Why navigating PMI is so important

Any post-merger integration project is a critical exercise – in case of failure it can take down entire corporations, or at least their management.

Remember the merger between the US carmaker Chrysler and the German manufacturer of luxury cars, Daimler? Daimler’s CEO, Hans-Jürgen Schrempp, celebrated the 38b DM-deal in 1998. After seven years of merger-struggle, he resigned in 2005. Eckhard Cordes, responsible for Daimler’s strategy, was earmarked as Schrempp’s successor, but left the Corporation after Dieter Zetsche had been nominated new CEO.

The merged business became unmerged again in 2007, and Private Equity firm Cerberus took over Chrysler. McKinsey estimated Schrempp’s damage to run at an unfathomable 74b US$, making this one of the top capital-destroying mergers ever.

The DaimlerChrysler merger of cause has been of gigantic dimension, however, the reasons for its failure are not uncommon at all: Cultural differences, incompatible strategies, management distraction, unclear integration focus – the same drivers letting post-merger integrations of all sizes fail (compare my blog contributions “M&A Pitfalls”).

Navigating PMI defines leaders

Below the line, the way the CEO navigates PMI does not only define his contribution to value creation (be it positive or negative), but it defines him as a leader. Great leaders don’t only understand strategy, but they also nurture the necessary talent and know-how to implement it. Any post-merger integration is part of a critical strategic program, and should be treated as such. That’s why resourcing a PMI program with top people is a – if not the – critical success factor in PMI management (compare: Inside Post-merger Integration (4): Drivers of Success).

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.

M&A Pitfalls: We will not shed any people!

Decisions on people, their jobs and future are often the hardest. They have to be taken anyhow.

No one likes to communicate unpopular decisions, however, avoiding decisions on people and their future is not helpful in most cases, and certainly not in M&A scenarios. Yet, Management frequently chooses the easy way out and prefers to communicate that there will be no job loss with the merger. More often than not, that’s a promise which cannot be held up. (Also compare my contribution “Setting up Merger Communications”.)

Consolidation of functions and departments (HR, Finance….) usually goes along with a reduced resource need, starting from the heads of department, and ending with the lowest qualified positions. Duplicity of roles is commonly not warranted, neither under a cost perspective nor for organizational clarity. In the new setting of a combined business qualification requirements may change (in IT, for example). Also, holding people in undefined roles will lead to frustration and unhappiness.

Overall, mergers routinely create the need to deal with redundancies – it’s a fact, and should be accepted and communicated as such. Ultimately, reality will catch up with Management, and spreading a message which will be proven wrong over short or long will eat into leadership’s credibility.

Prevention strategies include:

  • Development of a TOM and role definitions for key personnel.
  • Leadership changes are not inevitable, but common. Communicate it.
  • Early involvement of works councils to manage expectations.
  • Prepare the organization for changes.
  • If the future is unknown, say it, but at the same time point out specific future decision points in the integration timeline.

M&A Pitfalls: Cultural differences are minimal!

Getting a grasp on corporate culture is difficult, but ignoring culture can destroy value.

A common mistake in post-merger integration is the underestimation of cultural differences between the acquirer and the acquiree. If employees cannot identify with the new organization, and a “It doesn‘t work like this here!”-mentality is spreading, the risks of customer neglect and ultimately business failure are increasing.

Triggers may be the abolishment of dear symbols and brands, or the change of policy, rituals or processes without proper communication. And we all know: People get really mad if you take their perks away.

Prevention strategies include:

  • Identify important cultural building blocks.
  • Describe the future state and develop a transition path.
  • Leadership communication of vision and purpose is mandatory.
  • Walk the talk !
  • Read early signals. Pull in lower and middle management.
  • Be patient! Cultural change does not come overnight.

M&A Pitfalls: Full Integration

Managing a post-merger integration is a mammoth task. Integrating everything is not a requirement.

Objectives should be challenging – no doubt. The objective to integrate an acquired business in full may be a little too much, though: Full integration is rarely required to achieve the major acquisition goals, and is usually only asked for if a clear business strategy has not been formulated.

