M&A Pitfalls: Just get it done!

No Deal – No Gain: Some M&A deal parties would rather close a deal than not, only for their own monetary interest (photo by Pixabay on Pexels)

In preparing a M&A deal, certain groups or individuals may want to see the deal through no matter what:

Banks, consultants and advisors: They all take their share of the deal, and have a legitimate interest to make their piece of the cake as large as possible. However, if a deal falls through, they may still write a few bills, but the lion’s share of the gain is gone; their resource investment is largely in vain.

Other stakeholders may fear that they will lose face or credibility if their proposal to acquire a certain business was rejected. Yet others may view an acquisition as their very own and personal undertaking, and will not support a decision that would mean a stop to their pet project. 

The truth of the matter is that rejection of a potential investment due to failed target criteria conformity is a sign of strength, rather than of weakness. Strong leaders and managers stand out in adverse conditions and rather take a moment of heat than carry the long-lasting consequences of a failed project.

A common strategy to prevent the “Just get it done!” M&A pitfall entails the upfront agreement of certain rules in deal sourcing and preparation, for example:

  • Monitor more than one potential M&A target
  • Discuss the possibility of saying “no” prior to due diligence, and be ready to say it if needed
  • Define the target financial outcome as part of a structured M&A program.
  • Use a defined financial model. Do not change it in the process.
  • Invest into a professional due diligence, and include potential legal/technology risks in the assessment. Confirm asset values independently.
  • Perform extensive impairment tests on immaterial assets
  • Do not rely on external consultants only, and build internal capabilities     

Setting up Merger Communications

Because M&A is people business, informing and involving people concerned with the program is very important. As opposed to many other workstreams, Communications need to be at the ready on Day 1: People will want to know what is going on immediately with the announcement of the acquisition or merger, not later.

Early employee information should center around

  • the meaning and external impact of the project,
  • what is driving the value to customers behind the transaction,
  • what is expected from the employees,
  • how and when the implementation of the vision will take place.

While Day 1 communication is a first-level leadership task, ongoing communication can be, and should be, spread out through different organizational levels.

To a normal employee, change is worrying. That’s the reason that common questions target the change aspects of the program. Employees are very little concerned with what the acquisition means to the company and to financial earnings. They worry about the meaning of the transaction to them, personally and professionally. Ongoing communication should address these questions respectfully, and openly. Difficult discussions must not be avoided.

HR may function as the communication center and catalyst, but communication must not be an exclusive HR task. Deployment of various communication tools in parallel has proven to be most effective.

9 Rules of Post-merger Integration

Follow nine rules of post-merger integration to increase the odds for a successful project (Photo by Magda Ehlers on Pexels)

Over the past weeks, I have written nine short pieces on select PMI-related subjects. Each of the articles featured a rule (or a recommendation) which should be generally followed in standard PMI programs. There are no guarantees, but heeding them will increase the probability of a successful, value-adding and satisfying PMI process.

These are my suggestions helping you shape up your acquisition and post-merger integration program (each linked to the respective article):

Rule #1: Repeat acquirers have higher chances of success

Rule #2: Successful acquirers follow a pre-defined program

Rule #3: Keep it simple.

Rule #4: Resource your program with top people

Rule #5: Strong project governance enables integration success

Rule #6: Deal targets are unlikely to be achieved without tracking

Rule #7: Procrastination does not add value

Rule #8: Cultural change often transpires to change to leadership

Rule #9: Integrate IT systems linked to implementation of the TOM only

Much of the above sounds like common sense, and in most cases, it is. However, many failed integration attempts illustrate that a post-merger integration process is not as simple as it sounds. In fact, PMI is a very complex endeavor, involving people, behaviors, (competing) targets, different processes and systems. I have certainly not discussed all and every aspect of an integration project a PMI manager should consider. PMI takes planning, preparation and targeted execution. It binds resources and distracts from the day-to-day business. Yet, growth by acquisition is a proven means to outperforming competition and industry peers. A failed integration though is costly and can bring down an entire company, alongside its management. Therefore, I recommend not only your acquisition process be guided by knowledgeable external advisors, but in doubt the integration process, too.

Christopher Kummer, president of the Institute of Mergers, Acquisitions and Alliances, a research organization in Zurich, Switzerland, said once “Nothing compares to what comes after you acquire the business.” I think he is right.  

