Success in M&A deal

In this blog, we shall discuss why soft assets – People and Culture are critical to the success of a M&A deal.Historically, more importance in a M&A deal is given to issues like Finance, IT systems and Operations and lesser importance was focused on the softer side of the transaction – People and Culture.
The deal team always focus on the tangible aspects of the transaction – Access to new markets, Develop new products and accelerate customer revenues but end up ignoring the intangible aspects of the deal.This can have significant ramifications on the success of the deal.

Cultural aspects in M&A deal

• M&A studies historically have shared two important findings which are a)Culture matters in M&A and b)Acquirers have been traditionally bad at managing cultural differences.
• This finding makes sense because during the due diligence in M&A, acquirers rank culture as their lowest priority. Hence the reason that acquirers are generally very poor in managing people or cultural issues post M&A.
• Acquirers generally prioritize hard assets over soft assets.Integrating hard assets are generally consistent across deals but integrating soft assets is specific to the deal and its rationale.
• According to Mercer report in 2018, 43% of M&A deals were delayed or terminated due to cultural issues and also negatively impacted the purchase prices.In addition 67% deals experienced delayed synergies realization due to the negativities surrounding cultural issues.
• The major reason to this issue is that the leaders of the acquired company rarely walk the talk.The target and its employees want to see actions in acquirer’s decision making process, communication style and transparency.When this does not happen, then there is loss of productivity, flight of talent and customer disruption. As a consequence, majority of transactions fail to achieve their financial targets.
• As human capital is critical to the success of any acquisition, the deal success lies in winning hearts and minds of all the employees. Hence people who are critical to the success of the post merger integration needs to be identified and embraced early, given insights into the future and what their roles in future would be.
• Identifying and prioritizing the people and culture issues earlier in the transaction would help the deal makers avoid issues in Post merger integration and maximize value.

Building Blocks to the M&A deal

• Acquirers should have a clear understanding of the relation between people, culture and business outcomes.Hence the combined entity needs to have building blocks in place to ensure no value is lost due to poor soft assets integration.
• In case of a Digital Transformation deal, a poor organizational culture can kill the M&A deal.In recent M&A deals, acquirers find it easier to acquire new technology than changing culture, people and processes.

Importance of Change Management in M&A deal

Change management is extremely critical and there are 10 ways how acquirers can help employees embrace change and take advantage of opportunities in the M&A transaction.
These are:

1. Expand Due Diligence
2. Identify Culture change owners
3. Develop a robust communication plan
4. Provide clarity to the people seeking information
5. Demonstrate leadership at all levels
6. Transparency and honesty in communication
7. Focus on other stakeholders, importantly the customers
8. Convey tough decisions in timely manner
9. Execute all the initiatives as planned
10. Manage resistance and devise steps to diffuse it

Employee engagement is critical because engaged employees remain positive, energised, motivated and resilient.As a result, they shall display their best work which would help the merged organization realize their financial benefits.

Where acquirers go wrong in M&A deal

• Too much acquirers go wrong when they keep the target company seperate post acquisition and then figuring out how to integrate.
• This approach can improve the operating efficiency but fails to provide the accretive synergies expected.
• The integration team need to have a robust framework on how to onboard and off board the target employees. This shall help them to retain the key employees.
• Though more acquirers do focus on culture when evaluating an acquisition, we do not see diligence from external consultants on culture like how we see for financial and legal due diligence.

Integration and Alignment in M&A deal

• Most companies are not able to achieve their expected synergies and the major cause of this is attributed to issues in Integration.In addition half of the employees in the target company exit within 1 year and almost all founders leave the company within 3 years.
• To be successful, a proper integration project plan should be in place that includes the detailed roadmap of how the target company will be integrated to achieve the synergies targets.The plan should take into account the integration of tangible and intangible assets in comparable measure.It should have the approval of the target leadership team so that it can be executed smoothly.
• Once the leadership of both the entities are in agreement, then the integration plan can be shared with key employees whose consent is necessary for the success of the deal.If this is not done or if the key employees do not align themselves culturally or financially, then there is every chance that they will depart from the organization.
• The integration and cultural alignment needs to start at the top and be followed for all levels down the organization.

Key components in M&A deal playbook

A M&A playbook should include the soft and hard assets in order to achieve the deal drivers.
The following activities should be part of the M&A playbook.

1. Integration should be included as a part of the Due Diligence activity
2. Priortise deal value drivers in Integration planning
3. Establish an Integration team structure that focus on deal value drivers and measures success.
4. Address Day1 requirements in Soft assets – Employee experience and communications along with hard assets – Financial Reporting and Compliance

For a technology company, culture is a core component of their brand and their ability to attract the best talent.Hence retention of soft assets is very important because the realization of target synergies is dependent on them.
Many companies focus on reducing operating costs post transaction which can lead to the loss of functional experts who are essential to execute the business plan post merger.This short sighted move lessens management credibility and impact the revenues and costs synergies targets identified as part of the deal rationale.

Conclusion

• Integrating the people and culture aspects of the deal determines the long term success of a M&A deal and key to maximize shareholder value.
• Deal makers can mitigate M&A risk and drive deal value by putting culture at the centre of business transformation.
• Organizational values are more important for employees joining the workplace and even rank higher than financial rewards for many people when deciding to apply for a position in the company.