The objective of M&A is to increase the value of a business. That value can be measured in terms of increased cash flow or a reduced risk profile. When the business press covers a splashy deal, you might hear the buyer’s CEO claim that when the deal closed it “created value” for his or her shareholders, implying that they’ve enjoyed an immediate windfall. That claim is a verbal sleight of hand.
Rarely do shareholders enjoy an immediate and tangible uplift in value when the company they own acquires another. When a public corporation announces an acquisition, it’s more common for the buyer’s stock price to decrease than to increase. Analysts might argue that the net present value (NPV) of the buyer’s future cash flows has stepped up. However, NPV is just a value concept dependent on the projected cash flows being realized (or the combined business sold before future performance assumptions turned out to be flawed!)
The problem is that at the time of the deal, risks associated with future performance are often underestimated or overlooked completely. Whether or not the performance is influenced positively or negatively depends on various variables. Factors influencing performance positively include leadership decisions and investments, which drive increased cash flow. Factors that negatively influence performance include a deterioration in market conditions or the loss of key personnel that reduce (perhaps eliminate) cash flow in the acquired business.
For this reason, the months and years following the transaction’s close are critical. The investment has been made; there’s no renegotiating the purchase price or deal structure. It is in the hands of the buyer stabilize, sustain and hopefully grow the acquired business during the period of post-merger integration period.
What is post-merger integration ?
Post-merger integration (PMI) is the strategic process of combining and aligning the operations, resources, and cultures of two or more organizations that have merged or been acquired. The objectives are (or should be) to achieve the increase in cash flow and/or reduction in risk of the combined entity. Those benefits can be realized, for example, purely by the addition of the target’s cash flow. They can be also enhanced via the attainment of synergies with the buyer, such as a eliminating expenses that are duplicated between the buyer and target.
PMI takes somewhere between six months and three years to complete, depending on the size and complexity of the acquired business and the level of integration the buyer seeks. The depth of integration sought will be on a spectrum. Minimal integration, or ‘light touch,’ might be proposed when the acquired business has a different service/product offering and is in a location far away from the buyer’s core business. At the other end of the spectrum, a full integration might be an option for a buyer wanting to combine the acquired business with its existing business(es) so that the two are indistinguishable at the end of the process.
It is important to recognize that integration often demands change within the buyer’s core organization, not just for the target, with the two companies coalescing around a new, collective operating model.
Integration is a project that requires planning, focus, and discipline to succeed; it will demand significant resources, as do other complex change projects (e.g., an ERP roll-out or a reorganization). Furthermore, it is good practice to establish an integration management office (IMO) dedicated to implementing the integration. The IMO team is typically different from the team leading the deal. Ideally, personnel will overlap to ensure that the key findings from the deal phase are translated into the integration.
While every PMI project is unique, just as every acquisition is unique, the integration process shares some commonalities. Let’s take the acquisition of a private company, for example. Where the buyer intends to integrate the target fully, the key phases of the acquisition are: initial planning, immediate post-close (a stabilization period), the initial integration phase, a secondary integration phase, and the closeout/transition to business as usual. Initial planning should begin before closing, and the buyer should, very early in the deal process, define its overall strategy for combining the target business with its existing business.
…and why should you care about PMI?
While mergers and acquisitions present opportunities for growth, expansion, and synergy, neglecting the crucial post-merger integration phase can have calamitous consequences. One of the primary reasons why a buyer should ardently care about this process is the potential disruption that poorly managed integration can cause, particularly to employees and customers.
First and foremost, employees on both sides are often subjected to significant uncertainties during the integration process. Changes in job roles, structures, and reporting lines can create anxiety and apprehension.
This disruption can result in decreased morale, increased turnover, and a loss of key talent, hindering continuing operations and innovation within the newly formed organization. Moreover, customers may experience confusion, inconsistency, or dissatisfaction due to changes in product offerings, service quality, or communication channels, potentially leading to customer attrition and a decline in revenue.
Integration, if done right, is not cheap. An EY survey of integration costs found that the median cost across different sectors ranged from 4-10% of the target’s annual revenue, making it a sum that the buyer team will want to budget and manage carefully.
Distraction from core business activities threatens productivity and profitability. If not managed effectively, these disruptions can lead to missed financial targets, eroded shareholder value, and a failure to realize the expected synergies and benefits of the merger. Therefore, buyers should prioritize the critical post-merger integration phase in their M&A strategy to mitigate these risks and ensure a successful transition to a unified, efficient, and value-enhancing organization.
PMI Success Factors
The good news is that the ingredients for a successful integration are almost all within the buyer’s grasp. Consider, for example, the following factors that have been shown to be determinative of integration success (and failure):
- Value and Risk Assessment: Begin by identifying the top most crucial value drivers and risk factors to steer the integration process effectively and ensure clarity on unlocking value.
- Deal Nature Deliberation: Tailor the integration strategy to match the nature of the deal, whether it focuses on cost savings (scale) or revenue growth (scope), and make integration decisions accordingly.
- People-Centric Planning: Prioritize building the new organization around the envisioned future and promptly appoint enthusiastic leaders, and key personnel promptly to minimize talent loss and anxiety among employees.
- Timely Preparation: Commence integration planning even before the deal announcement and ensure that all necessary groundwork is laid before closing to expedite the integration.
- Streamlined Decision-Making: Implement an efficient decision-making process to avoid excessive bureaucracy, possibly with a Decision Officer overseeing the integration for timely, well-informed decisions.
- Leadership Excellence: Select a capable leader with the authority to make decisions, coordinate teams, and set the pace for the integration, ideally with a strong strategic background.
- Continuous Evaluation: Post-integration, conduct thorough assessments to learn from the process, identifying successful aspects and areas for improvement, especially crucial for frequent acquirers.
- Cultural Alignment: Address the challenge of integrating different cultures by defining and adopting the desired culture early on, with leadership actively guiding its adoption.
- Stakeholder Engagement: Engage and reassure all stakeholders, including employees, about their role and the positive aspects of the deal, reducing concerns and anxieties.
- Strategic Focus: Maintain focus on the core business and customer needs throughout the integration, with senior leadership providing direction and closely monitoring progress to ensure alignment with the overarching strategy.
Need help with a PMI Project?
CNP can help plan and execute post-merger integration projects. With the help of our friends at Intista, we can also make sure that your integration team is trained in integration success and has access to world-class PMI tools.
Concept and Perspective 