Diethard Engel
Management & Consulting Services

Based out of Germany, Diethard Engel is an independent consultant and interim manager, focused on Business Transformation, Post-merger Integration / Carve-out and Executive Finance. He has run multiple post-merger integration/carve-out projects for international businesses.

Inside Post-merger Integration (9): IT Integration

In part 7 of my series on PMI, I have discussed common integration sequencing, namely integrating straight-forward backoffice functions like Finance & Accounting first, followed by core functions, for example Sales & Marketing. IT seems to fall through the cracks. It shouldn’t.

IT Integration is complex and risky, but necessary nonetheless. (photo by Brett Sayles on Pexels)

First things first: If an IT business acquires another IT business, obviously IT is anything but infrastructure: It is the very core function. In the PMI scenarios I am looking at, IT is merely an enabler: It’s the backbone of any standard industrial manufacturing business, and also for most service providers, for banking and insurance firms. Without IT, there are no business systems, there is no ERP, no management of complex projects, and no communication, neither by email nor by phone. IT for many businesses is vital. Touching IT systems, switching platforms, or even releases, can be a very demanding project, in terms of risk, resources human and financial, while the immediate reward seems limited. Still, there is a reward, and a common IT platform may not fuel growth in the long run, but at least a fragmented IT environment does not limit growth either.

So, where to begin? I recommend going to back to the TOM (Target Operating Model) – or, as I like to call it: The Holy Grail of integration. The TOM dictates integration targets and sequence. If any of these targets are linked to specific IT systems, the acquirer will know which ones need changing, upgrading, or integrating. The focus should be on those systems only which support delivery of the TOM, and hence enable delivery of the strategy.

Rule #9: Integrate IT systems linked to implementation of the TOM only.

Standardizing any other systems in future still has its merits, but there is no immediate need to act. Rather than making non-strategic IT systems a part of the post-merger integration program, they should be tackled for renewal and harmonization in context of their standard product life cycle.

However, in course of the PMI process a couple of IT-related steps should be taken in any case: The new IT strategy should reflect the new combined companies’ strategy. Future requirements on IT systems will also determine what kind of workforce will be needed. A combined IT organization may require less or differently qualified staff. In addition, contracts and license agreements should be checked, and the server and service environment reviewed for harmonization and saving potential.

This is the last article in my column on post-merger integration. Thank you for visiting an reading.

In case you have missed the previous article in the series “Inside Post-merger Integration”, it can be found here. (https://de-mcs.de/inside-post-merger-integration-8-merging-culture/)

Diethard Engel is an independent consultant and interim manager, focused on Business Transformation, Post-merger Integration / Carve-out and Executive Finance. He has run multiple post-merger integration/carve-out projects for international businesses.

Inside Post-merger Integration (8): Merging Culture

Understanding corporate culture is difficult – that’s why it’s ignored in many post-merger integrations. It does not have to be like this.  

Cultural integration has proven to be a key success factor in merger execution: Most acquirers claiming a successful integration say they have considered cultural aspects in the PMI process. In order to be able to address culture, obviously one got to understand what “culture” means, first. In short, corporate culture is the sum of all elements impacting on people or organizational behavior.

Corporate Culture is a multi-dimensional complex.

Culture is qualitative by nature, and therefore difficult to measure, however, that does not mean it wouldn’t be measurable: Rankings or ratings are frequently used to gauge non-quantitative parameters. Identification of those elements meaningful to a specific target culture is key to a successful integration: Symbols, stories and rituals on one hand, and specific behaviors and processes on the other dictate how people feel and act.

Corporate culture is directly reflected in leadership behavior. Therefore, change to culture requires change to leadership behavior, which leads to my

Rule #8: Cultural change often transpires to change to leadership.

Acquirers should know who will lead in future, and whether the designated leadership will live the desired culture. Walk the talk is more than just a proverb: It is what employees see, and eventually imitate. Depending on the scale of cultural gaps, bringing in outside leadership may be an option worth considering.

The degree of formality in a business may determine the amount of leadership change an organization can endure: Knowhow and personal relationships are assets an acquirer has paid a price for. However, the less formal an organization, the more it relies on leadership and continuity. This may limit the ability to stipulate cultural change through leadership team changes.

Trying to change an entire business culture may overwhelm the organization. Rather think about a few elements that are key to the success of the new (joint) business, and target these for change. As a result, the team will focus on managing meaningful differences, and not take away cultural elements which are not critical to business performance, but important to people and their microcosm.

