How to Maximize Value from Your M&A Advisors
By Chris Charlton, UK Partner at Global PMI Partners
Mergers and acquisitions always heat up the management atmosphere. There is so much to do at once and so much at stake, it is crucial to proceed with a clear sense of priorities, and this calls for a carefully structured approach.
A merger or acquisition represents a highly charged political climate where people operate with very different personalized agendas. There are so many challenges (including sagging morale, low level of trust, and declining productivity), conflicting points of view (largely due to widespread uncertainty and culture clashes), and management distractions (most frequently centering around personal goals, politics and positioning). Unless you employ a carefully orchestrated project management approach, it is almost impossible to get through the integration without damaging the potential of the deal. The first value of an external advisor is to provide a clear and independent view, while championing structure through the inevitable complexity and competing priorities, no matter which phase of integration you are in.
Key Merger and Acquisition Phases
Whenever a company asks whether it wants to grow or shrink, buy or build, keep or sell, integrate or manage separately, it must always ask the questions: when and where. In making these choices, company managers should rely on their collective wisdom and experience, as well as ever-changing information.
Sizing Up Your Targets
There are many methods, tools and processes used to identify company strengths and weaknesses and in finding acquisition candidates that can supplement and/or complement your existing business. The detail of each tool is outside of the scope of this article, though it is worth knowing that they are all simply about getting managers to decide on the right company as a merger partner or acquisition target.
There are two fundamental processes required during the premerger phase. Firstly, the acquirer must engage a thorough due diligence review of the target to detect any legal, financial, and business risks that the buyer might inherit from the seller. Secondly, a strategic review in which the acquirer determines what synergies there are and how it will take advantage of them. Eventually, the acquirer (often in consultation with the acquired firm) will have to write up this review in the form of a post-merger integration plan.
Identifying synergy can often be a complex process and has often led to unrealistic expectations by management and their advisers. There are some basic questions, however, that you can ask to determine whether or not you are likely to be successful:
- Does the buyer bring something unique to the deal, so that competitive bids by other companies cannot push the purchase price too high?
- Is the merger or acquisition consistent with sound strategy with respect to diversification and other key issues?
- Has the acquirer attempted to make accurate forecasts of the seller’s business? For example, has the buyer assessed the seller’s technology?
- Can the acquirer handle an acquisition of the target’s size? What proportion of the acquisition can the acquirer fund without issuing new debt or equity?
- Is there good operating and market synergy between buyer and seller?
- Is the new parent committed to sharing capital, markets and technology with the acquired company?
- Do the buyer and seller have reasonably compatible cultures?
- Do the buyer and seller share a clear vision of the newly combined organisation, and is this vision based in reality?
- Will the acquirer strive for a rapid pace of integration in implementing the new company’s vision?
Financial vs. Strategic
There are two basic types of merger or acquisition: financial and strategic. Untapping the potential available through financial restructuring in a financial-type acquisition rarely requires significant integration. Indeed, it may actually be harmful to integrate. Typically, the acquired company is treated as a separate entity.
A strategic acquisition, however, where the value-creation opportunities of the deal lie in the synergies between the companies, requires a much greater degree of integration. Here the acquired company often adds value to the acquiring company by integrating with the buyer’s existing operations and often involves combinations of companies in the same or related industries, such as banking. Frequently, performance improvement is targeted through reducing costs (usually by reducing headcount) and / or increase revenues (usually by increasing the customer base).
Strategic acquisitions are generally more demanding on organizations, principally because the integration required to achieve the desired results have a far greater human resource requirement including management skill. And this is almost always at a time where resources, notably from operations and IT, are already stretched to the limit. Other key internal change initiatives, as well as business as usual, must have a major bearing on your integration strategy. But how do you that?
Strategic acquisitions can also include strategic alliances, where companies agree to share the risks and rewards of a specific project or set of projects. Alliances may be sealed through a contract such as a cooperation agreement to share a resource or funding, through cross-shareholdings, or through shared ownership of an incorporated joint venture. In some cases, alliances may function as a trial “merger” under controlled conditions, unless the reason for the alliance was a regulatory barrier to merging). Overall, however, the integration requirements are generally lower for alliances than full-blown mergers or acquisitions.
