How a pre-close Integration planning can be critical to achieve deal value and synergy capture quickly in M&A?

Introduction

  1. Companies use M&A as a growth strategy to build market share, increase revenues, gain entry to new markets/expand in existing markets, get access to new capability and add/strengthen their service offerings.
  2. After the company identifies the target to acquire based on the strategic rationale, due diligence of the target is done by the acquirer to identify the risks and opportunities that this deal can bring.In addition to validating the target business operations and its financials by performing Quality of Earnings study, the due diligence team is also responsible for synergy analysis.The synergy analysis basically identifies the value drivers that can increase revenues or reduce costs to acquirer as a result of the proposed acquisition.

Due Diligence vs Integration

The integration team would be responsible for integrating the seller business with buyer and realizing synergies targets.The integration needs to be involved in the due diligence stage itself.This would provide clarity to the Integration lead on the value drivers of the proposed acquisition along with key opportunities and risks present in the acquisition.Basis these findings, the integration lead can finalize the:

  • Degree of Integration required between the target and acquirer
  • Target/End state operating model post acquisition that can achieve the synergies targets and the overall success of the deal.
  • Value drivers that needs to be focused on immediately to achieve synergies targets.
  • Devise an integration plan which can mitigate the risks identified during due diligence in order to achieve synergies targets.

Integration Management Office and Governance structure

Once the initial integration strategy is devised, the next step is to create an Integration Management Office that would be responsible for ensuring successful integration. The IMO is a temporary team created solely for the acquisition and will house senior leaders from target and acquirer, who shall be responsible for end state operating model within specific timeline to achieve the synergy targets. The Integration Management office will include:

  • Deal Sponsor – A senior level executive, mostly a corporate officer who shall sponsor the deal and communicate to the board on the progress of the integration through monthly updates.
  • Integration Leader – A Senior level Business leader who will be responsible for running the IMO and co-ordinating the integration with multiple functional teams to ensure that the integration achieves the deal rationale.
  • Functional members – These are the identified leads from the various functions like HR, Finance, Legal, IT and Business who will impact the integration.Each Functional leads will have its team who shall be accountable for the Integration goals/milestones.

Identifying Value Drivers

  1. Once the IMO is established with each members understanding their roles and responsibilities, the next step would be to build specific integration plans that are aligned with the value drivers to capture synergies.Generally 20% of the value drivers contributes to 80% of the synergy targets.The IMO needs to identify those 20% value drivers and prioritize the same by building and executing integration plans.
  2. Initially the IMO decides on the degree of integration between the target and acquirer to ensure the core business activities of target is not disrupted.Generally the back office/common functions like HR/Finance/IT are integrated first.This will provide some cost savings, eliminate duplicate process and quick wins to IMO before they proceed to capture revenue synergies.

Deal Announcement/Day zero planning

  1. The acquirer decides to announce the acquisition publically, after the initial integration and communication strategy is finalized.
  2. The deal announcement should clearly state the strategic rationale behind the proposed acquisition and how this deal will benefit customers, employees, vendors and other stake holders.

Pre-Close Integration Planning

After the deal is announced, the IMO should immediately start the Integration.The Integration planning should factor in 3 parameters:

  • Speed – The pace at which integration has to be happen affects the success of the integration. The speed of integration should be high and there should be no delay from the acquirer.Any delay will cause uncertainty on the stakeholders like employee, customers and vendors which will give a chance for competitors to poach employees and customers from the acquirer thus causing value erosion.
  • Synergies – The integration plan needs to focus on how to achieve synergy targets which include additional revenues capture and reducing costs.For instance, if cross-selling is identified as a value for additional revenue synergies, then a detailed Sales integration plan needs to be devised to identify accounts for cross-sell, finalize the sales compensation, assigning quota for Salesforce and providing incentives for achieving the targets.Each plan needs to be broken into sub projects which would be further broken to key milestones.Each projects needs to be tracked to identify the progress and ensure that milestones are achieved.All plans should be flexible and should be modified adapted as per the circumstances.

Stablilization of Business

  1. The most important step after deal is announced is for the Integration leader to reach out to target customers and ensure to them that there will be no disruption in the continuity of the services.
  2. The Integration lead needs to articulate the value proposition behind the proposed acquisition to the customers and how this acquisition can benefit the customer in longer term.
  3. The customers also needs to be assured that there will no changes to the terms and conditions in their contract. The pricing will be the same also the services provided to them would be continued.This approach would assure the customers not to be worried about the proposed deal.In addition, this also provides the base for the acquirer to cross sell his services to customer at a later stage.
  4. By reaching out to customer proactively, the acquirer protects the existing business from the customer and prevent competitors using this uncertainty period between signing and closing to poach customers.The customer would also be happy that he is involved in the integration and would be supportive of the acquisition.

Retention of Key Employees

  1. The deal announcement would also have an impact on the target employees.The acquirer needs to immediately reach out to employees and explain to them the key rationale of the proposed acquisition and how this will affect them.Employees would be concerned about their future role, whether their job is safe and whether their reporting structure would change.
  2. The IMO needs to have a precise communication strategy to address all the concerns of the employees.The employees needs to be reached out through webinars, townhall and also through 1 on 1 meetings.
  3. A detailed and consistent communication strategy will give a clarity to employees on their future.Once the employees feel safe and clear, they would support the acquirer in the vision of their end state target model.

Conclusion

  1. The period between signing and closing of deal is highly uncertain.This uncertainty would create anxiety and confusion within customers, employees and vendors which can be exploited by competitors by poaching them from the acquirer.
  2. The acquirer needs to proactively reach out to all the stakeholders to ensure them that there will no disruption in the normal business operations as a result of this acquisition.
  3. The acquirer’s integration planning needs to adhere to legal norms, as the regulatory terms prohibits sharing of confidential information between seller and buyer till the deal is approved and closed.Hence the acquirer needs to build the integration plan along with legal counsel to ensure that they do not breach any norms.
  4. A successful pre-close integration approach would go a long way in executing integration at Day1/Closing of the deal.

The integration activities that is need to be carried out at Day1 would be covered in tomorrow’s article.



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