Finding the Greatest Opportunities for Creating Value in a Business Combination
By Jack Prouty, Past President, M&A Leadership Council
Simply merging two companies does not necessarily lead to the creation of a third company of greater value. So, where can we find the greatest opportunities for creating value in a combination?
Companies might want to think about creating a new, better customer value proposition; improving the leveraging of human, technology and IP assets; and exploiting the joint research and development capabilities so that 1 + 1 actually is greater than 2 (a statement often made in CEO M&A announcements, but seldom ever realized).
In all, I believe there are seven critical success factors (CSFs) to achieve successful integration.
- Address the Leadership Issues
While this article focuses on what I believe are the seven critical success factors for effective M&As, leadership is the most important. I have found that if the senior business sponsor is committed to the overall success of the acquisition effort, most if not all, of the other CSFs fall into place.
However, from a leadership perspective here are some of the pitfalls that can occur in merging two companies:
- The key executive (CEO or responsible senior executive) is totally disengaged from the process and views it largely as a tactical effort to be carried out by middle management in their functional roles. Lack of this key executive involvement means strategic ownership and direction are missing and will result in an underinvestment of resources, and an absence of overall corporate commitment. The signal to the organization is that this is not an important business priority and those that will be in the trenches driving the effort will be doing the heavy-lifting without senior management support. ….Not a strong endorsement for high-potential resources to get involved in the effort.
- Another leadership issue I have observed is a lack of alignment among the executives of the two organizations on how the integration is going to occur; or just as bad -- a lack of alignment among the senior executives of the acquiring company on the acquisition rationale and/or integration approach. If the executives are not aligned, it will be that much more difficult to mobilize the two organizations to work together to be successful.
- Another key leadership issue to be addressed is selecting the right management team. This is the number one issue that the new CEO or designated business owner should address and finalize as soon as possible. People in both companies want to know who is in charge, to whom they should report, and how the new business is structured. Failure to do this right and do it quickly causes business value erosion, employee turnover and loss of key executive credibility.
In successful companies, the key executives from the two organizations send the message to their team that they believe this integration is the most important initiative in the company, that they are personally committed to its success and that they are setting the tone and direction for this integration effort.
2. Set Strategic Context before Tactical Execution
What is the end-state vision of the combined business? In other words, what should the integrated business look like in a year or two? What key strategic business issues must be addressed before launching a large number of teams to go do something? Specifically, we recommend that companies first think through how they will re-assemble the assets of the two companies to truly create a new, better business. They should think through branding issues; determine the customer value proposition (given that the two companies probably face their customers in a different way in terms of price, service, quality, etc.); and address how they will position the new company in the marketplace.
3. Focus on Value: Preservation, Realization, and Creation
We are often asked, “How do you measure M&A success?” My simple response is…. did you increase shareholder value or not? Whatever your motivation for undertaking this particular transaction, the focus needs to be on achieving the expected benefits of the deal! Companies should spend much more time in due diligence and in the pre-close activities thinking about where the real value exists within and between each company. Once the deal is announced, a company should move to stabilize the existing businesses and preserve the existing assets. Our recommendation to clients is that between deal announcement and Day One (the day that the two companies become one legal entity) as well as the first several months after Day One, the focus should be on value preservation.
Action steps to realize the value of the deal need to be outlined, executed and measured after Close, when you can actually begin the integration activities. It is in that first 100 days after close that we would expect to see the focus shift to value realization whether through expense reductions, revenue enhancements, cost avoidance, or marketplace repositioning.
Our view is that creating longer-term value is best achieved as you transition from integration to the end-state of the combined business. Once the “Newco” organization is in place (management team, consolidated organization structure, common systems, etc.), management needs to reassess the combined business from the standpoint of how to exploit the opportunities for creating longer-term value.
Companies that take the systematic approach of value preservation followed by value realization and finally value creation are usually the most successful acquirers.
