The M&A Mini-Series: Capturing Synergies Right From the Start (July 2016)
The contract is signed.
The company’s potential is greater than ever before.
The company is now also more vulnerable
and under intense pressure to get the deal off to a fast start.
Integration planning and implementation
is another critical element of every M&A journey.
Success depends on an elite corps of battle-tested professionals
with the know-how to align disparate potential
into a seamless, synergistic reality –
an effort that needs to start long before the contract is signed.
In my last newsletter – part two of my four-part “M&A Mini-Series” – I discussed deal structure analysis. Specifically, I discussed why the accounting team that was assembled during due diligence was also critical to identifying future accounting problems, risks and opportunities during deal structure negotiations.
In this newsletter, I’ll move on to integration planning and implementation and discuss why alignment should be a top priority from the outset to help set the terms of the deal and then turn them into reality. I’ll also offer insights we at Blythe Global Advisors have learned regarding how to plan and execute a successful integration.
If there’s a theme running through this mini-series, it’s this: From the moment companies begin to consider a merger or acquisition, the entire team needs to be assembled – both the internal resources and external consultants, each with their respective areas of expertise. Then, this center of knowledge needs to stay intact and fully informed throughout the entire process to provide input at every juncture.
In fact, as I’ve worked my way through these newsletters, I’ve reached the conclusion that using the term “phase” to describe the M&A process is incorrect. There are no phases in the strict sense of separate, linear steps to get from A to Z and then the work is finished. Each element of the M&A process – due diligence, deal structure analysis, integration planning and implementation, and accounting implications (my next newsletter) – overlaps with each other, informs each other and has tentacles well into the future of the new organization – and, thus, requires team continuity.
Nowhere is this more important than with the integration planning and implementation contingent because there’s a point a lot of folks miss: The task is called integration planning and implementation. The planning effort to align the two entities needs to start before (ideally) or during due diligence with the implementation effort continuing well after Day One. This enables your team to focus not only on financial stability but also to transition to the future state with the fewest number of surprises.
Today’s deals are bigger than ever before – more difficult, more risky and with more moving parts. Consequently, there’s more chance of not realizing anticipated outcomes. For companies that don’t apply sufficient effort to the really hard work of integration and alignment, Day One can be the business equivalent of a false-positive lab result. Everything is changed, but nothing is different. At the two headquarters of such newly merged companies and at their now redundant labs, plants, branches, distribution centers, stores, etc., management and employees will go about their work just as they had the day before Day One – doing their jobs in their respective silos and sowing the seeds for inefficiencies, missed opportunities, lost revenue, low morale … chaos.
Anyone who’s read my newsletters knows that I’m not given to hyperbole. But, chaos is a correct description. Almost 90 percent of failed mergers or acquisitions can be traced to poor alignment – with the evidence being higher costs resulting from redundant, unconnected processes and systems, low morale leading to the exit of key employees and, finally, missed forecasts.
Here’s a prescription for a successful alignment effort.
First, as stated above, assemble the team of integration experts as soon as the idea of a deal is beginning to seem real. Here’s a caveat: Good is not good enough for this team. Mergers and acquisitions are incredibly complicated – there’s never been one without surprises and setbacks. This team needs to be superior – a band of business geneticists who have experience dealing with companies’ DNA and using an array of skills that most organizations’ best people don’t possess. We’re talking battle-tested veterans who know what’s lurking around corners and where the pitfalls are because they’ve fallen into a few. (Full disclosure: Not only do we at Blythe Global offer these services, we also have the scars to prove it.)
Along with the due diligence and accounting teams, implementation experts can offer valuable impartial input as to whether the deal is worth pursuing. Lots of people are going to be in love with the deal. Bluntly said, executives need an objective party to tell them early on if their baby is going to be ugly. If the decision is made to pursue the deal, these objective experts can help management understand what it will take to realize a successful transaction. For example, as the M&A negotiators keep adding incentives that make the deal harder, the implementation team can provide information to help management decide whether the objectives and payouts are reasonable and achievable.
