Even when a transaction makes sense strategically and is valued appropriately, poor merger execution can prevent a company from achieving success. Here we’ll explore seven of the most significant risks of mergers and acquisitions, presenting the most common execution pitfalls and how your organization can avoid M&A pitfalls.
Learn how Liberty Advisor Group can help make your M&A activities more successful.
M&A Risk 1: PRESUMPTION
Too often, executives assume that once a deal is announced, leaders will simply know what they need to do next to integrate the acquired company successfully. The consequences of presuming and assuming have long been known: Such transactions are doomed for failure. The main culprit is that these resources are being asked to absorb integration work in addition to their daily responsibilities. When acquiring companies choose to forgo setting up a strong, centralized program management office to coordinate integration work across functions, the results are tragically predictable (and predictably tragic.) Due to competing priorities, integration-related activities often take a lower priority and milestones are frequently missed. This, in turn, extends the duration of integration work and delays the realization of deal value.
- Establish a clear governance structure with dedicated resources
- Assign a centralized group to manage the integration, provide a standardized process and set of tools, and serve as a coordination point across functions
- Identify single points of contact to be accountable for completing integration work for each function
- Establish a regular meeting cadence to manage function-specific integration plans and provide a mechanism for escalating and resolving issues
Don’t: Presume that integration work will get done on its own
Do: Establish clear governance processes and accountability for completing the integration
M&A Risk 2: CARELESSNESS
As teams get into the details of integration work, it’s easy to lose track of the underlying financial case for the transaction. Synergy targets developed during the diligence phase of the transaction can often be based on summary-level, or worse, untested assumptions. A common mistake has companies forgetting to assign individual synergy targets to functional areas, resulting in the estimated deal value going unfulfilled. Even when proper planning for synergy targets is performed, lack of diligent tracking of actual costs and benefits puts a company’s desired financial targets at risk.
- Use synergy projects as the organizing dimension for how integration activities are conducted
- Allocate integration resources based on the relative business case of synergy projects
- Assign individual synergy targets to each functional area, with the sum of the targets being 25%-50% higher than the publicly-announced target
- Utilize robust and consistent tools for estimating and tracking the financial impact of individual synergy projects
- Institute an executive review and approval of synergy projects as part of the overall integration management effort
- Marry the achievement of synergy targets to the incentive compensation of individual functional leaders
Don’t: Lose focus on the financial benefits of the deal
Do: Aggressively pursue and diligently track deal costs and benefits
M&A Risk 3: INSENSITIVITY
Cultural clashes are one of the biggest sources of failure for mergers and acquisitions. The underlying values, assumptions and artifacts that define the acquiring company’s culture can be extremely different from those of the target, even in transactions involving direct competitors in the same industry. Cultural differences are often the source of employee frustration and may create further challenges in maintaining daily operations required to run the business. Added to those stressors, acquiring companies often make the mistake of allowing “dual leadership” to persist instead of streamlining the organization and reporting structure. This lack of decisiveness puts both sets of employees in an uncomfortable purgatory that results in a less than effective staff and prolongs the uncertainty of the new entity.
- Take advantage of the diligence process to carefully assess cultural components: There are many more possible stumbling blocks than you might imagine. Review working hours, work-from-home policies, travel expectations, decision-making processes, employee demographics, incentive and compensation plans, organizational hierarchy, level of bureaucracy, cultural artifacts and other HR-related policies
- Determine the desired level of cultural integration when developing integration plans
- Clarify which aspects of the target’s culture will be maintained and what distinguishing parts of your culture must be adopted by them
- Identify and exit leaders and employees who conflict with the desired culture as soon as possible
Don’t: Underestimate the importance of cultural fit of the acquired company and employees
Do: Methodically assess and plan for cultural integration
M&A Risk 4: PROCRASTINATION
Integration teams are often too cautious to violate “gun-jumping” rules, which leads to a reluctance to share information and solidify post-close plans. While there are legitimate regulations preventing the appearance of acting in a coordinated fashion prior to closing the transaction (particularly for pricing), there is a significant amount of planning that can be achieved within the requirements of the regulations. Waiting until the transaction closes postpones key decisions about the future state operating model and often results in a longer and more arduous integration timeline.