The next part of my series on post-merger integration will cover another important element of PMI management, namely IT integration. Stay tuned.

In case you have missed the previous article in the series “Inside Post-merger Integration”, it can be found here.

Diethard Engel is an independent consultant and interim manager, focused on Business Transformation, Post-merger Integration / Carve-out and Executive Finance. He has run multiple post-merger integration/carve-out projects for international businesses.

Inside Post-merger Integration (7): The Need for Speed

Empirical studies show that successful acquirers integrate swiftly. There are two major reasons to act fast.

Speed is a critical component in post-merger integration. (Photo by Pixabay on Pexels)

I have no intention of running the details of financial modeling by you (and honestly believe there are others much better suited to do so), but any manager should at least understand the core principles behind a financial evaluation. Financial models used to gauge planned monetary benefits of an acquisition can be very complex indeed, but largely depend on only three factors. In summary, these determine the return on investment (ROI)*:

  1. The investment amount (a.k.a. purchase price);
  2. The sum of anticipated future net financial income/cash flows;
  3. And time.

Actually, time is relevant in two aspects, namely the point at which the purchase price is paid (cash out), and obviously at which points in future the anticipated positive cash flows are going to be generated (cash in).

In many investment cases, future income and cash flow are supposed to improve over historic performance under previous ownership. A major driver for such planned improvement are synergies (compare my previous article on the subject). If synergies are generated later than originally anticipated in the financial model, the ROI is going to react negatively. Since the purchase price is a fixed determinant in our mathematical equation, the only other driver to balance a negative time impact with is the amount of synergies generated: While late payment will diminish ROI, increased amounts of future payments will improve it. (However, in my experience I have never seen synergies exceeding the original plan high enough to compensate for their late delivery.)

The other – non-arithmetical – reason to integrate fast is the human factor: People like clarity. The faster a new organization takes grip, the faster new processes are being implemented, the easier employees can be kept engaged. Dragging out change over an unnecessarily extended period in time is counterproductive. The momentum built with acquisition and integration start slows dramatically after the first 100 days.  Hence my

Rule #7: Procrastination does not add value.

Integration should follow an ambitious timeline: Benefits from synergies flow faster, growing an earlier base for future development and growth. In addition, people are more likely to stay with the program if initial changes bear visible fruit swiftly.

Determination of the right pace, though, is the tricky part: If the timeline is too aggressive, employees view objectives as not attainable, which leads to frustration. If it is not aggressive enough, there is no progress, and people lose focus.

A healthy mix of fast-paced change and longer-term objectives is the proven answer: Integration of backoffice functions like Finance/Accounting and HR is often sought to be completed within the first six months after closure, and more complex integrations of core functions should be completed within a year. The “need for speed” is one of the reasons why the integration team should be on board as of Day 1. 

The next part of my series on post-merger integration will cover cultural integration. Stay tuned.

*There are other factors, too, but the three listed ones should suffice to illustrate what I am trying to show in the context of PMI.

In case you have missed the previous article in the series “Inside Post-merger Integration”, it can be found here.

Diethard Engel is an independent consultant and interim manager, focused on Business Transformation, Post-merger Integration / Carve-out and Executive Finance. He has run multiple post-merger integration/carve-out projects for international businesses.

Inside Post-merger Integration (6): Synergies

Synergy planning delivers key input for the valuation model to any acquirer buying a business for integration. Hence, effective synergy delivery is a key success factor in PMI.

Usually, acquirers buy a business at a price above its stand-alone value: Most buyers will want to apply changes to a business and improve it to justify the on-cost. Such changes are supposed to deliver financial benefits, a.k.a. synergies. Numerous integration projects show those businesses integrating core functions, such as Sales & Marketing, generate larger synergies than those concentrating on support functions, such as Finance & Accounting.

The deeper the degree of integration, the larger both synergies and risk.

The Target Operating Model (TOM) developed pre-deal will largely prescribe which areas and functions shall be integrated, and when. Unfortunately, deep integration requires more effort, increases the risk, and takes more time. Many successful acquirers integrate select support functions swiftly, followed by more complex core functions after an extended preparation time.

