Mergers and Acquisitions Integration in Transformational deals

Mergers and Acquisitions integration in Transformational deal

In this blog, we shall discuss on the successful mergers and acquisitions integration approach required when acquirers buy companies that are outside their core business competency.
Digital disruption has changed the M&A strategy, as acquirers are taking more risks by acquiring companies with different operating and business models.The success of these transformational deals depends on the effective integration and how acquirers are able to foster a common culture and commitment among the target and buyer to achieve the deal objectives.
Previously, early integration planning, rapid execution and commitment to Integration goals improve the odds of M&A success.This no longer is enough now as Transformational deals are more complex which requires effective leadership coordination in all stages of Integration.

Transformation Deals face the following Integration challenges post acquisition.


Low Strategic Success vs High Operating and Financial success in mergers and acquisitions integration

The reason companies look at transformational deals is because of the following:

  • Most of the matured industries are already consolidated due to high M&A activity post recession where high cash reserves followed by favorable economic conditions allowed firms to carry more M&A.
  • Digital has changed the existing business models and have redefined the way customers communicate, travel and get entertainment.So more companies use M&A as a tool to acquire new capabilities in order to stay relevant.

This change in the M&A approach by acquirers require that they achieve the strategic goals along with Financial and Operational goals post acquisition.

Studies from recent M&A study indicates that the acquirers are not able to achieve the strategic goals during integration, but taking advantage of integration checklists and best practices, acquirers are able to achieve their financial and Operational goals.

This is because acquirers still face challenges in aligning different operating models and resolving cultural differences between acquirer and Target firm.

Success in GTM Integration is difficult

  • In cases of Transformational deals, acquirers look at M&A to gain access to new markets, new customers, products and services.
  • The intent is to sell additional services/capabilities acquired to existing customers and selling acquirer services to target customers.This objective is difficult to achieve as acquirers are not able to gain detailed knowledge on the target services in order to sell effectively.
  • Hence deal objectives like expanding market share, strengthen presence in new markets and add new customers are difficult to achieve in Transformational deals.
  • Success in GTM integration is dependent on the effective senior leadership coordination and in identifying which functions of target should be integrated/allowed to operate independently so that target uniqueness/differentiation is preserved.

Effective capture of synergies improves cash-flows and profitability in mergers and acquisitions integration

More M&A transactions are able to achieve their synergies targets because:

  • The integration team is involved earlier in the deal phase which helps them to understand the deal objectives and do integration planning.
  • Acquirers follow the best practices in Integration which enable them to achieve the synergies targets.
  • Leadership compensation is tied to achieving the Synergies targets. Hence more leadership commitment is observed.
  • Speed of Integration has increased with acquirers taking full advantage of the time between deal announcement and closure by building integration plans along with prioritizing functions that needs to be integrated quickly to achieve quick wins.
  • Leadership announcements are made soon after acquisition. This helps the employees to follow their leaders during integration
  • Following best practices in Communication planning by the acquirer gives the customers and employees high clarity on the deal objectives along with their roles and responsibilities.

Transformational deals are focused on achieving Cost and Revenue synergies.Assigning Synergies targets to the respective functional/ business leads and by making them accountable has increased the odds of achieving synergies targets.

Involving mergers and acquisitions integration earlier

  • In case of Transformational deals, acquirers need to involve their Integration team much earlier in the deal cycle, as early as in the Target screening phase to finalize on the Integration Strategy and Target Operating Model.
  • In order to achieve strategic success in Transformational deals, acquirers need to plan for integration and have an approach how target will be integrated with the acquirer.This needs to happen even before the Letter of Intent stage.
  • Involving the Integration team earlier would increase the odds of achieving Strategic, Financial and Operational synergies post acquisition.This team should be tasked with right capabilities and skill-sets to carry out an effective integration.

Challenges in mergers and acquisitions integration

  • As more companies engage in cross border deals, acquirers face difficulties in integrating target legal entities and their Geo functions.This involves substantial planning and involvement of resources in co-coordinating the integration.
  • Process and Systems Integration followed by people integration are the other major challenges.This is due to the different cultures and operating models of the target/acquirer.
  • Hence a well managed Integration Management Office (IMO) is essential to implement right activities at right time.The IMO needs to mobilize the cross functional leads and effectively coordinate with each other to manage inter-dependencies and enable the transition to end state operating models.

Challenges in people mergers and acquisitions integration

  • Transformational deals often involve acquiring target companies for employees and management skill sets.With difference in business models, culture and the way of working, Acquirers need to have a proper change management system in place along with effective communication strategy to retain talented employees.
  • The IMO needs to give importance to cultural differences and integrate only those functions which add value to the deal.
  • Some of the common issues that Target employees face after deal is closed is lack of clarity in their future role and how they are aligned to the long term vision of the combined entity.Hence the Integration team needs to have a right employment engagement process in place along with right incentives/rewards to retain the talented employees and prevent attrition.
  • Training needs to be provided to the Target employees for processes which are different from that of acquirer and will be integrated to the acquirer process

Importance of mergers and acquisitions integration leadership

Companies pursuing transformational deals look at achieving their strategic objectives to get ahead of the competition.Leadership involvement, especially that of C-Level suite is critical to achieve this.
In many deals, the momentum decline after 6 months post closing.This is because:

  • The leadership priorities change with changes in markets and business trends.They are no longer fully focused on Integration success.
  • Many companies either do not have budgets allocated for Integration or have limited budgets.
  • The integration processes are not well defined for long term

As M&A deals come with huge risks and rewards, executive and board compensation are linked to the achievement of synergies targets.With C-Level executives like CFO and CIO having their incentives linked to the success of the deal, Financial and IT synergies are achieved much sooner.
It is also important that the deals have full time executive sponsors who are committed to achieve the deal objectives and synergies targets.

Tracking deal performance in mergers and acquisitions integration

  • Tracking synergies and reporting on the Synergies number is critical to measure the Integration success.With executive compensation linked to the success of the Integration goals, acquirers are reporting higher success on achieving their deal objectives.
  • To improve deal success, one would require selecting the right target, valuing the target at the right price, identifying synergies targets during the due diligence and involving the Integration team early to plan on achieving the integration targets.
  • The Integration objectives needs to aligned to the value drivers of the deal and would require tasking right resources and capital to achieve the objectives

Conclusion

  1. Acquirers require mergers and acquisitions integration to acquire companies to transform their business and operating models.Hence it is necessary to have a full time Integration Leader to co-ordinate among different functions and departments to achieve the deal objectives.
  2. The Integration Leader needs to ensure the following:
    • Is the Integration Strategy aligned with the deal strategy?
    • Is the Integration team involved earlier in the deal?
    • Does the Integration team completely understand the target capabilities and the deal rationale?
    • Are Functional leaders in Sales, HR and IT mobilized to drive the integration?
    • Are there proper incentives mechanisms in place to achieve deal & integration goals?


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