Second, expand the integration team to include a cadre of cross-functional executives – accounting, tax, HR, IT, communications, etc. Yes, secrecy is absolutely necessary and the circle needs to be small; but, these folks know the nuts and bolts of the organization – its strengths and weaknesses. They’re essential to developing a coherent, viable plan that will work across groups and across the lifecycles of systems toward desired objectives. As the deal begins to take shape, this team will tackle critical questions at a very granular level that will decide whether the sunny predictions of the dealmakers can be turned into actual results. Here’s a very short list of the kinds of tough issues that need to be tackled and assigned a detailed blueprint.
- Can both entities consolidate and align payroll through the parent company by the target date?
- Can IT implement one seamless ERP system by the target date?
- If the deal was structured to expand access, how will separate sales teams, branches, outlets, etc. be consolidated and reallocated? What’s the compensation and commission policy going forward? How quickly can synergies be achieved? What back-office functions will be affected?
- How will contracts be structured going forward? What are the implications of the deal on contracts in place with customers, partners, vendors, etc.? What’s needed to safeguard relationships with these key constituencies?
- What’s the best way to make the most of current staff? Who absolutely needs to be retained? Who should be bought out? How should corporate staff be deployed across what will most likely be more and larger subsidiaries, divisions or regions?
- Beyond the processes, systems and hard wires, what are the cultural differences that need to be bridged?
Third, develop a comprehensive, realistic internal and external communications strategy and involve an expanded level of management in this strategy. This next level of management is essential to both the Day One kickoff and beyond. Armed with the right messages regarding the value and potential of the deal, they will complement senior management and provide the local leadership that’s necessary to get the deal off to a fast and successful start. Nothing is more lethal to a merger or acquisition than a leadership vacuum. These folks will keep the company moving forward and provide the positive atmosphere for retaining people who are essential to long-term success.
In closing, let me repeat that aligning two already successful, vibrant entities involves really hard issues. Successful alignment requires dedicated resources, expertise and capacity not available inside organizations. It’s a job that must be done right – right from the beginning – in order to meet the expectations of external and internal constituencies.
If you would like to discuss anything in this or any of my newsletters, please contact me. At Blythe Global Advisors, we have a proven track record of helping companies make investment decisions with confidence. I’d be delighted to talk with you.
To discuss this important topic further
or if you’re looking for general accounting advice and counsel,
- Working with a company recently acquired by a private equity firm to upgrade accounting department processes and procedures now required by the PE firm and new debt holders.
- Assisting a public company evaluate potential acquisitions including performing carve-out procedures for in-process acquisitions and financial reporting, and providing integration assistance for completed transactions.
- Helping a private equity-backed company implement upgraded consolidation and monthly reporting processes for disparate global businesses to improve the timeliness and accuracy of financial statements.
- Assisting several early-stage and high-growth companies prepare for contemplated debt and equity transactions.
- Providing IPO readiness services to several companies including leadership and oversight of the financial reporting process related to Form S-1 preparation.
- Providing technical accounting and M&A accounting assistance to several companies including accounting and disclosures in accordance with ASC 805.
- Providing initial SOX implementation services to several recent IPO companies in the health sciences, restaurant and technology industries.
- Performing business integration and technical accounting assistance to a public multibillion dollar healthcare services company.
- Providing part-time controller/CFO services to several private equity- and venture capital-backed companies ranging from startups to $50 million businesses.
- Providing financial reporting, XBRL and technical accounting support to several smaller public companies.
- Providing pre-audit support to several companies preparing for their first external audit.
The newsletters published on this Web site, current as of the dates of publication, are for general information and reference purposes only. They do not constitute specific financial or accounting advice for individual circumstances and/or companies. Such specific financial or accounting advice should always be sought separately.