Integration: The Key to a Seamless M&A Transition
Here's what midsize target companies should know about merger and acquisitions
Post-Merger Integration (PMI) is a complex process, to say the least. It involves, among other things, the onboarding of new employees, integrating financial systems, preparing internal and external communications and novating contracts. The objective of PMI is to minimize disruption and ensure business continuity. An unplanned and lazy PMI can result in low-quality outcomes like demoralized employees, disenchanted clients, budget over-runs and increased bureaucracy. Decision-making becomes slow and uncertain, resulting in workplace conflicts, unclear direction, and negativity. In this scenario, the first casualty is the promoter, followed by key employees and finally, the clients. Eventually, the organization starts losing focus on the objectives of the transaction and instead, spends disproportionate time fire-fighting. This is usually the case when the complexity of the deal is underestimated. While a large chunk of the complexity lies in the deal shape, contracts, employee size, and geographic locations, organizations often ignore intangible aspects like culture, brand, and employee engagement.
Even though organization leaders and transaction teams acknowledge the intricacies involved in M&A, planning for integration is likely to fall through the cracks. This is because they spend significant time and effort on deliberating strategy, deal origination, due diligence (DD) and signing and closing transactions. They overlook the fact that the heavy-lifting usually begins after a transaction is signed and announced. Often, PMI becomes the sole responsibility of internal departments like Finance, HR, Legal and Facilities, who have limited bandwidth and lack accountability. As a result, PMI gets relegated to a "check-in-the-box" activity at the end of a transaction's life-cycle. This is worsened if integration activities are under-budgeted and carry aggressive timelines.
In our experience, organizations which devote considerable time to crafting a PMI strategy that looks beyond back-office integration, are well positioned to maximize the long-term value of an M&A transaction. PMI thus becomes a critical success factor for such organizations. Their strategy is to run PMI like agile "change management" programs. These programs are operated by "swat-like" teams, that balance speed with quality. A professional and experienced PMI team engages with the transaction team early-on, at the DD stage and compels them to take integration seriously – by asking the right business questions, factoring the risks highlighted during DD, and estimating appropriate budgets required for integration. They also steer transaction teams away from "one-size-fits-all" approach to a more scientific one in estimating PMI budgets and timelines.
The "change management" approach to PMI mitigates several pressing issues faced in a post-signing environment. Here are a few examples –
Governance – Promoters of the target company are usually anxious to know what is expected of them, post-signing. They do not take well to dilution of authority and long-drawn approval processes of the acquirer. In such situations, PMI teams bring discipline in governance. They thrash out the target operating model (TOM) envisaged during DD. The TOM defines roles and responsibilities of promoters along with processes to enable smooth decision making.
Timeliness – Once the closing date is fixed, "Going Live on Day 1" becomes a priority activity for PMI teams. The idea is to achieve back-office integration at speed. This is usually a resource-heavy exercise that exhausts most of the integration budget. In order to meet this challenge, PMI teams roll-up their sleeves to execute a meticulous week-by-week plan with fast turnarounds.
Collaboration – Transaction teams set aggressive revenue synergy targets in the business case to make deal economics viable. It is, thus, imperative for Sales and Marketing teams of both organizations to join forces from the word go. PMI teams facilitate ice-breaking sessions, boot camps and workshops to encourage collaboration between the sales teams. The objective is to work together on a go-to-market strategy, combine the pipeline and identify cross-sell opportunities.
Motivation – One of the trickiest subjects that PMI teams must deal with is integrating people who are predisposed to a brand and culture. It is a challenge to retain key talent, as employees of target companies tend to view the acquirer with scepticism. Therefore, PMI teams focus on keeping employee engagement and morale high during the transition to avoid attrition. They organize social events, town halls, meetings with leadership, and engagement surveys to keep employees motivated.
Continuous Learning – Each transaction is unique and throws out new risks that need to be addressed. Thus, integration is seldom smooth. Post-closing, PMI teams look back at processes to review lessons learned and establish best-practices. They socialize these lessons with leaders driving or sponsoring M&A in an organization, to make better integration decisions in the future.
Finally, organizations must embrace global best-practices in PMI to deliver a seamless transition in an M&A deal. We anticipate that significant best-practices will emerge from the enterprise technology sector. Over the last few years, large organizations have become serial acquirers of small to mid-sized digital, analytics and mobility companies. For example, Accenture's acquisition of Fjord in 2013, a service-design digital agency in the UK and one-thousandth its size. Despite significantly divergent cultures of an agency and a global consultancy, Accenture has been able to make a success of its acquisition. Fjord continued to grow and launched its Asia HQ in Hong Kong in 2015. The success is significantly attributed to Accenture's integration efforts of preserving Fjord's brand and culture.