Focusing on Key Elements in the Life Cycle of the M&A Deal
By Jack Prouty, President M&A Leadership Council
From my direct experiences, research, and learning from others I have boiled down what I believe are the seven critical success factors for effective M&A integration. Those companies that have focused and executed on the following key elements across the life cycle of an M&A are the ones that most often achieve successful M&A integration (something only about one in three can claim).
What are the keys to success?
#1. Strategy: Set the strategic context for tactical execution. I cannot tell you how many times I have heard about companies immediately launching a number of functional teams to develop integration plans without first stating why they were acquiring this company and what their integration objectives were. The result is a bunch of teams running around in silos trying to integrate functional areas without understanding the basics of what they are trying to achieve and how the pieces should fit together. Successful M&As focus first on articulating the acquisition rationale and objectives and then managing the tactical and functional activities to achieve those.
#2. Value: At the end of the day the real success or failure of an M&A is going to be determined by whether shareholder value was increased or not! The first focus of the management of the companies in the pre-close needs to be on preserving the value of the existing assets of the two companies; upon close it needs to then be on realizing the value of the deal and then as they move into the steady state of one company it needs to be on creating greater value.
- Value preservation: The day the deal is announced internally and externally is typically what we refer to as the “riskiest day in the life of an M&A.” This is the first time that key stakeholders hear an acquisition/merger is in the works. Unless activities are planned and launched quickly to stabilize the organizations, value starts eroding: lost sales, lost productivity, delayed decision making, etc. “Best practice” companies are prepared to launch the actions and priorities needed to stabilize the businesses and preserve the existing assets between announcement and close when they must continue to operate as two separate entities.
- Value realization: Once the transaction closes, the effort needs to shift to realizing the value of the deal by implementing action plans for achieving the value and the synergies of the deal. The focus here is on accomplishing this while transitioning to the steady state of business operations (common systems and platforms, integrated operations, or whatever the end state vision is). “Best practice” companies focus on both effectively managing the businesses during this transition state (from two separate businesses to one integrated business) as well as ensuring that the benefits of the deal are captured.
- Value creation: The lesson learned is first to integrate and then optimize. Once the two entities are under common management, infrastructure, and operations (however the organization best defines the end-state vision) then it is time to reassess and combine the assets to truly create greater business value and realize the full potential of the combination. The “best of breed” companies take this two-step process: first focus on integration and then transform the combined business to an operation much greater than either company could be on a stand-alone basis.
#3. Leadership: In my experience, the #1 factor for determining ultimate success or failure of an M&A is LEADERSHIP. If the senior executive, who ultimately owns this business (the CEO, divisional President, General Manager, etc.), is driving this effort, is committed to achieving M&A excellence, and is deploying the assets to plan and execute the integration effort, then the probability of M&A success rises exponentially. In addition to the “business owner”, leadership means alignment and commitment by the senior management team of both organizations to the strategy and objectives of the deal. Without top-down leadership, the challenges and barriers to successful planning and execution of an M&A transaction are huge.
#4. Governances: It seems simple, but often is not done or at least not done properly. And that is to clearly outline and communicate how the two organizations are going to work together during the interim stage between date of announcement and date of close; what are the legal do’s and don’ts that people in the two organizations need to be aware of; how decisions will be made and actions taken in the interim and during transition; etc. By outlining the rules of engagement between the senior management of the two organizations, between the integration teams working together, and the rank-and-file of the organization, problems are avoided, issues that arise are quickly escalated and addressed, and focus is on working together in a spirit of trust and openness.
#5. Balance: While the M&A planning and implementation is going on, it is important to continue to focus on running the existing operations (of both businesses) better than ever. The view of the M&A Leadership Council is that while a dedicated group of people should be driving the integration activities, the majority of the organization should be focused on the day-to-day business. One of our workshop alumni made a great build on our comment of the 90/10 rule: “90%+ of the organization should spend 90% of their time running the day-to-day business and only 10% on integration, while 10% should spend 90% of their time on integration and 10% on the daily business.”
#6. Rigor: As Jim Jeffries, Chairman of the M&A Leadership Council, says, “M&A is project management on steroids.” If you are going to be doing M&As then you need to have M&A program management excellence: a focus on discipline and rigor; a sense of urgency on accomplishing tasks; quick decision making; empowerment of teams; avoidance of “analysis-paralysis” and “group-grope”. Most companies do not have this project management excellence expertise in house, but for each M&A project it is a critical function to be performed. It also requires a headset change from how we typically run our day-to-day business. We have to run fast so a good plan today in M&A is better than a great plan tomorrow; delegation to the lowest level possible is important; not confusing project structure with corporate structure; and accepting that mistakes will be made, but risks must be taken.
#7. People and Culture: M&A is change and change is scary, but refusing to change as the result of an M&A is not an option. To achieve the objectives of an M&A, it is critical that we manage people through the cycle of change from where we are to where we need to be. This means both their employees and ours, customers, suppliers, strategic partners, etc. Two key points to keep in mind regarding this: 1) Rule #1 On Date of Announcement: focus on Communicate, Communicate to all key stakeholders addressing all their “me” issues; there is no Rule #2! and 2) You must address the people issues before you can attempt addressing the integration issues. Cultural differences always exist. The key is to understand the cultural differences…. where it becomes the biggest issue is when those cultural differences can impact business operations and destroy value. Too often management views these as “soft” issues. My experience is that these “’soft’ issues” are both the hardest and the most important to deal with. It is key to deal as much with the emotional and political issues of an M&A (i.e., the people issues) as it is with the rational issues (e.g. what functions are we going to consolidate, integrate, etc.).
At each stage in the life cycle of an M&A (qualifying targets, conducting due diligence, planning and executing the integration, moving to the integrated end-state, and transforming to the new organization), I encourage you to focus on these 7 critical elements, as the “best of breed” companies do, for achieving M&A excellence.
About the Author: Jack Prouty is the managing partner of Prouty, Montgomery and Partners (PM+P) and a subject matter expert in the field of mergers and integrations. He has over thirty years of line management and consulting experience working with Fortune 1000 companies on effectively integrating acquired companies, repositioning/transforming their business for improved market success and conducting large scale change programs for bottom-line benefits. Mr. Prouty’s work has stretched across the life cycle of transactions: acquisitions, mergers, consolidations, joint ventures, divestitures, and roll-ups. Mr. Prouty is also President at M&A Leadership Council and contributor to many of our M&A programs!