Mergers and Acquisitions: The Formula for Successful Integration

Businesses grow and expand both organically and through mergers of similar sized companies, acquisitions of smaller companies, and integration of varying business units. Imagine that your company has spent a significant amount of management time and money to acquire a company, or to combine and integrate two different business units. You made the decision consistent with your long term goals and strategy. You’ve done the due diligence, determined the financial consequences, and negotiated the terms of the deal. Still, at the end of the first year of combined operations, the numbers don’t turn out as expected, and you’ve lost key personnel who delivered positive results in the past. What went wrong?

At the outset of the mergers and acquisitions (M&A) process, intentions are always good. Decisions are made based on careful analysis of the organizations involved; assessment of financial implications; and belief that, strategically, this is the right thing to do. And yet, even a cursory review of available research will confirm that the integration of two organizations—whether internal to the company or between two separate companies—can be fraught with peril. There are many more stories of failure than success. Business articles in the M&A area consistently state that at least half, and perhaps three-quarters, of all transactions are unsuccessful.

The lessons our XPRT specialists have learned in this area apply to M&A transactions of all types. Transactions that are thoroughly understood, carefully planned, and faithfully executed lead to a high probability of integration success.

Understanding the Three Phases of the M&A Transaction

Before beginning any M&A transaction, we first must focus on understanding the three distinct and overlapping phases of any attempted integration: Due Diligence, the Legal/Financial Deal, and Integration.

Due Diligence

Before any transaction is undertaken, there has to be extensive up-front planning and analysis. There are business articles and textbooks written on the necessary steps in the due diligence process. Highlights include the following:

  • Identify the transition team
  • Set objectives
  • Establish metrics
  • Establish a schedule for completing each task
  • Establish a budget
  • Analyze the organization and people
  • Assess how the acquired company fits with the existing entity
  • Assess the management teams of both entities and prioritize the leadership
  • Analyze methods and processes of both entities, and prioritize what works
  • Objectively choose the “best of breed” managers and employees
  • Establish a risk management plan – internal and external
  • Analyze customer impact and how customers will respond to the combined organization
  • Analyze IT systems and how they affect productivity
  • Outline the necessary communications: define the audiences, the messages, and the timing
  • Evaluate leasing/location/offices and other physical impacts of the combined organization
  • Assess the needed support services, both during and after the transaction
  • Evaluate thoroughly the BD/Capture/Proposals of both entities
  • Establish a method for clearing issues
  • Conduct periodic and regular reporting on progress and status

Unfortunately, most M&A transactions focus the due diligence in two primary areas: legal and financial. The missing element is the assessment of the human impact, woven through all of the items listed above. The most critical aspect of this human element is the CULTURE of the companies, both before and after the transaction. Management has to take the time to understand the culture of the new organization, compare it to the culture of the existing entity, and decide what culture is desired—theirs, yours, or something new.

What audience do we need to communicate with and when/how/how frequently do we do that? - What does the management team look like? Who will stay and who will either be let go or depart on their own? - How will all of this impact our people, both in the current entities and in the combined organization? - How will the clients and customers we serve be impacted? -- Its all about the people - Assess human impact - Evaluate, monitor - Communicate

Legal/Financial Deal

As the Due Diligence is unfolding, the parties begin working on the Legal/Financial Deal. To those involved in the transaction, this is the most critical aspect of M&A because the documents have to spell out the terms and conditions of the transaction: How much will it cost? What will be the return on the investment? These aspects of the deal cannot and should not be underestimated in any way.

At XPRT, we have learned that the lawyers and financial people will ensure that the legal and financial documents will be properly prepared. We have also learned, however, that management often fails to understand several important components of this phase, specifically the up-front involvement of the management team that will be responsible for the implementation of the transaction.

  • Communicate with and involve the people from the acquired company in the transition planning and execution. This will provide the opportunity to:
    • see the teams work together
    • understand the quality people you’ve acquired and their capabilities
    • start molding the culture you want when the integration is completed
  • Carefully evaluate the management team, including people from both the acquiring and acquired companies. It is critical to retain the best team possible and avoid “brain drain” after the transaction is completed.
    • Make sure managers are directly involved in the planning and execution of integration
    • Ensure regular and thorough communications, including:
      • Plan
      • Objectives
      • Importance of the people
      • Compensation and incentives
      • Relocation (if closing or merging facilities)

Getting the deal itself done is not simple, but it’s often the most straightforward aspect of the entire transaction. It’s “black and white,” as they say. The ability to understand and plan for the gray areas – the people and the communications – will set the stage for success.

Integration

Once the proverbial ink is dried and the transaction has been completed, the hard work of Integration begins. This is where the vast majority of unsuccessful M&A transactions begin to falter. The roles and responsibilities of the parties has been spelled out in the legal and financial documents, but fully integrating the two businesses will take many months, and sometimes years.

There are four fundamental steps that must be followed in properly integrating two companies or even two different business units. If planned for in the Due Diligence phase and documented in the Legal/Financial phase, these steps have already been discussed with the transition and integration teams – now is the time for careful monitoring of progress.

  1. Establish metrics and hold the management team responsible for success. The metrics may be personnel decisions that need to be implemented; business development/capture targets; revenues to be earned; or specific goals to be achieved. What matters is having the metrics in writing, communicating them to the people involved, and establishing consistent reporting on progress.
  2. Deal fairly and honestly with both the people you retain and those you release. Everyone will be watching to see whether management has both the company’s and the employees’ best interests at heart. For those who will be released, give them reasonable notice, access to appropriate tools to help them transition, and a respectful exit. For those who are staying, make sure they understand their roles, and give them a place where they can ask questions – and get their questions answered quickly.
  3. Communicate, communicate, communicate. If people don’t know what is going on, they will begin to speculate. Give them the news, even if it’s not what they want to hear. And make sure they are allowed to raised reasonable questions and make suggestions to help the integration process.
  4. Pay attention to the “new” culture. Most likely, the culture of the combined organization will be different, whether by design or default. Make sure people know what to expect, and make sure the management team operates consistently with the desired direction.

Summary

Corporate transitions, from M&A transactions to consolidating business units, can be productive, profitable, and even exciting for those involved, when they are carefully planned and executed. Perhaps the biggest mistake an executive team can make is the failure to properly assess, plan, and then implement a well thought out business strategy. Companies will generally invest the time, effort, and resources to get the “deal done,” but may make the devastating and sometimes fatal mistake of not investing in the Due Diligence and Integration phases.

XPRT has the resources and experience to guide small and mid-size companies who have not been through these transitions before, or who don’t have the necessary infrastructure to develop the strategy for successful integration. We can help.

 

Len has 40 years’ experience in helping lead domestic and international companies of all sizes to solutions that achieve their vision for the future. He has supported clients in all aspects of helping their businesses grow—from strategy development; to business development and capture; through project/program startup, optimization, and execution.

David has 35 years of professional experience leading corporate organizations, strategic initiatives, and projects, built on his work as a lawyer, business executive, and entrepreneur. His expertise includes strategic and business planning, program and project management, M&A strategy and implementation, government contracts and proposals, negotiations and dispute resolution, and corporate policies, procedures, and governance.

For a free XPRT consultation to assess what your business needs to bid and win US government contracts, for help with your US government bid, or for more information, contact XPRT at (844) 332-9778.

Phillip Pettet