- Rely on legal and compliance executives to clearly define what can and cannot be shared within the requirements of the “gun-jumping” rules
- Define specific escalation procedures for decisions that need executive approval and resolution versus those that can be made by functional or project leaders
- Empower the centralized integration office to conduct pre-close planning so that the combined company can execute those activities as quickly as possible after close
- Begin development of the future state operating model, organization structure, and business processes during the planning phase to prevent undesired legacy reporting structures from persisting post-close
- Seek out the “rising star” candidates within the middle management layer of the target company that can provide a substantive understanding of the target’s operations and could be the “flag-bearers” of the future state operating model of the combined company
Don’t: Be hindered by pre-close constraints
Do: Accelerate definition of the future operating model of the combined company
M&A Risk 5: GOSSIP
News that their company is being acquired is reason enough to cause anxiety for employees of the target company. The what-ifs spark rumors and speculation about outcomes that can spiral into further anxiety and cause major disruptions to daily operations. Furthermore, communications regarding integration activities can at times contain conflicting messages, which only adds to employee uneasiness and distraction.
- Limit the number of team members who have access to sensitive information
- Establish a detailed communications plan by stakeholder audience; a complete plan should address both internal and external stakeholders and identify key messages and delivery mechanisms
- Identify a centralized communications committee through which all broad communications – both verbal and written – are developed and delivered
- Implement governance processes such that the senior leadership and legal teams must review and approve communications before they are distributed
Don’t: Let rumors distract and derail the integration process
Do: Diligently control the message
M&A Risk 6: SHORTSIGHTEDNESS
Integration teams are so focused on getting to the transaction close that they mistakenly think of Day One as the finish line. In fact, while there is a significant amount of work that goes into a successful Day One, much of the integration work remains unfinished. For example, it is only after the transaction closes that the team can begin integrating IT applications, consolidating sourcing agreements, eliminating redundant employees, and introducing new products and services as a combined entity, to name but a few.
- Build long-term integration plans with as much detail as possible to anticipate post-close integration work
- Continue governance processes and meeting cadence to maintain focus on integration activities
- Refresh plans (as necessary) post-close to maintain momentum and reinvigorate team members
Don’t: Declare victory on Day One
Do: Allocate the necessary focus and attention for completing long-term integration
M&A Risk 7: NEGLIGENCE
Many assumptions are made during the diligence and integration planning phases with the limitations on information that can be shared. As more information is uncovered, some of these assumptions are bound to be invalidated. Too often, acquiring companies fall into the trap of not planning for contingencies. This may manifest itself in many ways, such as not anticipating the voluntary departure of key resources of the target or relying too much on the revenue projections of the target (i.e., not anticipating potential customer churn as a result of the deal).
- Identify key resources of the target and develop incentive plans for retention; succession plans should be developed to anticipate voluntary turnover of these resources
- Identify synergy targets 25%-50% higher than the publicly-announced target to account for the potential shortfall of top-line synergy projects. Top-line synergies are often subject to influencing factors outside of the company’s control (i.e., cross-sell synergies);
- Evaluate the churn risk of key customers pre- and post-close and adjust projections accordingly
Don’t: Ignore the inevitable hit on productivity that the integration will have on sales, operations and employees
Do: Plan for contingencies
AVOID THE MERGER INTEGRATION RISKS WITH LIBERTY
Liberty Advisor Group is a business and technology consulting firm that solves the most complex business issues and improves enterprise value. Our goal is to yield meaningful operating results and gain the information high ground. Merger integration is one of our core service offerings, having assisted clients across a number of industries with managing mergers and acquisitions. Our key differentiator is our ability to deploy an agile, experienced team rapidly. Core to our structure and approach as a firm, we have highly-experienced resources that serve as “force multipliers” for companies going through a merger or acquisition.
By quickly establishing a centralized integration management office, we implement proven tools and processes to prioritize projects and activities that result in financial savings for the company. We’re also able to assist in the content and substance of a number of key functional areas including: information technology, sourcing, operations, distribution, communications, and human resources. We’ll help you avoid common pitfalls and keep you focused on the greater good.
Hundreds of experts have conducted countless studies about the long-term success of mergers and acquisitions and most have led to a resoundingly similar conclusion: mergers and acquisitions have a 70-90% failure rate. Reasons for such a low rate of success include, but are not limited to: a lack of strategic fit to inaccurate valuation and overpayment to a failure to reach growth targets.
For more information or to find out how we can help your next M&A endeavor, contact us today.