tragically predictable.  Due to competing priorities, integration-related activities often take a lower priority and milestones are frequently
missed. This, in turn, extends the duration of integration work and delays the realization of deal value.

Preventative Measures:

  • Establish a clear governance structure with dedicated resources
  • Assign a centralized group to manage the integration, provide a standardized process and set of tools, and serve as a coordination point across functions
  • Identify single points of contact to be accountable for completing integration work for each function
  • Establish a regular meeting cadence to manage function-specific integration plans and provide a mechanism for escalating and resolving issues

Don’t: Presume that integration work will get done on its own

Do: Establish clear governance processes and accountability for completing the integration

SIN 2:  CARELESSNESS

Description:

As teams get into the details of integration work, it’s easy to lose track of the underlying financial case for the transaction. Synergy targets developed during the diligence phase of the transaction can often be based on summary-level, or worse, untested assumptions. A common mistake has companies forgetting to assign individual synergy targets to functional areas, resulting in the estimated deal value going unfulfilled. Even when proper planning for synergy targets is performed, lack of diligent tracking of actual costs and benefits puts a company’s desired financial targets at risk.

Preventative Measures:

  • Use synergy projects as the organizing dimension for how integration activities are conducted
  • Allocate integration resources based on the relative business case of synergy projects
  • Assign individual synergy targets to each functional area, with the sum of the targets being 25%-50% higher than the publicly-announced target
  • Utilize robust and consistent tools for estimating and tracking the financial impact of individual synergy projects
  • Institute an executive review and approval of synergy projects as part of the overall integration management effort
  • Marry the achievement of synergy targets to the incentive compensation of individual functional leaders

Don’t:  Lose focus on the financial benefits of the deal

Do:  Aggressively pursue and diligently track deal costs and benefits

SIN 3:  INSENSITIVITY

Description:

Cultural clashes are one of the biggest sources of failure for mergers and acquisitions. The underlying values, assumptions and artifacts that define the acquiring company’s culture can be extremely different than those of the target, even in transactions involving direct competitors in the same industry. Cultural differences are often the source of employee frustration and may create further distraction and challenges in maintaining daily operations required to run the business. Added to those stressors, acquiring companies often make the mistake of allowing “dual leadership” to persist instead of streamlining the organization and reporting structure. This lack of decisiveness puts both sets of employees in an uncomfortable purgatory that results in a less than effective staff and prolongs the uncertainty of the new entity.

Preventative Measures:

  • Take advantage of the diligence process to carefully assess cultural components: There are many more possible stumbling blocks than you might imagine. Review working hours, work-from-home policies, travel expectations, decision-making processes, employee demographics, incentive and compensation plans, organizational hierarchy, level of bureaucracy, cultural artifacts and other HR related policies
  • Determine the desired level of cultural integration when developing integration plans
  • Clarify which aspects of the target’s culture will be maintained and what distinguishing parts of your culture must be adopted by them
  • Identify and exit leaders and employees who conflict with the desired culture as soon as possible

Don’t:  Underestimate the importance of cultural fit of the acquired company and employees

Do:  Methodically assess and plan for cultural integration

SIN 4:  PROCRASTINATION

Description:

Integration teams are often too cautious to violate “gun-jumping” rules, which leads to a reluctance to share information and solidify post-close plans.  While there are legitimate regulations preventing the appearance of acting in a coordinated fashion prior to closing the transaction (particularly for pricing), there is a significant amount of planning that can be achieved within the requirements of the regulations. Waiting until the transaction close postpones key decisions about the future state operating model, and often results in a longer and more arduous integration timeline.

