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.

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.

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.

Inside Post-merger Integration (2): Programmatic Acquirers

Reviews and research have shown that programmatic acquirers are more successful in increasing shareholder value than their peer group. Let’s take a look at some of the drivers.

Programmatic buyers actively pursue acquisitions as a key component of their growth strategy. They acquire regularly, and usually close two or more deals per year. The target companies’ combined sales or market capitalization can be considerable in relation to the buyer’s. In other words: Programmatic buyers know what they are doing, and why.

Programmatic buyers show M&A success is not random. It is plannable, sustainable, and can be a continuous source of growing shareholder value if done correctly. Programmatic buyers do not treat M&A like a project, but rather like a program. The difference is that projects are singular, non-repetitive endeavors, which may follow certain common rules, but those are in general non-systematic. A program prescribes a flow, following a pre-defined governance and given parameters. A program is never ad-hoc.

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

The programmatic acquirer features a detailed M&A operating model, which allows following through on the complete process from strategy to operating model of the combined business.

The end-to-end M&A operating model includes clear performance measures, incentives, and governance processes. For example, potential acquisitions are not ad-hoc evaluated; instead any evaluation is based upon a pre-defined model, with clear parameters and decision criteria. Ideally, there is a regular feed of data into a potential target pipeline.

Unless a potential acquirer can point to such program, it is recommended to use expert advice already in the pre-deal phase. M&A experts will bring the experience to the table, which the prospect buyer cannot have, lacking the routine in the acquisition process. However, any internal expertise can be build, by hiring experienced personnel, or by using external know-how initially.

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

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Inside Post-merger Integration (1)

Today, I am starting a short series on post-merger integration best practice. Do not expect any new groundbreaking insights: PMI success depends on some core elements, many of them well known to the community, but re-iterating some of them may be helpful.

Who would have guessed: If you repeat a certain exercise, you will get better at it, both in terms of quality of execution and speed. This is valid in any area of life, including business. Surveys show that businesses which include anorganic growth (i.e. growth through acquisition) in their strategy tend to be more successful than businesses relying on organic growth only. At the same time, analysis shows that singular big deals rarely add shareholder value, but multiple smaller deals do. Why is that so?

Mostly, hands-on integration work is handled by middle management and their functional teams, even if the program is led by an external resource or a central department. This puts a significant strain on employees, and their day-to-day tasks. The integration effort going along with big deals (i.e. deals representing a large share of sales or market capitalization of the acquiring company) increases exponentially with size, leading to inward focus and potentially losing sight of customers, markets and business. Large integrations also tend to take longer – increasing risk even further.

Rule #1: Repeat acquirers have a higher chance of acquisition success

By their nature, large singular deals are not suited to be repeated frequently. The acquirer will have little chance to build sustainable internal capabilities for future acquisitions, based upon multiple post-merger integration experiences. The same applies to businesses not seeking the big deal, but acquiring on smaller scale, in an opportunistic approach: Such acquirers are best suited to seek external support for their post-merger integration process.

In the next article, I am going to review success factors applied by repeat buyers, so-called programmatic acquirers. Stay tuned.

Strategic Projects: Drive or Stall in the Pandemic?

Covid-19 is impacting on many businesses – directly or indirectly: The economy takes a nose-dive, and the future is more uncertain than ever. How should Management react?

Steering a ship in calm waters is difficult already, but holding the helm in rough seas takes perseverance, a clear vision, and trust into own and the team’s capabilities. It is any CEO’s first responsibility to improve (and grow) a business, even in rough times.

Strategy
The business strategy describes the path to success, in particular considering markets, technology, and competition. Strategic goals and objectives are long term – usually with a minimum horizon of 5-7 years (may be shorter in New Economy business models). Having a strategy at all is a good starting point, but sticking to it is imperative since the determinants of the market environment usually do not change over night – not even in a pandemic.
Tactics
A successful strategy is supported by a series of well-defined, concrete postulations, targeting specific goals and objectives. They define the stepping stones towards full implementation – and largely translate into those strategic projects without which the strategic process comes to a grinding halt.
Drive or Stall?
Exceptional situations require exceptional measures – but panic is a bad advisor. Even in a shrinking economy, the general business direction will remain the same. Instead of stopping all strategic initiatives, each of them should be reviewed carefully for its effectiveness, cash-impact and risk/reward ratio in an objective process.
Risk Management
Obviously, especially in uncertain environments managing risk becomes paramount. Implementing KPI systems, routine milestone reviews, and a stage gate process to control critical waypoints are essential elements of a continuous monitoring process.
Courage
„Killing your puppies is the hardest part!“, is a quote by an R&D Director I used to work with. It takes courage to stop a process one has invested in…. Nevertheless, pulling the plug on a project may very well be the right decision if the project is derailed, and objectives cannot be reached at all or at least not with acceptable efforts.

Summary

“The Chinese use two brush strokes to write the word ‚crisis.‘ One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger–but recognize the opportunity.” (Quote by John F. Kennedy)

Unfortunately, there is no one-size-fits-all approach to strategic decision making. However, driving the strategy by implementing strategic projects in a controlled manner will position the business for the future. Heeding this principle will allow you to hit the ground running past the pandemic.

