Coming up with the right Re-Org structure in M&A deal

Re-org structure in M&A

In this blog, we will be discussing on the re-org structure in M&A and selecting the right structure post acquisition to capture the maximum value from the deal.
A reorg post acquisition is done to align the people, processes and systems of the combined entity based on the strategic objectives of the deal.
Majority of the reorgs that are undertaken post acquisition fail because of difference in cultures of both the entities, incompetence of integration manager and incorrect priorization of activities to be integrated. In some cases, a wrong target is selected as an acquisition candidate.In many cases, the new structure created post acquisition actually destroys the deal value instead of capturing value.
Successful acquirers are very good at selecting the right organization structure and operating model to capture the desired synergies from the acquisition.
While designing the reorg, a major part of the planning to design a right structure is needed to be done before the deal closure sometimes as early as during the due diligence phase.
Post the deal closure, these plans needs to be implemented with the help of Integration office and the relevant functional leads in order to achieve the synergies targets.
Detailed targets to be achieved along with a P&L statement

  1. During the diligence phase, the acquirer should have a detailed understanding of how the target would help it capture additional synergies.These synergies can be cost, revenues and tax synergies.The acquirer needs to translate these synergies to be realized to the cash flows.The acquirer needs to come up with the timing and amount of cashflows that will be realized post deal closure.
  2. The acquirer also needs to look at the total costs spent to achieve the synergies targets.These costs does not include only the employees and consultants costs but also the cost of change.As the reorg disrupts the current business forcing a change, there could be a risk of key employees leaving the organisation while not able to cope up with the change.
  3. The detailed analysis of benefits and costs approach would help the acquirer to come up with the right reorg structure that would help in maximizing the synergies cashflows and minimizing the risks associated with change that comes with the reorganization.

Re-org structure in M&A step 1 – Focus on the strength and the weakness of the target

  1. The acquirer would do a detailed due diligence on the target company.Some of these due diligence methods would be holding discussions with the target employees, gather feedback on the target company from internet, social networking sites like LinkedIn and Glassdoor and also in looking at the target websites.
  2. This analysis would give a fair assessment to the acquirer on the strength and weakness of the target company.These findings will be documented in the due diligence report.
  3. The acquirer when designing the reorgs for combined entity needs to take into account the strength and weaknesses to finalize on the correct reorg structure. This would help in leveraging strengths by streamlining the process and allocating resources.
  4. Post deal closure, the integration team needs to validate the hypotheses of the acquirer done during pre-deal phase and refine the reorg structure based on any additional information.

Focus on the processes

  1. The reorg structure does not focus only on the reporting structure and hierarchy of the combined entity.The structure is required to integrate the businesses of the combined entities, streamline corporate activities and align people on deal outcomes.
  2. The target and acquirer will be using their own processes for each functions.The acquirer should not blindly look to replicate its processes on target but need to understand the current management, business processes of the target along with the systems that support the processes and the underlying culture.It would be catastrophic for the acquirer to expect the target employees follow a completely different process than what they are used to follow.This will result in anguish and frustration among target employees.
  3. The acquirer needs to do a gap analysis between its processes with that of the target and would need to only change those processes which are extremely critical to achieving synergies.The acquirer should provide complete training to the target on the revised process so that it is easy for the target employees to adopt the process fast.
  4. The acquirer should also be flexible to change it’s own processes which are inefficient and can either replace those with the target process or adopt the industry’s best practices for these processes.

Re-org structure in M&A step 2 – Implementing the Integration

  1. Once the acquirer has chosen the right reorg structure, operating model and assigning the functional leads to implement the synergies by providing synergies targets and timeframe to achieve the end state, the relevant teams would start to implement the plan.
  2. Before doing this, the acquirer should validate its integration plan and approach against the information available on the target post deal closure.In M&A, there can be changes in the decision taken from the data during due diligence and the detailed data available to the acquirer post deal closure.
  3. The acquirer should be flexible to refine the hypothesis based on the additional information discoverer post deal closure, before starting the implementation.This will help in reducing efforts and costs.

Tracking the Integration Results

  1. The acquirer should test the effectiveness of the reorg approach based on the results achieved from the integration.
  2. The acquirer should wait for a year to track the effectiveness so that it gives enough time for the acquirers to test the strength and weakness of the approach followed.
  3. By tracking the actual results against the synergies targets, the acquirer can identify the areas of weakness and can refine these processes in order to generate results.

Conclusion

  1. A Reorg structure in M&A  is important to capture the value envisioned during the deal. A right reorg structure is always aligned to the value drivers and objectives of the deal.
  2. Reorgs fail when they don’t cater to the cultural differences between the acquirer and target by failing to engage the target employees.In some cases, an ineffective leadership of the integration team in not able to capture the required synergies also contributes to the failure.


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