Stabilization, Integration and Optimization in M&A
by Jack Prouty, Past President, M&A Leadership Council
One of the riskiest days in the life of an M&A, and in fact often THE riskiest day, is when the deal is first announced. Immediate reaction of the various stakeholders (employees, customers, strategic partners and financial shareholders) is fear, concern, uncertainty.
Unless addressed properly and quickly upon date of announcement and for a reasonable period afterwards value can be eroded within the two companies. People become internally focused, they worry over the “what about me” issues, and lose sight of the day-to-day business priorities. The prime determinant of success or failure of an M&A is whether we increased shareholder value or not. If we erode value in this interim period, we just create a greater challenge in achieving the value of the deal in the future.
Too many companies overlook the basic fact that the first action we need to focus on in effective M&A integration is to stabilize the two businesses, minimize any decreases in interim business performance and properly address the people issues.
The M&A Leadership Council’s recommendation is that the buyer prepare for date of announcement by outlining a set of business stabilization activities which can be quickly launched and that a series of these actions continue until things settle down and people get back to both the business-of-the-business and effective integration planning and implementation.
The most obvious element of business stabilization is a robust communications program which addresses all the “me issues” of the distinct stakeholders. However, there are additional actions we would recommend as part of an effective business stabilization program:
- Executive Alignment and Mobilization:
This includes conducting a jump-start planning session with the buy-side executives prior to the announcement; this gets them aligned and focused on the “go forward” integration strategy and framework: acquisition rationale, integration objectives, high-level integration plan, synergies to be achieved, structure and management of the effort, priorities, milestones, etc. (Note: these are more fully addressed in our live-online and in-person training sessions). Part of this also deals with managing people through the cycle of change and the key messaging. Just as critical to the buy-side executive alignment workshop is to have a modified version of this meeting with the sell-side executives to secure their alignment on the path forward and mobilize them on the critical communications and stabilization activities that need to occur with their team. The key executives of both organizations need to be aligned and speaking with one voice to all stakeholders at the “get-go” as a critical element to achieving business stabilization as quickly as possible.
- Communications:
This is the full roll-out program not just on date of announcement, but beyond -- with very rigorous templates, processes, and a game plan that addresses all the “me” issues of the various stakeholders. This needs to cover not only what gets said, but how it gets said, who says it (with everyone scripted on the same messages), the media for communications and the frequency. A discussion on the importance of a hearty and complete communications program is a standard part of the agenda in our training sessions. I would recommend, especially for serial acquirers, that you have a well-developed communications playbook ready for launch, as needed.
- Engaging the Key Management of the Sell-Side as Co-Integration Leaders in All Functional Areas:
During this interim planning before legal close, it is important to get people from the two organizations working together and interacting. Not just for sharing information, but just as importantly, for building personal relationships. This personal interaction is essential for people to not only feel they are part of the process, but also to become more comfortable with the acquiring company, its people, way of operating, and management style. In some recent experiences, I have had the senior management of the target company push back on this level of interaction and information sharing. To me, within the constraints of legal counsel, this is a non-negotiable: to accelerate business stabilization and effective integration planning we need these cross-company functional teams to be working together. Also by getting the employees from the acquired company busy on the as-is assessment they feel that things are being done with them instead of to them. Much better than have them exist in a vacuum reacting to rumors and gossips of what is going on. This activity supports stabilizing both the organization and key employees while delivering critical information needed in the integration planning.
- Fast Launch of the HR Workstream:
An important element of stabilization is communicating and informing people truthfully on their “me” issues. This includes addressing all their personal concerns regarding employee benefits, compensation, titles, professional development, etc. within the buy-organization as well as mitigating concerns about the differences between HR and EB between the buy- and the sell-company. Be sure to include your HR team early in the acquisition process.
- Setting the Business Governances/Rules of Engagement in Place Between the Two Organizations:
This needs to cover how the two companies are going to work together during the pre-close planning process and what decisions need to be coordinated. Let me elaborate:- First, a large amount of information can be shared and needs to be shared between the two companies to facilitate effective planning and provide basic understanding of how the two businesses are operated. The law firm Baker & McKenzie has a simple chart which shows 1.) information that is almost always permitted to be shared, 2.) a list of those typically restricted, and 3.) a list of those almost always prohibited.
- Secondly, the governances and rules of engagement must specify some business “do’s and don’ts.” My view is that any business or financial decisions made by the target management that creates a material impact on the acquiring company must be either coordinated with the buyer or deferred. Here are several examples of material issues I have observed: promoting a large number of senior executives on the target company roster prior to close; making significant bonus and salary commitments that the buyer then had to deliver on; signing a new service or IT contract without full disclosure during diligence. By outlining the terms and conditions in the purchase agreement and/or agreeing up-front to interim business operating guidelines these issues can be avoided.
- First, a large amount of information can be shared and needs to be shared between the two companies to facilitate effective planning and provide basic understanding of how the two businesses are operated. The law firm Baker & McKenzie has a simple chart which shows 1.) information that is almost always permitted to be shared, 2.) a list of those typically restricted, and 3.) a list of those almost always prohibited.
- Baseline Benchmarking on Date of Announcement:
On critical performance activities across the two companies, conduct baseline benchmarking on Date of Announcement, so one can track performance across both the buy- and the sell-side so there is no fall-off in performance/productivity. Sales examples would include: number of sales calls per week; percent of sales closed weekly; booked business; pipeline review; etc. The verbal point made CEO-to-CEO is that each organization prior to close must continue to run their business effectively; so these leaders need to agree on the joint measurements to be used and then each company must track these assessments in order to minimize value erosion.
I am a strong advocate that what gets measured is what gets done. I recommend that to minimize risk of value erosion and ensure business stabilization, specific metrics can be developed and tracked. Ideally I would want these to emphasize early warnings so corrective actions could be taken if there becomes business slippage. Examples might include the following:
- Sales Performance: sales calls per week, percentage of proposals/contracts closed, booked sales, etc.
- Productivity: throughput, inventory levels, daily sales outstanding, etc.
- Employee Morale: employee satisfaction surveys, etc. (Note: employee satisfaction is a leading indicator of potential employee retention)
- Customer Satisfaction: customer complaints, customer purchase levels, customer satisfaction surveys
The key is to identify and track those fundamental measures that are the most important indicators the businesses are continuing to perform at least at the pre-announcement level.
The purpose of this article was not to be exhaustive or comprehensive in addressing business stabilization, but to raise your consciousness and bring attention to this critical set of initiatives. As you look to build your in-house competencies in M&A you should recognize that in achieving the benefits of an acquisition, focus should be first on stabilization, next on integration and finally optimization.
As always we look forward to your feedback on this article as well as your sharing of thoughts and experiences on this subject.
Best regards,
Jack Prouty
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Learn more about business stabilization at our next two upcoming events:
The Art of M&A® for Due Diligence Leaders / In-Person - Boston, Sept 12-14, 2023
The Art of M&A® for Integration Leaders / In-Person - San Diego, Oct 11-13, 2023
See our Training Calendar for all upcoming courses in 2023.