The author: Diethard Engel is an interim manager and consultant, focused on Business Transformation, Post-merger Integration / Carve-out and Executive Finance in the manufacturing industry.

Association with Global PMI Partners

Effective beginning of this year 2021, I am formally associated with Global PMI Partners, a consulting group specialized in post-merger integrations.

Recognized as bespoke post-merger integration professionals, GPMIP and myself look forward to a fruitful cooperation, in which we will share our expertise, approach and resources. My association with GPMIP allows me to tackle larger and even more complex projects as I have full access to a pool of functional experts who can step in and support PMI projects of any size.

To learn more about GPMIP, follow this link:

https://gpmip.com/

Just one more reason to entrust me with your strategic project!

I implement your C-level agenda.

Diethard Engel
Management & Consulting Services

CFOs Drive Success in Acquisitions

In M&A, CFOs shouldn’t only focus on financial due diligence and financing structures, but directly contribute to value creation, say EY consultants Juan Uro and Lukas Hoebarth in an article, published by the CFO Magazine.

When delegating important tasks in M&A, be sure the assignee got the right competencies

I could not agree more: My CFO-background has proven to be a true asset in my post-merger integration projects. Understanding synergy targets (and target setting), dependencies and cost of implementation, interfaces, as well as planning and controlling are indispensable competencies when managing a post-merger integration. My experience tells this goes well beyond project management skills.

The CFO’s contributions in deal value creation are regarded especially important in:

Articulating where and how synergies can be realized, in line with the deal thesis;
Identifying the true cost to achieve synergies;
Building synergy targets into multi-year strategic plans and budgets;
Assigning specific owners to each synergy goal and including synergy attainment in their individual annual performance measures; and
Driving management to define operational key performance indicators that measure synergies and serve as leading indicators.

To make a long story short: If such activities are delegated, they should not be delegated into Corporate Development or left to M&A’s exclusive attention. Rather, if handed over to someone else, it should be a person with the right background.

Transform While Transacting M&A Deals

Take a peek at Deloitte’s recommendations regarding the opportunity for business transformation on occasion of a post-merger integration, published in the Wall Street Journal.

Any integration project comprises significant transformation elements in my experience – compare my contribution of December 9, 2020. Grabbing the opportunity to question the new (joint) organization’s business model, setup etc while you are at it anyhow seems a logical step.

Addressing transformation in integration planning can add additional value to your transaction.

Warum Post-merger Integration Management immer auch Business Transformation ist

Stellen Sie sich folgendes Szenario vor: Ein Unternehmen tätigt eine Akquisition. Im neuen gemeinsamen Unternehmen soll geändert werden: Nichts. Ist das wirklich ein wahrscheinliches Szenario?

In meiner Erfahrung ist jedes Post-merger Integration Projekt mit erheblichen Veränderungen für beide Unternehmensteile verbunden: Das akquirierende Unternehmen will strategische Ziele erreichen, und strategische Ziele erlangt man nur durch die Umsetzung spezifischer Maßnahmen, zum Beispiel durch Änderung des Footprint und Angebots, Vereinheitlichung der Prozesse und Systeme, und oft auch durch Verschlankung der Personalstruktur – alles Schritte einer echten Business Transformation. Neben der Fehleinschätzung der erreichbaren Synergien liegt das größte Risiko für eine erfolgreiche Integration in der Unterschätzung des Veränderungsbedarfs.

Als Interim Manager habe ich internationale PMI-Projekte durchgeführt, die sich vordergründig durch den Zusammenschluss zweier oder mehr Unternehmen definierten, tatsächlich aber im Gesamtblick viel eher einer gemeinsamen Neuaufstellung (manchmal sogar: Restrukturierung) glichen. Die Geschäftsführung muss sich darüber im Klaren sein, dass jede Integration eine Neudefinition der Strukturen bedeutet, und dass die Umsetzung mit den üblichen Risiken einer Restrukturierung einhergeht: Verunsicherung und Motivationsrückgang, ungewollter Personal- und damit Know-how-Verlust, Produktivitätseinbuße, Unterbrechung der Supply Chain….

Die Entwicklung des Integrationsplans unter Berücksichtigung dieser Aspekte kann den Unterschied zwischen erfolgreicher Integration und Vernichtung von Kapital bedeuten. Leadership, Transparenz und Kommunikation sind erwiesene Treiber erfolgreicher Integrationsvorhaben. Daneben ist die Umsetzungsgeschwindigkeit nachweislich ein weiterer Erfolgsfaktor: Langwierige Integrationsvorhaben haben sich in der Praxis als nicht effektiv erwiesen.

Da oft keine geeignete interne Ressource für die operative Post-merger Integration zur Verfügung steht, kann die Verpflichtung eines externen PMI-Managers die Wahrscheinlichkeit einer erfolgreichen Integration und damit einer erfolgreichen Akquisition erhöhen.

Weitere Tipps von PMI-Profis und Beratungshäusern zum Thema Integration Management finden sich als Beiträge hier auf meiner Website.

Zum Autor: Diethard Engel ist als Interim Manager auf die Bereiche Business Transformation, Post-merger Integration / Carve-out und Executive Finance für produzierende Unternehmen spezialisiert.