A full integration approach is less targeted than a focused strategy, and often leads to a scenario in which everybody integrates something, but nobody understands the true integration objective and benefit. A lack of prioritization of integration goals will inevitably lead to resource issues, and resource issues lead to frustration. A thought-through change concept does not exist. Consequently, the organization will be very busy, but likely also another example for an unsuccessful integration attempt.

Prevention strategies include:

  • Management involvement in developing the future organization design
  • Developing a target operating model (a.k.a. “TOM” – compare this article)
  • Leadership commitment to the TOM
  • Identification and elimination of leadership that will not be part of the joint business

M&A Pitfalls: Timeline? What Timeline?

ROI hinges on investment amount, future income flow, and time. The latter tends to get ignored.

More often than not, I get called to support a project that is past due already. At the time I arrive on site, management has realized that the original timeline cannot be met, and that integration progress and synergy delivery are delayed. In other words: The original timeline is shot, with the knock-on effect that the entire financial model does not work anymore.

Mostly, a lack of planning during due diligence can be identified as the root cause: The effort linked to integration is larger than anticipated, there is no structured project management or controlling, risks and progress (or the lack thereof) are not clearly communicated. In addition, frequently day-to-day business and integration work are not properly aligned, leading to competing priorities.

There are, however, a few things management can do to avoid this scenario:

  • Start integration planning with due diligence (or even earlier)
  • Implement a strict project governance
  • Assign strong managers to the project team
  • Communicate, discuss and review priorities
  • Develop transparent project KPIs (financial and non-financial)
  • Use continuous visual progress reporting
  • Routine team meetings
  • Share and celebrate successes

M&A Pitfalls: We can pull it off!

A post-merger integration represents an enormous effort. Many businesses underestimate the resource drain.

Deal preparation is important, however, the true integration effort starts after signing. As a matter of fact, even if you have an in-house M&A team, most of the work lies with functional management and their teams. I have seen very few organizations – actually close to zero – who would have an additional layer of resource available for the occasional integration work.

That is one reason that integration teams are frequently staffed with people unqualified for the job – their only merits were that they were available at the time…. In addition, day-to-day business takes priority in may cases, leading to a distraction of management and their operational employees. If teams get overloaded, frustration builds, people resist change and eventually they may even leave.

Prevention strategies include:

  • Assess resources before signing
  • Bring in M&A experienced resource
  • Align management and set realistic expectations
  • Consider changing the reward system to achieve integration goals
  • Create a positive atmosphere for change and creativity

M&A Pitfalls: We’ll be fine!

“Don’t worry  – benefits are coming.” Well – sometimes they don’t.

Overestimation of synergies is one of the reasons for unsuccessful M&A projects. If all and any  – even remotely possible – synergy effects are included in the financial M&A model, any shortcoming will have an unrecoverable negative impact on ROI.

M&A Managers and C-Level Executives should consider risk adequately in their models. Amongst other, risks may emerge due to timing, market or lifestyle developments, competitor reaction, or innovation/substitution. When pulling the model together, a couple of prevention strategies can be applied to avoid stepping into the “We’ll be fine!”-M&A pitfall:

  • Calculate major contributing synergies, and apply a decent risk factor
  • Model what-if-scenarios with delayed timelines
  • Consider potential competitive retaliation strategy
  • Play with alternative models of the future
  • Use corridors instead of fixed numbers

M&A Pitfalls: Justify it!

At times, the result stands before the analysis has even started (photo by Breakingpic on Pexels)

At times, people know the outcome of the analysis before the analysts have started the evaluation process, or even completed their model. They want a certain result – a result in line with their personal preference.

In the context of M&A, such expectation to hit a certain mark can lead to grave consequences, yet still it is not unheard of. Evaluation methods use parameters, and parameters can be changed – sometimes they get adjusted, tweaked and changed until the arithmetical result fits the bill. The downside obviously is that the parameters may not be reflective of reality, risks are being ignored, and sensitivities are left unconsidered in the decision process.

Therefore, an independent check of the model and the applied assumptions is helpful. Other prevention strategies include:

  • Do not change assumptions without substantial reasoning.
  • Apply the 80/20 rule: Calculate the most important synergies only, and ignore the rest.
  • Be sure to have the resource to implement any planned initiatives, in terms of manpower, competence and funding.

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
  • Enable an open pro/con discussion, for example by setting up a “play” like this one featured by M&A Science.
  • 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