There are three basic types of strategic acquisition:
- Horizontal: buying a competitor
- Vertical: buying a current supplier or customer
- Diagonal: buying into a new market, typically a new product or service line that can be marketed through current distribution channels
The Post-Merger Challenge
A challenge that may arise is that each type of strategic merger or acquisition requires a different integration strategy, though there are common elements to all three. Experience helps enormously. This was the central finding of a Business Week study that compared experienced acquirers (an average of six or more deals per year) to relatively inexperienced acquirers (one to five deals per year). The experienced acquirers, which constituted 24% of the acquirer group, did much better than the inexperienced ones at rising above their industry peers in total return to shareholders during the three years following the deal. In the small, experienced group, 72% had returns above industry averages, compared to 55% for the large, inexperienced group.
While creating the strategy and preparing the plan is vitally important, many mergers still fail to deliver expected results due to ineffective integration planning and management. A review of leading studies from the 1980s to the present shows the many factors affecting post-merger performance. Researchers examined the impact of mergers on the long-run performance of companies (typically three years or more). The key to value, it seems from the research, lies in post-merger (or post acquisition) management. This is driven from a realistic, rather than overoptimistic, identification of positive and negative synergies in the pre-merger stage.
Skimping on the investment in the integration effort is often the root cause of poor integration management. Companies often invest heavily in due diligence, then get remarkably stingy in terms of their willingness to spend externally on the integration effort, instead relying solely on already stretched managers. The economics argue strongly in favor of allocating sufficient resources to support a sophisticated integration process.
Good integration management is characterized by discipline, focus, and dedicated resources. A project group should be formed to manage the transition.
This organization needs to be adequately resourced, with people’s responsibilities clearly defined. Key management challenges include:
- Meeting aggressive deadlines
- Achieving tough financial targets
- Restructuring quickly with limited information
- Merging a variety of systems applications and architectures
- Retaining key employees
- Maintaining adequate communication
- Managing relocations and consolidations
A large, complex merger takes time to integrate fully – as long as three years in some exceptional cases. However, it is generally recognized that integration basics should be managed quickly if the merger is to be successful; and many of these will be completed pre-close; and within the first 100 days post-close.
While integration is generally seen as a post-merger activity, it should not be forgotten that integration cannot be divorced from any of the other phases, including due diligence and agreement. There are important analyses and decisions being made that have an important impact on integration. Notably, the success of a deal is usually predicated on being able to carry out certain integration actions. Whether it is the consolidation of facilities in a particular region, the transfer of technologies needed to get a new product to market, or the enhancement of margins through increased purchasing power, these objectives need to be well documented from the outset. This helps create a common theme throughout all of the major phases, and that is an important step in preparing for the many management challenges sure to come.
A successful integration strategy is principally dependent upon the motivation for the merger or acquisition. Typical motives include:
- Operating Synergy: achieve economies of scale by buying a customer, supplier, or competitor
- Strategic Planning: accomplish strategic goals more quickly and successfully
- Inefficient management: realize a return on investment by buying a company with less efficient managers and making them more efficient or replacing them
- Market Power: increase market share
- Financial Synergy: achieve lower cost of capital by smoothing cashflow and increasing debt capacity; obtain a more favorable tax status
- Undervaluation: take advantage of a price that is low in comparison to past share prices and/or estimated future prices, or relative to the organic investment cost
You should understand these motives and exactly what the integration is setting out to achieve. While high-level expectations will already have been set in the premerger phase, it is at this stage that you can prepare the detailed plans for achieving all those synergies and most importantly account for the other major programs currently under way in your organization.
The integration will necessarily encompass all the resources, processes, systems and responsibilities of the integration effort, both domestically and globally, ensuring that the integration fits with the company’s overall strategy and culture. As with any major change program, it is important for the entire organization to be involved. The shared sense of purpose can help employees embrace rather than resist the inevitable changes.
