Why Day1 Integration is the riskiest day in the entire Integration process of a M&A deal?

Introduction

  1. This post is continuation of my earlier post where I had shared on the key integration activities to done by the acquirer when the deal is announced but not yet closed.Link to article is provided.
  2. Now after successfully executing the activities, the acquirer is all set to close the deal subjected to fulfillment of all closing conditions.
  3. For deals involving small private companies/Technology IP acquisitions, signing and closing can happen at same time as no regulatory approvals/change of control clauses consent is required for the closing of the deal.Even in those cases, the acquirer can delay the closing so that it gets time to be ready with integration plans.
  4. Day 1 is the date when the acquirer become the legal owner of the target business.At day 1, the acquirer has access to all confidential information of the target.It is recommended that Operation Day1 and Legal Day1 are held separately by the acquirer.

Legal Day1 vs Operation Day1

  1. At legal day 1, the ownership is exchanged with the deal consideration.This is the day when the SPA is executed.
  2. In most of the cases in Legal Day1, there shall be inevitable delays due to paper work issues or delay in funding.
  3. Hence it is advisable to have Operation Day1 on a different day as this is the day where the acquirer meets the target employees formally to communicate the rationale behind the proposed acquisition and how will this positively affect all the stakeholders.

Day1 Integration Readiness

Acquirer needs to plan for the Day1 and first two weeks post closing.
The following things should happen in two weeks following Day1

  1. Offer letters provided to selected Target employees along with role, designation and compensation
  2. Benefits allowance like Insurance and Pension better are shared
  3. Creation of mail id and access to emails and intranet systems of buyer to target employees
  4. Identity cards, stationary items and calendar access is provided
  5. Dedicated mentor from buyer organization as point of contact to target employees to resolve concerns related to onboarding, access to systems and approvals for travel and other expenses are provided.
  6. In addition, having a buddy designated for group of employees to support them in getting settled into the new organization is extremely helpful.

First Impression is the best impression

  1. Day1 is when all the employees of the target company gets in official contact with buyer organization.Hence it is extremely important that the acquirer creates a positive experience for the target employees so that they are motivated and confident.As the employees are already anxious due to the disruption caused by the acquisition, any bad experience on Day1 would make the employees even more anxious and confused.
  2. It is also imperative that the acquirer senior leadership is present to welcome the target team to the organization. The communication that is needed to be shared by the CEO/Senior leadership to target employees needs to be prepared in advance by the Corporate communications along with Integration team.
  3. The communication strategy needs to be drafted in advance and customized for each stakeholders like Customers, Vendors and Employees.The messaging should be consistent and communicate the benefits of the proposed acquisition, the deal rationale and what would be the target operating model of the combined entity.The communication needs to be transparent and honest so that all the stakeholders have clarity on the deal rationale, their role and what is expected of them in future.
  4. The Integration team also needs to share their plan of the future operating model to all the stakeholders in order to get a buy in from them.After sharing the plan, this will be executed seamlessly over the next 100 days with key goals for each milestones.

Degree of Integration between the buyer and Target

  1. By Day1, the acquirer would have decided how they intended to integrate the target with its business.The degree of integration needs to be tailored specific to the deal objectives.
  2. For instance, in a tuck in acquisition, the target is completely integrated with the buyer.The target systems are no longer in use and all the target data is migrated to the acquirer systems.

Speed of Integration

  1. Speed is most critical in Integration as any delay would lead to confusion and uncertainty. Synergies needs to be captured quickly and hence timeline for integration is important along with the synergy capture so that the Integration team can prioritize areas which needs to be integrated first to capture maximum value.
  2. All the target functions are not integrated at one time.Generally backoffice functions like HR, IT/Business systems and Finance is integrated first followed by sales force integration.
  3. The acquirer would not like to integrate those functions which can disrupt the business operations.For instance, if the cultural difference between the target and acquirer is high, then it is prudent to allow the target to function independently to preserve their culture.
  4. Even while doing sales integration, the integration team should only identify joint customer accounts where the target and buyer have presence.The distinct accounts are allowed to be run by the existing sales force and no impact should be there in terms of sales compensation, targets and incentives for those accounts.

Conclusion

  1. Day1 is more of symbolism for the acquirer to communicate the rationale and how the deal would positively impact all the stakeholders.The messaging should be consistent, transparent and honest so that Target employees understands clearly what is expected from them.
  2. Target employees should be welcomed by the acquirer leadership team.This should be followed by townhall meetings, webinar, team meetings and 1 on 1 meetings so that the target employees have a clarity of how the deal will change the current operating model, any change in their role and reporting.
  3. All the basic issues for target employees needs to be immediately addressed in Day1 or two weeks following Day1.This shall include concerns around compensation, bonuses, benefits on Insurance and pension.
  4. The target employees should have access to buyer systems like timesheet, intranet, expenses reimbursement systems etc.
  5. The buyer should integrate all the backoffice systems like HR, Compensation, Finance, Sales operations, Vendors management systems so that buyer can start to track key information of target like Revenues, Bookings, General Ledger and Employee details.
  6. If Day1 is successful, then there is high chance for acquirer to be successful in following initiatives including implementing the target operating model in the next 100 days.The target employees will feel better about the new combined organization and will be keen to support the key objectives behind the deal.
  7. The 100 day plan for implementing the end state operating model to capture synergies targets post Day1 would be covered in the post tomorrow.


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