Managing M&A Integration Challenges
Capturing the full value of a business combination hinges on what happens after the deal closes. Here’s what to watch for.
Digital Exclusive - 2018
Global merger and acquisition (M&A) activity has accelerated, as corporations, private equity firms, and others take advantage of buoyant stock prices, increasing consumer confidence, and relatively low borrowing costs. Acquirers are motivated by a desire to enter new lines of business, expand their customer base, obtain new technologies, and extend their geographic reach. After all, these are all springboards to growth.
That said, growth through M&A is a high-stakes game. Money and careers are on the line. Customers, suppliers, bankers, stockholders, and other stakeholders are watching intently. And, of course, the media always love stories about mergers gone bad — just ask Daimler-Benz and Chrysler or AOL and Time Warner. The best deal-makers know that success depends on more than negotiating the best price. Renowned American deal-maker Ted Forstmann once said, “You buy the wrong business at 25 percent less than you should pay for it, you will take a little longer to go broke.”
Capturing the full value of a deal hinges on how well the newly combined company manages and executes after the deal closes. Post-merger integration is a notoriously difficult undertaking, and lack of clarity and execution in this phase is a big reason why deals fail. Here’s how to ensure you’re on the path to success.
Ideally, the acquiring company should begin planning the integration process even before the deal is announced. Acquisitions require a careful assessment not only of the target company, but also of the buyer’s capacity to implement and build upon the larger business. This appraisal can help identify key employees, crucial projects and products, sensitive processes and matters, and differences in corporate cultures. The M&A team also must conduct vigorous compliance due diligence on the target company. Times have changed and there’s much more emphasis on transparency and ethics today. Regulations covering money laundering, tax avoidance, the environment, and privacy also have become stricter — acquirers can’t risk buying trouble.
In other words, acquirers have to ruthlessly prioritize during integration planning. The key is to figure out all the critical value drivers of a deal and stay focused on those without being distracted.
Culture Is Key
Cultural fit is one of the key factors in deal success. Every company has its own culture — the shared values, standards, attitudes, and beliefs that govern members of an organization. Usually the acquirer wants to maintain its own culture, but sometimes acquirers combine best practices of each organization. Whatever the approach, the key is to commit and manage the culture actively. M&A makes people nervous. They’re uncertain about what the deal will mean. They wonder how they will fit into the new organization.
Don’t Overlook the Details
While concentrating on value drivers like culture, it’s easy to overlook all the other details that go into being ready once the deal closes. The employment, legal, tax, and entity considerations, particularly with merging multinational or new geographical operations, can be intimidating.
In deals that involve expansion to new countries, legal entities must be set up in multiple jurisdictions that are ready to operate and support employees that are transferring in. Incorporating a new business in some jurisdictions can take days or weeks. Shelf companies may be an option to save time. The business entity will need a registered office to serve as the official address, and, in some jurisdictions, will need local directors.
Once the necessary legal structures are in place and the transfer of employees occurs, an onboarding program is essential. Key to winning over the hearts and minds of new employees is making sure the more mundane human resources tasks are handled properly. Offer letters, employment contracts, labor policies, and handbooks must comply with local employment laws and regulations. Benefit programs must be integrated, and payroll and HR systems need to be updated.
Making sure the company and employees follow the laws, regulations, standards, and ethical practices in new geographies is a complicated task. Some countries require statutory filings to be handed over in-person or contracts to be done in the native language.
When operating in a diverse market, companies must be mindful of cultural differences in every region they engage in. Knowing and understanding the local requirements for financial and corporate compliance can also save the organization from fines, lawsuits, and reputational damage.
Of course, prioritizing financial synergies during the early stages of an integration is also important. Typically, corporate administrative and “back-office” functions, such as procurement, payroll, finance, HR, and IT present opportunities for cost reductions. Slow or poorly handled integrations in any of these areas can jeopardize greater business goals. Acquirers often underestimate the administrative resources needed for compliance.
Maintain Your Focus
Fatigue often sets in after deals close, but acquirers need to stay focused on compliance because laws and regulations are constantly changing. In heavily regulated industries, such as healthcare and financial services, requirements for product registrations, certifications, and labeling vary by country. The only way one can react quickly is to be local.
If internal resources don’t have the capacity or local expertise, external compliance help from a single partner with in-depth knowledge of all the markets involved in the deal is essential. By engaging such a partner in the integration-planning stage, issues and potential liabilities can be spotted during the risk assessment. After closing, the partner can help navigate ever-changing local requirements, so the newly merged company can move quickly and effectively in executing the integration plan.
As a method of corporate growth, acquisitions are revolutionary rather than evolutionary, and managing a merger, regardless of size, is distinctly different than managing an ongoing operation. It’s important to recognize that uncommon growth often calls for uncommon solutions. Every merger involves “negative synergies,” including departures of key talent, lost sales, systems incompatibility, productivity declines, turf battles, and cultural friction. However, acquirers can limit their costs and challenges by having an integration plan in place. Will you be ready?
Thomas F. Erichsen, MBA, is a senior business development director at TMF Group where his focus is within private equity and real estate services. He has spent his entire career in banking, capital markets, alternative investments, fund administration, and prime brokerage.