By-and-large, synergies differentiate into customer-facing synergies (access to markets or customers, new technology for new products….) or those targeting reduction of expenses (material cost, people redundancies, infrastructure…). In any case, due to their importance in the acquisition’s financial model, synergy projects require measuring and follow-up. Since both value and timing of cash flows impact on ROI, each synergy project got to have a timeline and a clear set of KPIs attached to it. It does make sense to be sure that processes are in place to be able to measure those KPIs; KPIs that remain unmeasured are highly unlikely to be met. For example, where “New Products as % of Sales” has been defined as a KPI, one should know what exactly qualifies as a New Product Sale (totally new, new variant, existing product in new market, how long is a product new, when does measurement start….). Also, once the features of a KPI have been defined, a system (IT-based or not) should be in place to track these parameters, across both companies, buyer and target.

Rule #6: Deal targets are unlikely to be achieved without tracking.

Each synergy target should be supported by a timeline and a milestone plan. Milestones describe an event (status can only be “achieved”/”not achieved”), but not a course of action. Hence, each milestone need to be underpinned by action planning in a level of granularity allowing the functional owner to monitor progress adequately. Senior Management need to be updated routinely on synergy projects, progress and risk. At least sponsoring Senior Managers should be engaged, should use and share relevant KPIs consistently, regularly and openly. Synergy planning, measuring, monitoring and progress communication will increase the likelihood of achievement significantly.

The next piece in this series will cover the need for speed of integration. Stay tuned.

In case you have missed the previous article in the series “Inside Post-merger Integration”, it can be found here.

Diethard Engel is an independent consultant and interim manager, focused on Business Transformation, Post-merger Integration / Carve-out and Executive Finance in the manufacturing industry. He has run multiple post-merger integration/carve-out projects for international businesses.

Inside Post-merger Integration (5): Project Governance

Most successful acquirers set up their M&A projects in a strong and controlled environment. Here is how they do it.  

Project Governance is the glue keeping it together

Empirics show that project governance is an enabler to unlock synergy achievement, hit (or beat) the integration timeline, and promote cultural integration, too. In that sense, project government is the glue that keeps the project whole and together. So, if the acquirer gets project governance right, the probability for hitting the original acquisition goals increases. (Some argue though that strong project governance is rather an indicator of being well organized, and that planning and organization would be the drivers of integration success in reality. For our purpose, this is an academic discussion because we will try to get all drivers of success equally right.)

Rule #5: Strong project governance enables integration success

Project Governance forms the solid base for PMI success

Project governance defines roles and allocates responsibility and accountability. It also sets the rules of engagement, in particular how decisions are derived, and how the project is controlled to ensure efficient use of resources. Project governance rules should be set prior to close, and are usually formally acknowledged (and communicated) by the project’s steering committee.

The steering committee is the decision making body (a.k.a. Steering Group, Program Leadership Team….) which ideally includes representatives of both corporations, buyer and target, in a balanced way. Since steering committee decisions frequently have large impact, top-level management participation is mandatory. Other members are usually recruited from the general stakeholder group, including shareholders, potentially banks or representatives of the advisory board.

A constant flow of accurate information into the steering committee will drive early risk recognition, thus enable risk, and not issue, management. The most common conflicted subject is availability of resources to run the project and implement initiatives according to an agreed project plan. It is the steering committee’s responsibility to review, and in doubt change priorities or scope, reallocate resource as needed, change requirements, or timeline. Pre-defined reports and decision memo formats support busy managers in the evaluation of alternative scenarios for informed decision making.

The next piece in this series will deal with synergies, achieving of which is key to any M&A financial success. Stay tuned.

In case you have missed the previous article in the series “Inside Post-merger Integration”, it can be found here.

Diethard Engel is an independent consultant and interim manager, focused on Business Transformation, Post-merger Integration / Carve-out and Executive Finance in the manufacturing industry. He has run multiple post-merger integration/carve-out projects for international businesses.

Inside Post-merger Integration (4): Drivers of Success

Everybody has heard horror stories of terrible M&A failures, destroying value and potentially bringing down entire businesses. On the other hand, many Corporations make M&A a continued success. They share a common recipe.  

Luckily, we don’t have to invent the wheel over and over again: There is plenty of evidence from scientific analysis, market surveys and case studies that it’s a handful of components which decide whether or not a project setup will lead to post-merger integration success. Generally, successful acquirers sport

  • A strong team;
  • Strict project governance;
  • Well-defined synergy targets;
  • An ambitious timeline for completion;
  • A people-centric approach to cultural integration.    

Getting all of these right will not guarantee integration success, but certainly increase the odds for successful completion of a post-merger integration process.

Admittedly, it is all but easy to get an integration right, however, there seems to be a proven path which we will explore in this and the next articles in my column “Inside Post-merger Integration”. Let’s take a look at the first key building block, the integration team.