4. Align Technology Integration with the Business Integration
In several situations we have observed dueling integration efforts: the businesses are driving their integration effort, while separately, IT is driving its integration effort. Our bias, strongly supported by our experiences, is that the IT integration effort needs to be done within the context of the overall business integration effort.
It is critical that technology is used both as an enabler and as a lever during the integration. As we have often stated, IT impacts the integration effort of every other function, often takes the longest, and typically represents the largest area of both cost and significant business benefits. The proper alignment of technology strategy with the overall strategic business integration plans can mean the difference between success and failure.
5. Maintain a Business Balance with Day-to-Day Operations and the Integration Effort
Once a merger is announced, there is a great deal of anxiety regarding the new entity. What is it going to look like, how is it going to operate, what’s the new corporate name/logo/brand image, what markets will it be in? Especially on mega-deals, top executives spend less effort on the existing business and become eager to integrate the organizations in order to begin realizing the promised benefits and value. Lots of task forces and committees are set up to launch the integration planning and implementation activities and resources are pulled from the daily business to drive the effort. Suddenly, in addition to all of their normal daily activities, individuals are under great pressure to assist in expediting the merger of the two organizations.
My recommendation is that between the date of announcement and the date of close, most people in the two companies need to focus their time and effort on running the day-to-day business of the two organizations. Only key management, members of the integration management team and a select number of functional managers need to be involved in the integration planning. The people chartered with managing the integration effort – a small, core team – must be dedicated full-time to that effort and not have continuing day-to-day responsibilities for business operations. A formula we have used is 90/10 and 10/90: i.e. 90% of the organization needs to be focused on the business-of-the-business with no more than 10% of their time on integration-related matters; conversely 10% or less of the resources should be focused for 90% of their time on the integration effort, with maybe 10% of their time on day-to-day business.
6. Install a Rigorous Integration Program and Process
The integration must be thought of as a complex project with applicable structure, process, metrics resources and skill sets. This doesn’t mean it needs to be complicated. Quite the contrary, the more you can simplify, prioritize and accelerate the integration the better it will be for the organization. The more you can organize the integration around a project management system, the more successful and simple it will be. And remember, the earlier you can start this process the better. Companies that prioritize pre-deal integration project planning and put in the requisite project management structure, rigor and discipline are significantly more likely than most to have a successful deal.
Prior to the announcement and launch of the functional integration planning teams, top executives will have done a “strategic review” and are crystal-clear about the logic of the deal. They should have determined what synergies there are between the companies and how best to take advantage of them. They have gathered all the pertinent data, talked about assumptions and then agreed upon what, when, how and in what priority actions need to be taken to capture value. This high-level value-driven analysis is then broken down into executable, manageable chunks with a structure and the tools to manage each piece.
The integration effort requires detailed plans, structure, resources, processes, metrics, and operating procedures to manage across all the functions and activity areas. M&A program management is not a core competency of most companies and certainly not of most people in the organization. But if you are going to be successful in your integration effort you need to build or contract for this competency. Speed and quality of execution are critical for successful integration.
7. Address the People and Culture Issues
It’s the people and culture, pure and simple, that can make or break the integration. Results of our surveys and those of others have continually validated that deals were more likely to succeed if acquirers focused on identifying and resolving cultural issues. An assessment of culture and people issues needs to start in due diligence and then continue with effective change management and business stabilization actions through the pre-close integration period and into date of legal ownership.
So what can you do? Communicate, communicate and communicate. Flood the communications channels with targeted messages that are repeated over and over again. You cannot over-communicate during a merger. Remember that you are going for the hearts and minds of every individual in each company. Let people know what is happening and what will happen next.
Remember the “ME” in merger: it is all about “me.” I often say on date of announcement that Rule #1 is communicate, communicate and Rule #2 is…… there is no rule #2!
As for culture, obviously the better the fit is from the beginning, the easier it will be to successfully integrate (this is where great due diligence is a strategic asset). Treat existing cultures with respect, integrate them as best as you can and then create a culture that is unique to the new entity. For more information around culture I direct you to several articles in our previous blogs (macouncil.org/blog); search on keyword “culture.”