1. Connect Across the Deal Lifecycle
“Is it safe to buy?” and “What does it take to integrate?” are often asked as two separate questions in M&A deals, separated by time. But due diligence and integration should not be viewed as separate components of the deal. While asset quality and synergy dynamics are key components of executing due diligence activities before a transaction takes place, integrating the two organisations is equally important, as integration is where the promise of the deal is fulfilled. Thus, “What does it take to integrate?” is a question that should be asked as part of the due diligence process, not after.
To answer the question, organisations need to have deep operational expertise on deck from the moment they consider the deal. The lead integrator should be part of the due diligence team to ensure integration efforts are taken into account when evaluating a target and to support a seamless handoff between deal teams. Moreover, the actual cost to integrate at the operational level may have a material impact on deal valuation as synergies and optimised value may be more challenging to capture when integration is slow or incomplete. Even when the transaction is such that the target is viewed as a “standalone” not to be integrated, we have seen many cases where plans change in the first 100 days, with organisations realising they would have benefited from a more comprehensive approach to due diligence, including the cost of possible integration, up front.
A key question deal sponsors should be asking themselves when analysing a target is not only “Are there synergies to be realised?” but “Are the synergies operational and realistic?” Are they broken down to a level that is meaningful, measurable and assignable? In deal terms, for synergies to be synergies, they must be able to be identified, captured and realised. Further, synergies should be identified at the operational level so they can be captured and subsequently realised on the P&L statement. Applying broad percentages (growth/cost synergies) or an “across the board” approach to synergies is simply asking for trouble and putting the execution team in a tough spot from an identification and delivery perspective. Applying broad percentages may be necessary in the early stages of the deal lifecycle; however, these percentages should be allocated at the operational level prior to the closing of the deal to ensure they can be captured and realised through the P&L in a timely manner. The costs to implement synergies at that level are often overlooked, but they can have significant impact on the evaluation efforts.
Lastly, successful transactions have great “handoffs” across all stages of the deal lifecycle. Progressing through the deal life cycle can be challenging enough; however, where transactions often get sideways is in the breakdown of handoffs from one team to another – in more severe cases there is no formal handoff across stages at all. As we discuss in more detail further in the paper, it is imperative to ensure that the team selecting a target (deal zone) is coordinating with the team that is closing the transaction (transaction zone) and both of these teams are aligned with the integration team (post-close zone). Having the appropriate timely conversations, comprehensive sharing of data and alignment around deal rationale and thesis is imperative to a deal achieving its maximum value. The earlier in the deal lifecycle the post-close team (or leader) is involved, the greater the probability of avoiding traditional post-close pitfalls. Leading practice is to have the post-close leader involved and entrenched from due diligence forward.
There are three specific “zones” across the transaction lifecycle:
- The Deal Zone: This is usually led and driven by corporate development with the focus on identifying and landing a deal.
- The Transaction Zone: The efforts in this zone are driven by the general counsel’s office with a focus on closing the transaction.
- The Post-Close Zone: Activities are driven by the integration/divestiture leader and are focused on either carving out part of the organisation or integrating the acquired entity, in some cases neither.
Each of these “zones” has its respective role in the transaction lifecycle; however, when treated as mutually exclusive zones, the success rate of a transaction decreases significantly.
2. Connect All Activities to Deal Rationale
Are your final destination (target operating model) and interim states aligned with the business case for the deal? Research indicates that nearly 75% of all acquisitions are unsuccessful in creating value, citing lack of clarity in the integration process and poor communication as some of the reasons.
When executing on a transaction, resources are usually inherently strained as key personnel try to successfully execute their day jobs while also being pulled in different directions to help support a pending or approved transaction. With competing priorities, it is imperative that an organisation does not lose sight of why it is executing the deal in the first place. Organisational leaders need to know where the organisation is headed day in and day out with clear lines of communication to key stakeholders. Leading practice is to have defined interim and final destinations, which will help guide daily activities and ensure that the team is charging and climbing the right hill and effectively prioritising activities as they arise. The most successful transactions are executed by organisations that can distill their end game in clear and digestible terms that can be embraced across the whole organisation. Regardless of the size of the transaction, it is imperative that a clear path to the next 30, 60 and 90 days is defined, socialised and communicated within, at the very least, the leadership levels of the organisation.
Are all the “programme activities” advancing your business rationale? This is the question that should be consistently asked as your organisation executes the transaction lifecycle. When a transaction is contemplated and subsequently announced there is excitement and a flurry of activity that gets kicked off in the organisation. Unfortunately, much of this activity is creating more churn than value. We often see actions being taken “in anticipation” of what might be needed rather than through a deliberate well-thought-out process that identifies the critical path activities necessary for a successful transaction. As we mentioned above, having clear destinations for the organisation is imperative to ensure all programme activities are advancing the business rationale for the deal. Leading practice is to execute transaction readiness sessions with senior leaders to establish the destination for the organisation and then distill that down to the functional and divisional levels. For instance, what does the enterprise’s interim and final destinations mean to finance, accounting, legal, IT, marketing, product, supply chain, manufacturing? Companies completing successful transactions take practical steps to ensure that the vision for the transaction is operational across all customer- and non-customer-facing operations.
Alignment of mindset. A recent Mergermarket survey indicated that 70% of respondents identified a lack of compatibility among management teams and 30% identified a cultural mismatch as key factors leading to deal failure. Combining cultures is never “one and done”; it requires effort over a sustained period of time. Creating a “burning platform” for change is not always a bad thing. We have found that many organisations have been successful in utilising both the burning platform approach and the destination-setting approach to align mindsets around a critical path to close and the 100 days post-close.
One size does not fit all when it comes to dealing with human capital and cultural dynamics. Leading practice is to execute a change management working session that not only aligns goals and objectives of various parts of the organisation but also assesses the impact of the changes on people, processes, systems and the culture of the organisation.
Having the right tool set and know-how is critical: Successful organisations have been able to turn high-performing cultures into valuable assets by paying close attention to the elements above. While not a measurable asset on the balance sheet, a strong culture can be the bedrock of any organisation and the difference between a successful and less successful transaction.
3. Move Quickly Through Change
Speed is critical to a successful integration. Once a deal is announced, not only excitement but fear, insecurity and, in some cases, panic may set in within different parts of the organisation. Working through business planning as quickly as possible (without compromising quality) will help reduce the uncertainty following the announcement of a transaction. Leading practice indicates it is important to quickly put in place “synergy sponsors” in key areas of the business to work alongside “change champions” for different parts of the organisation. Getting ahead of the change curve is imperative, and the most successful transactions are those that make changes deliberately and swiftly upon closing of a transaction. Failing transactions are often marked by paralysis and “deal fatigue,” which set in when a deal is announced but change comes in drips and drabs. To avoid this, organisations want to ensure that when the transaction closes, they have their key resources in place that can execute their 100-day plans swiftly and decisively. To ensure this is the case, some of the most successful transactions employ “transaction readiness” tools focused on change to ensure the right people, processes and systems are in place to swiftly execute short-term and long-term plans. As outlined the section above, it is critical that the plans being executed are aligned with the deal rationale and key activities are limited to those that are advancing the deal vision and are accretive to the business.