An acquisition and its integration is likely to impact the entire organization, its structure, processes and behavior. That’s why I rather like to refer to PMI projects as transformation programs. (Linguistically, “program” seems to carry a little more weight than “project”.) Running a transformation program means serious business – you will want to get it right under all circumstances. It all starts with selecting the right people to help you with it.

Rule #4: Resource your program with top people

As one of my colleagues said once: Availability is not a skill set. Your integration team should consist of hand-picked, strong leaders, coming from both sides of the deal, buyer and acquiree. A dedicated team lead, a skilled PMI Manager, can be resourced from the outside (consider an interim manager with methodical and implementation know-how), but the rest of the team should be from within the organizations, if at all possible.

Integration activities will take up time – a lot of time, while business continues. This may put an undue strain on the resources, and should be considered already in the setup. Adding functional backup to deal with day-to-day business while the department head is distracted with project work is a proven response.

The integration team structure will reflect the strategic business intent: The target operating model dictates the functional (and/or regional) areas of integration (compare the previous article, “Pre-deal Planning”) – and the integration team aligns with the areas of integration. Usually, the team is organized by workstreams, with each workstream representing one integration area. Each integration workstream should be led by the relevant functional manager. Ideally, there is a good balance between the buyer and target in leading and staffing the workstreams, for example representative of size.

The next piece in this series will deal with setting up project governance, another key success factor in post-merger integration. Stay tuned.

In case you have missed the previous article in the series “Inside Post-merger Integration”, it can be found here.

Diethard Engel is an independent consultant and interim manager, focused on Business Transformation, Post-merger Integration / Carve-out and Executive Finance in the manufacturing industry. He has run multiple post-merger integration/carve-out projects for international businesses.

Inside Post-merger Integration (3): Pre-deal Planning

Planning integration pre-deal is an iterative process (Photo: Diego Henao on Pexels)

An acquisition target has been identified, and the strategic fit confirmed. What’s next?

M&A is people business: While the buyer also acquires assets (material and immaterial), it’s people who make things work, or not. The PMI Manager got to have backing and a good standing in both organizations, buyer and target. Hence, building relationships on senior level is a must. While many PMI Managers are tempted to start out with a host of project management tools they plan to deploy, demonstrating their technical capabilities, gaining commitment is the crucial step: Senior Management got to agree to, and be in support of, the general steps of developing the integration plan.

Once the path towards integration planning has been paved, the integration itself is moving into the focus of activities. Successful acquirers plan integration simultaneous to their due diligence, in fact: Integration planning is an integral part of due diligence.

Good thing is, not everything got to be integrated. Identification of those functions or parts of the business which are to be integrated should be driven by the acquirer’s business strategy and the linked desired benefits. This leads to

Rule #3: Keep it simple.

Full integration – all functions, all systems – is rarely required to reap the benefits of an acquisition. In fact, performing integration activities besides running a day-to-day business will eat deeply into resources, in both the target and the buyer. Hence, it is recommended to keep integration focused on those areas which are most promising in terms of benefits delivery, while balancing integration risk. Backoffice integration (Finance, HR) is often on top of the list (recognized as “low hanging fruit”), but integration of core functions, Sales and Marketing before all, usually offers the highest reward (but take more efforts, too).

Functional leaders should be involved in developing the integration goals and in gauging potential benefits. A structured goal definition process from general deal benefits (e.g. “market access”) to detailed objectives (e.g. “sell N units of product A at price Y”) will demonstrate how benefits can be achieved, and what is needed to get there.

As a result of this process (which takes time – it’s not a one-day workshop), the acquirer will have a detailed list of benefits, measures and activities required to achieve them, and – maybe above all – Management agreement on both sides that this is what it takes to integrate successfully. The result of the process represents the Holy Grail of integration planning, the Target Operating Model (TOM). The TOM details what the future organization will look like, what will be integrated for which benefits, and – equally important – what will be left alone. The TOM gives a strategic, risk-balanced view on the future state of the joint operation; it will serve as the blueprint for integration, should the deal be closed.

In case you have missed the previous article in the series “Inside Post-merger Integration”, it can be found here.

Diethard Engel is an independent consultant and interim manager, focused on Business Transformation, Post-merger Integration / Carve-out and Executive Finance in the manufacturing industry. He has run multiple post-merger integration/carve-out projects for international businesses.