Denying or delaying change can cause significant deal value erosion.
By Jack Prouty, President of the M&A Leadership Council
One thing we often hear during The Art of M&A Integration executive training programs, is that the CEO (or some other executive driving the deal) has openly stated, "We will do no harm," and "There will be no changes at the acquired company for XX time period." Really? Why? You just acquired this company, assuming ownership and potential liabilities for its operations, and yet you are going to do nothing to realize the value of the acquisition--and now have the risk of eroding value through inaction.
Thanks to our involvement in a significant number of deals ranging from $5 million to $40 billion, our view is that this "do nothing" acquisition/integration appoach actually does harm by creating value erosion. Most inexperienced top executives might believe that a "Do no harm" announcement will stabilize things and prevent business operating risks, and possibly so. But during this time, don't be surprised if you have opened another can of worms: more turnover, along with a significant drop in productivity; lost revenue opportunities; delayed synergies; and higher operating costs. Whatever the reason, we caution against this approach.
As a strategic buyer, you presumably acquired this company because there is a business fit and it brings value to your existing business. There may be logical and rational reasons to opt for "integration lite" with just minor changes to start with; however, I have never seen a case where some changes are not required soon after legal close and assumption of ownership. Here are some examples:
- The Buyer must typically provide consolidated financial statements within about 30 days of Close.
- When a publicly traded company acquires a privately held company, the acquired employees must understand the "do's and don'ts" associated with working for a public company.
- All employees, both new and old, must understand the organization's "sacred cows."
- There may be opportunities for "early wins" that require collaboration, such as selling combined service offerings; near-term cost savings; or purchasing leverages.
- The acquisition can come with major liabilities that must be addressed right away. For example, a small company can operate "under the radar" in ways a larger company cannot, which could raise issues with regulatory compliance; software licensing; safety and health rules; etc.
Even if the near-term changes will be relatively minor, your message needs to be, "There will be change within both organizations. We will effectively communicate changes and be smart about it, etc." Effective mergers and acquisitions are all about managing people through the change process. If you say there will be no change for six to 12 months, then any business change will cause a loss of credibility and trust (and in many cases, business realities will require business changes). Additionally, people expect change with new ownership. If no change occurs right away, there is likely to be strong resistance to any major changes downstream (e.g., termination of employees, closing of facilities, adapting to new processes).
One senior client of mine started off every meeting with "There will be changes." Even though there were minimal changes in the short term, when larger changes occured later there was greater acceptance and no real surprises.
We need to coach our CEOs and senior executives to avoid making the statement that "Our M&A approach is to do no harm, and to that end we will make no changes to the acquired company for six to 12 months." It feels good, and it may avoid near-term concerns by the acquired executives and managers, but it is an incorrect statement. The opposite will occur: You will do harm, and you will erode value.