Kategorie: 3. M&A Pitfalls

Maybe you have contacted a consultancy firm you are working with, or reached out to an agency supposedly specialized in providing the exact right candidate for your post-merger integration project. That’s great – because you have already internalized one of my nine key rules for a successful post-merger integration, namely

Rule #4: Resource your program with top people.

Gladly, I receive calls from those consultancy firms and agencies very regularly (I mean – c’mon, that’s my business model) because it is not them who will support you, but people like myself: The true experts.

Let me give you an example: Recently, I have been called with a project inquiry. The agency read a project brief to me, but couldn’t say whether the target would be acquired in full, or whether we were talking about some sort of limited investment. Moreover, the request was for a three-month integration period, phasing out the consultant gradually towards the end. Yet, there was no clear picture of what the target operating model should look like, let go the investor had an integration plan. Clearly, neither client nor agency had a realistic view on complexity and implementation timeline for a project like this. Oddly, more than half of the conversation was circling around terms and conditions, including my daily rate and potential travel expenses, indicating the agency was a lot more concerned with making their cut than with helping the client solve a problem of strategic dimension.

It took me five minutes to understand the client was setting up himself for failure, and that he needed profound consulting from someone seasoned with the experience of several PMI projects, from design to execution. More concerning, it took me only two minutes to comprehend that those supposed to provide the client with expert support had no clue what they were talking about.

A failed PMI project is not only costly, it can take down an entire business, alongside with its management. So please, dear potential clients, be sure to hook up with someone who takes a genuine interest in your business, and demonstrates at least a basic understanding of the challenge you are facing. At times, this might not be the consultant or agency you (or your procurement department) are used to work with. Google is your friend.

For your needs in post-merger integration or carve-out, you don’t even have to google – the expert is right here, at your fingertips.

Learn from common mistakes in post-merger integration, and unlock the power of prevention strategies for your program’s success. Based upon real-life experience, I have summarized what can go wrong in design and implementation of an integration project, and how to avoid ever-the-same mistakes.

A must-read booklet for any program manager.

Click here for your free download. No sign-up – no obligation.

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.

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.

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.

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

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

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

“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