Your integration strategy may encompass the integration of a wide range of factors including:
- Human resources
- Financial and tangible resources e.g. balance sheets
- Reputational and other intangible resources e.g. branding, mission statements
- Management systems – organization structure, controls
- Compensation plans
- Information Technology
- Corporate responsibilities
- Commitments to customers and suppliers
- Commitments to shareholders, bondholders, and lenders
- Commitments to employees
Hence the integration plan must outline exactly when and how the major resources, assets, processes, and commitments of the acquiring and acquired company will be combined in order to achieve the strategic goals of the newly combined company. Although one individual may be assigned to make sure that a plan gets created and respected, the best integration plans are ultimately created by groups. These groups should consist of senior managers and key employees from both companies, as well as external advisors including investment bankers, accountants, lawyers, and consultants.
It is useful to be aware of the value that different groups of advisers can bring to the table. Often the easiest way to assess the benefits and drawbacks of different groups of advisors is by looking at how they are paid.
If advisors are paid on a contingency basis (a common practice for investment bankers), they may be overly optimistic about how much synergy a deal contains and how easy it will be to achieve. Such advisors may have much valuable expertise to impart when it comes to financing, marketing, and structuring a transaction, but their enthusiasm should be taken with caution, especially with respect to the actual implementation process.
If advisors are paid on a sliding scale depending on the amount of time a transaction takes, whether or not it ever closes successfully (a common practice when it comes to lawyers, who typically bill by the hour). Such advisors might be tempted to take an overly pessimistic view about a transaction, finding liability exposure under every turned stone.
Consultants are generally immune to these pressures, though there are two common issues that may arise. Firstly, there may be a temptation to overload the company with consultants during the implementation process, which may not be the most cost-effective resourcing alternative; and secondly, consultants may be tempted to take over the decision-making role of managers, which is never good.
Ultimately, managers should use consultants and others to help them make decisions, not to make their decisions for them. In addition, consultants can be particularly useful when acting as an impartial group facilitator. A facilitator essentially acts as an independent third party who helps a group identify problems, find solutions, and make decisions. This is most useful in sensitive decision-making which may be subject to dominance or deadlock.
Key Considerations for Post-Merger or Integration Plans
- Are plans consistent with the intrinsic logic of the deal?
- Are the budgets clear, complete and assigned?
- Are there written plans to cover both the short-term and long-term?
- Do short- and long-term plans mesh?
- Has the planning process involved both senior managers and employees most affected by the plans?
- Do the plans take into account the operational and cultural realities of the two companies involved?
- What decisions are being based upon the plans?
- Are the plans supported by appropriate capable internal and/or external resources?
- Do the plans specify measures and milestones of progress?
- Who is accountable for achieving the plans? Establish clear, well-defined reporting relationships and lines of authority.
- Have the plans been distributed to all appropriate parties?
- Is there a program for communicating the plans internally and externally?
- Don’t underestimate the time and planning effort required in the merger process.
- Be aware of the limitations of your resources, particularly in the acquired company where motivation may decline.
- Communicate more than usual. Keep people informed as everyone is hungry for information. Remember that mergers and acquisitions cause the communication channel to grow longer, as more people are involved and the distance from decision centers increases
- Tell them how it is. Don’t promise that things will stay the same in either company.
Client Testimonial for a GPMIP Advisor who led the IMO through the Integration Phase:
He has been an excellent leader for our integration PMO. He is highly intelligent, fast paced and extremely insightful. Moreover, he has 2 particular skills which have helped our whole integration immensely. Firstly, he has an excellent manner, being extremely calm and controlled in some very pressurized situations – his unique ability to remove tension from a situation without affecting pace, was a major factor in the team’s success. Secondly, his immense experience enabled his team to run a tight process, without becoming slaves to it – he added that real pragmatic and commercial overlay that makes the difference between a governance approach either being ignored or depended upon.
Chris Charlton is the UK Partner for Global PMI Partners, an M&A integration consulting firm that helps mid-market companies around the world by delivering exceptional consistency, speed, and customized execution on the complex operational, technical and cultural issues that are so critical to M&A success.