Sealing the deal is just the beginning. In M&As, how well you integrate the two entities is what counts.
"No matter how well you plan the M&A transaction the success of the deal will always depend upon the implementation strategy and integration plan," says Katharine Byrne, corporate finance partner at BDO.
But with increasing use of vendor due diligence and controlled sales processes, “it is becoming much harder for buyers to spend time getting to know the company and its people,” she says.
This matters, because “while many companies postmerger may experience some missed targets or poor performance due to the distraction of the process, the loss of key people and failure to recognise the cultural differences is the principal reason why mergers fail.”
Culture really does eat strategy for breakfast. “The quote is overused because it is still so often overlooked,” says Byrne. “No company will have exactly the same culture but if there are good areas of overlap and alignment, then there is a basis for the two companies to plan for a successful merger of the two businesses.”
Inadequate diligence and planning is a largely avoidable impediment to successful integration, yet it continues to frustrate a wide range of Irish M&A transactions
Consultants can help with the due diligence side but it is the management teams who need to drive the integration plan and which needs to be incentivised for its success, she says.While there is no one-size-fits-all approach, Byrne outlines three simple guidelines worth following.
First, have an integration team: “Engage the key people during the process to understand the strategic objectives of the deal and to agree on the identification and capturing of synergies. Do not leave it for functional streams to adopt their own approach.”
Second, good communication is crucial: “Identify any potential cultural issues precompletion and seek to ensure the optimal reporting structure and systems that support open communication from day one.”
Finally, have a timeline: “Project manage the period immediately post-completion. Be it the ‘100 day plan’ or a quarterly review, the focus should be on the cultural integration as much as on the financial targets in order to ensure continued success.”
Inadequate diligence and planning is a largely avoidable impediment to successful integration, yet it continues to frustrate, and even derail, a wide range of Irish M&A transactions, says Mark Collins, partner and head of transaction services in KPMG."Our recent survey, with involvement from many of Ireland's leading corporate executives and M&A advisors, identified cultural misalignment, people related challenges and inadequate diligence and planning as the primary reasons why businesses fail to successfully integrate post acquisition. In fact, over three quarters of respondents identified these three reasons above other challenges such as inaccurate forecasting, failure to understand market dynamics or insufficient resources. Our advice would be for companies to establish a formalised cultural alignment plan and adequately resource its implementation to mitigate the risk of post-deal failure for reasons that should be largely avoidable."
Remember that employees fear change and are understandably concerned about the new world posttransfer.“Redundancies, contract changes, new systems and changes in reporting lines and management structures are all concerns,” advises Paul Gillen, employment partner, Pinsent Masons.
“The fear of change can, at best, distract employees and, at worst, encourage them to look for other employment. Many employees feel that at least in this way, they retain a degree of control of their destiny. Employers, and especially the new employers, need to be alive to this risk, the disruption it can cause, the negative impact it can have on its workforce resource planning and direct and indirect costs that it will incur.”
The more both employers, but especially the new employer, can do to reassure the employees the better. There will also be key employees who will need more reassurance than others . The new employer may even want to consider retention incentives post-transfer.
“Posttransfer integration will be impacted by whether Transfer of Undertakings Protection of Employment¨ ( TUPE) Regulations apply,” says Gillen.
Both corporate and private equity buyers ranked effective integration as the single most important factor that leads to a successful transaction
“If they do there will be a formal information and consultation process with the affected employees, which will look to the world posttransfer. Such consultations will help with employee buy-in. Further, the TUPE Regulations will legally restrict the new employer’s ability to harmonise or change the transferring employees’ terms of employment.”
In a transaction there may be no legal obligation to consult with the employees and even if there is a legal consultation obligation it tends to fall on the current employer pretransfer, he says. As such, the new employer should look to agree with the current employer to allow the new employer to meet with the affected employees.
Getting it right matters. In a recent study from Deloitte, both corporate and private equity buyers ranked effective integration as the single most important factor that leads to a successful transaction.
“Unfortunately integration often doesn’t get the focus it deserves,” says Anya Cummins, partner, mergers & acquisitions in Deloitte.
In terms of gaining employee buy-in, one of the key factors is the location of the target. “If an Irish corporate is acquiring internationally for example, using a deal structure that retains the key people in the target is important. We’re increasingly seeing deferred payment structures for shareholders linked to the retention of key people in the business, effectively putting the onus on the sellers to embrace the culture of the new target and foster the success of the integration of the acquisition,” says Cummins.
A senior team member from the acquiring business taking a key role in the new target business, particularly if located in a new geography, is another key tool used to bring that culture to life. Private equity funds in particular also use equity incentivisation for key senior management to foster that culture of growth with key senior management which is highly effective and known as “sweet equity”.
“The most common mistake we see is unplanned and quick integration – where a buyer attempts to fully integrate at pace and without understanding the culture of the business,” says Cummins. “We’re increasingly seeing a slower paced approach to integration whereby the buyer will leave the acquired business to operate effectively standalone for a period of time to carefully understand the business and to plan for a phased integration of the businesses. While this may slow down the ability to drive synergies at pace, it does help to manage downside risk.”