Preventative Measures:

  • Rely on legal and compliance executives to clearly define what can and cannot be shared within the requirements of the “gun-jumping” rules
  • Define specific escalation procedures for decisions that need executive approval and resolution versus those that can be made by functional or project leaders
  • Empower the centralized integration office to push participants to conduct sufficient planning pre-close so that the combined company can execute those activities as quickly as possible after close
  • Begin development of the future state operating model, organization structure and business processes during integration planning phase to prevent undesired legacy reporting structures to persist too long after the close of the deal
  • Seek out the “rising star” candidates within the middle management layer of the target company that can provide a substantive understanding of the target’s operations and could be the “flag-bearers” of the future state operating model of the combined company

Don’t:  Be hindered by pre-close constraints

Do:  Accelerate definition of the future operating model of the combined company

SIN 5:  GOSSIP

Description:

News that their company is being acquired is reason enough to cause a significant level of anxiety for employees of the target company. The rumors and speculation about outcomes of the acquisition often create further anxiety and can cause major disruptions to daily operations. Furthermore, communications regarding integration activities can at times contain conflicting messages, which only adds to employee uneasiness and distraction.

Preventative Measures:

  • Limit the number of team members who have access to sensitive information
  • Establish a detailed communications plan by stakeholder audience; a complete plan should address both internal and external stakeholders and identify key messages and delivery mechanisms
  • Identify a centralized communications committee through which all broad communications – both verbal and written – are developed and delivered
  • Implement governance processes such that the senior leadership and legal teams must review and approve communications before they are distributed

Don’t:  Let rumors distract and derail the integration process

Do:  Diligently control the message

SIN 6:  SHORTSIGHTEDNESS

Description:

Integration teams are often so focused on getting to the transaction close that they mistakenly think of Day 1 as the finish line. In fact, while there is a significant amount of work that goes into a successful Day 1, much of the integration work remains unfinished. For example, it is only after the transaction close that the team can begin integrating IT applications, consolidating sourcing agreements, eliminating redundant employees, and introducing new products and services as a combined entity, to name but a few.

Preventative Measures:

  • Build long-term integration plans with as much detail as possible to anticipate post-close integration work
  • Continue governance processes and meeting cadence to maintain focus on integration activities
  • Refresh plans (as necessary) post-close to maintain momentum and reinvigorate team members

Don’t:  Declare victory on Day 1

Do:  Allocate the necessary focus and attention for completing long-term integration

SIN 7:  NEGLIGENCE

Description:

Many assumptions are made during the diligence and integration planning phases with the limitations on information that can be shared. As more information is uncovered, some of these assumptions are bound to be invalidated. Too often, acquiring companies fall into the trap of not planning for contingencies. This may manifest itself in many ways, such as not anticipating the voluntary departure of key resources of the target or relying too much on the revenue projections of the target (i.e., not anticipating potential customer churn as a result of the deal).

Preventative Measures:

  • Identify key resources of the target and develop incentive plans for retention; succession plans should be developed to anticipate voluntary turnover of these resources
  • Identify synergy targets 25%-50% higher than the publicly-announced target to account for the potential shortfall of top-line synergy projects.  Top-line synergies are often subject to influencing factors outside of the company’s control (i.e., crosssell synergies);
  • Evaluate the risk of churn of key customers pre- and post-close and adjust projections accordingly

Don’t:  Ignore the inevitable hit on productivity that the integration will have on sales, operations and employees

Do:  Plan for contingencies

AVOID THE MERGER INTEGRATION SINS WITH LIBERTY

Liberty is a business and technology consulting firm that solves the most complex business issues and improves enterprise value. Our goal is to yield meaningful operating results and gain the information high ground.  Merger integration is one of our core service offerings, having assisted clients across a number of industries with managing mergers and acquisitions. Our key differentiator is our ability to rapidly deploy a relatively small team with significant breadth and depth of experience in merger integration. Core to our structure and approach as a firm, we have highly-experienced resources that serve as “force multipliers” for companies going through a merger or acquisition.

By quickly establishing a centralized integration management office, we implement proven tools and processes to prioritize projects and activities that result in financial savings for the company. We’re also able to assist in the content and substance of a number of key functional areas including: information technology, sourcing, operations, distribution, communications, and human resources. With Liberty, we’ll help you avoid the pitfalls and keep you focused on the greater good.