Many companies across the globe are looking to grow their businesses through mergers and acquisitions (M&A). Worldwide, the combined value of pending and completed M&A deals announced in 2021 has reached more then $3.6 trillion – already a 24% jump from 2020.
Whether through purchasing an entire business, a piece of technology, or simply a client list, it’s imperative to understand the benefits and challenges of integrating that newly acquired entity into your existing people, processes, and systems. A failed integration is one of the main contributors to deals not achieving their projected value or synergies.
To help facilitate a successful M&A integration for your organization, below are some insights we’ve gleaned here at Kranz Consulting while assisting our clients with M&A integration activities, and through years of practical experience.
Don’t Wait for the Perfect Time
“Defer no time, delays have dangerous ends.”– William Shakespeare
Delaying the start of integration planning is a common mistake for many organizations that don’t do a lot of M&A transactions. Serial acquirers have learned through experience that integration planning should start during the due diligence phase of a transaction, or in some cases, prior to the signing of an LOI. There are many post-merger integration considerations that should be discussed early on in the process that can have significant strategic implications for the success of a transaction.
After the close of the transaction, some acquirers opt to let the acquired entity continue to run the business as usual for a period of time, and then manually consolidate the financial data into the parent company reporting process. This can be attributed to several reasons, but the primary one seems to be a lack of resources that have the time or skill set needed to tackle such a large and complicated task. But keep in mind, the longer you wait, the more challenging this process can become.
By moving up the integration timeline, instead of waiting for a “perfect” time, organizations can realize the benefit of more synergies — such as eliminating multiple/redundant systems, aligning policies and procedures, rationalizing product roadmaps and go-to-market strategies, consolidating vendors, and merging vendor services under a single agreement, combining employee benefit plans, etc. Attaining these synergies decreases costs and helps to gain value from the acquisition faster.
A timely and well-orchestrated integration often reduces the level of organizational uncertainty that occurs when a company has been acquired. Employees feel more comfortable knowing they are officially a part of the combined team, instead of being left out on their own with little attention from the new owner.
A delay in completing the key M&A integration milestones can cause more challenges because knowledgeable employees may leave the company prior to completing the integration. Attrition is common with the uncertainty of an acquisition, so the longer the delay, the more likely it is for employees to leave. As key team members leave, critical knowledge of company operations goes with them – which may be needed to successfully complete the integration.
Implement Transition Services Agreements (TSAs) and Retention Agreements
To avoid losing critical team members during an integration, consider entering into agreements to retain those employees for a sufficient period of time that will allow for successful integration. In scenarios where the transaction is structured as a carve-out (i.e. purchased a segment of an organization that will remain intact), or if a third party will be performing key functions, it can be very advantageous to implement an agreement known as a TSA, or Transition Services Agreement. TSAs keep existing employees and processes in place for a specified period and define training procedures and transition steps required to operate the business during an interim period and then fully integrate a new line of business. IT, finance, and accounting are essential areas of focus when creating TSAs.
When determining payment amounts and timeframe, it’s important to think about what would incentivize employees to remain with the company through the retention period. There will always be situations where employees decide to leave and forego the retention payout, but it’s worth offering to minimize the potential risk of losing key individuals during a critical part of the M&A integration process.
Designate a Project Manager
M&A Integration projects are proven to be significantly more successful when an experienced and dedicated project manager is assigned versus when there is no specific individual assigned to oversee operations. This function can be performed either by an internal team member or by an external consultant if no team member has the bandwidth or experience needed to lead this effort.
The project manager or consultant will develop and oversee the overall project plan, develop communication plans, coordinate schedules, conduct regular status meetings, assign roles and responsibilities, track synergy targets, and assist with the prioritization of tasks where needed. Their guidance will help identify areas of risk to budget and timeline and appropriately address those to keep the project on track. It’s also their responsibility to maintain constant communication with all stakeholders to ensure that issues are addressed timely and adequately to complete the project on time and on budget.
Develop a Playbook for Future Acquisitions
Merriam-Webster defines a playbook as “a stock of usual tactics and methods.” Just like an M&A integration, a playbook consists of compiling a list of standard and replicable decisions, tasks, and participants that can be applied to every possible future transaction. Each M&A transaction will have its differences, but it’s still beneficial to create a plan that will include basic steps that can be tweaked for each individual scenario as needed.
An effective playbook should include the following:
- A defined integration strategy that spells out how the company will approach these acquisitions such as: leaving them as separate legal entities or merging them into existing legal entities, planning for integration of activities into existing systems, and alignment on all the key priorities and objectives. The optimal time to begin writing the playbook is during the integration phase, capturing best practices, and lessons learned while they are fresh in everyone’s mind.
- A list of tasks, milestones, and processes and estimated timing to complete each broken out into the different phases in the lifecycle of the acquisition: evaluation, due diligence, negotiation/closing, post-closing (30-60-90 days, etc).
- Fundamental standardization procedures for specific areas such as systems, policies, benefits, etc.
- Designation of roles and responsibilities required to complete all defined tasks and implement TSAs to retain key employees.
Keep Communication at the Forefront
“The single biggest problem in communication is the illusion that it has taken place.”– George Bernard Shaw
Communication is imperative to achieving a successful integration, both strategic and tactical, across all levels of the organization. Your project manager should set up a regular cadence for meeting with the various project stakeholders: team members, executives, steering committee, and any other parties involved. Outside of scheduled meetings, an open channel of communication should be maintained between all parties to address any issues, dependencies, or concerns as they arise rather than waiting for established meeting times.
Additionally, setting reasonable expectations with a buy-in of all parties will go a long way to meeting or exceeding project goals. Finally, make sure that all investor and/or debt covenant requirements have been built into the plan and effectively communicated to all parties. Maintain a constant dialogue with these parties, to confirm they are aware of project status and communicate any potential delays early and often. It’s better to overcommunicate than under-communicate in the case of an M&A transaction, as several internal and external parties will be involved and need to stay informed.
Utilize External Guidance
The integration of acquired entities can be stressful and fraught with many challenges. Serial acquirers who follow a playbook and get started early are generally more successful. Keeping the above recommendations in mind as you traverse the complicated task of incorporating your M&A activity into existing company operations will allow you to realize the value of acquired entities more quickly.
Following these steps will help you to identify and mitigate potential issues more quickly and effectively, ultimately leading to successful integration.
Kranz Can Help
If your organization is contemplating or already in the process of an M&A transaction, Kranz Consulting is ready to assist you with the experience of hundreds of transactions under our belt. Your M&A decisions must align with your business objectives and be promising at the same time. It sounds simple, but it’s difficult to master. With extensive experience planning and executing, we help companies quickly and cost-effectively add strategic capabilities and tactical support – creating value at every level. Our team of experts can help you with corporate strategy, valuation analytics, spinouts, carve-outs, & joint ventures, and overall merger integration.