The changing face of post-merger integration: How embracing sustainability can improve the odds of a successful M&A integration program.

By Krish Buchet, Associate Partner France at Global PMI Partners

Krish Buchet, associate partner at Global PMI Partners, a post-merger integration consulting firm, addresses a key issue in the mergers and acquisitions industry: Why do mergers fail? In address the issue of failed merger integrations, Buchet outlines 5 key factors to post-merger integration success in 2021.

We are all familiar with the eye wateringly poor performance statistics of success in M&A ranging anywhere from a 50% to as high as a 90% failure rate, depending on the study that is referenced. Though there is no real consensus on the actual figure, the common wisdom is that M&A is high–risk and the odds of success are not certain. Yet year after year, the number of transactions and the deal values continue to grow. The reasons for failure are manifold –– the high degree of complexity during the integration process being one of them. As companies shift away from shareholder value toward a stakeholder–centric approach, the natural conclusion is that with increasing complexity the risks will increase, narrowing the odds of success.  

Stakeholder vs shareholder

A stakeholdercentric approach means weighing the impact of all decisions on stakeholders other than shareholders, such as employees, customers, suppliers, the community at large and the environment. The rise in awareness of stakeholder management has consequently given rise to the adoption and development of long–term environmental, social and governance (ESG) strategies and the advent of robust ESG metrics in many companies. On the face of it, it may seem that the task of post-merger integration is about to become ever more complex. However counterintuitive it might seem, I would like to put forward the idea that this “additional spanner in the works” could be flipped into a substantial advantage, one that if leveraged appropriately could bring clarity of purpose and a unified drive toward a common goal for two entities that have just been thrown together. This indeed could be the key to resolving many of the human risks we often run into during the integration process, thus improving the odds of success. Afterall, human risks are often cited as being one of the most unpredictable, underestimated and thus poorly managed risks simply because they are difficult to identify, quantify and mitigate. 

“human risks are often cited as being one of the most unpredictable, underestimated and thus poorly managed risks”

What do we mean by human risks?

1.    Flight risk of key talent

One of the biggest risks in post-merger integration is the flight risk of key talent. There could be many reasons for it—lack of cultural/organisational fit, loss of motivation, lack of direction etc. In situations such as this we need a compelling vision capable of rallying together the hearts and souls of the employees – a higher purpose, the “raison d’être” that compels them to wake up and go to work. Employees that subscribe to such a vision are typically in it for the long haul and are thus unlikely to leave.

“Sustainable development – compelling vision capable of rallying together the hearts and souls of the employees – a higher purpose, the “raison d’être” that compels them to wake up and go to work”

2.    Incompatible organisational cultures

Poor organisational and cultural fit is a much talked about reason for failure in M&A. Much has been said and done by way of culture/organisation mapping and workshops to pull together teams to create an environment of tolerance and understanding. However, we all know that nothing unites a group of people from all walks of life like a higher cause or a common threat – indeed very much like in the Hollywood movies where groups of strangers band together to fight off alien attacks. Identifying with a common goal could pave the way for teams to forge a common history that could lead to the emergence of a common culture that so many mergers aspire to over time.

Now that we have framed the potential, let’s get down to business. What are the typical scenarios and what is the approach?

3 scenarios and 3 golden opportunities

Scenario 1: Target has nascent or non-existent ESG capabilities while the acquirer has a robust ESG program.

This is an easy one, you might say – not quite. In scenarios such as these the acquirer is very often confronted by the common rhetoric “this is the way we do business and it’s been just fine”. Thus, it is up to the acquirer to invest in a process that helps the target companies come to terms with the long-term consequences of doing business the current way and demonstrate the benefits of change not just immediately but for the years and generations to come.  The acquirer will have to help them understand that in a world where awareness of ESG is increasing and people are asking for change, the current modus operandi will no longer be enough to assure the long-term survival of the company. In doing, so we can appeal to the hearts and minds of the target, not only to obtain their buy-in but to co-opt them into playing an instrumental role in implementing the change. With time, target employees will develop a lasting source of pride, which in turn can be a powerful way to motivate current and future employees who understand what it means to be part of a more ethical business.

So what are some of the Dos and Don’ts?

Do:

     Invest time,energyand funds to upgrade the skills of the target company employees and put in place the necessary infrastructure around them.
     Engage them by showing them thelong-termnegative impact of their current operations and business model.  
     Show them success stories, inspirethemand ensure they have the necessary senior management support. Demonstrate that they have the potential to change things.
     Take into accountthe cultural dimensions (national andorganisational) and invest in a robust change management and communication process.
Empower employees to carry out the changes, so that they feel instrumental in the process. Line up subject matter experts who can offer the necessary ‘consultancy’ support and help them overcome mental hurdles when appropriate.
Ensure that their efforts arerecognisedboth internally and externally – provide them with the necessary forum to showcase their work so that other businesses in the organisation and even in the community may have the opportunity to learn from them.
     Be patient but relentless – this is hard especially when you are running up against generations of hard-coding.

Don’t:

     Don’tmake the tracking and reporting too onerous. Introducing cumbersome procedure takes the focus away from the BAU. An unwieldy process is a recipe for failure as it will
only encourage falling back into the old ways of doing things.
     Don’tbelittle the target by highlighting their lack of competencies in thedomain of ESG. Rather engage them to co-construct an ESG strategy and an execution plan that is right for the target.

Scenario 2: The acquirer buys a target with superior ESG standards boasting of a truly sustainable business model with a view to acquiring the know-how and diffusing it throughout the acquirer organisation.

All over the world employees are talking about the “raison d’être”, because of a serious mismatch between their personal values and those of their company. As companies grapple with ways to address the needs of not just their employees but also those of their stakeholders, they may choose to deploy different strategies – acquisitions being one of them. While many companies today have CSR/ESG personnel, many recognise that the process of change management needs more than just a handful of internal employees – it needs enough change agents with substantial credibility, i.e., folks who have walked the talk and possess significant credibility to make it happen. Acquiring a business with the know-how coupled with the willingness of the acquirer employees to change may indeed be one way to catalyse the change toward a more sustainable enterprise.

However, the reverse osmosis process of learning from the target organisation and adopting its processes and standards has to be carefully nurtured as it could endanger the target. So here are some of the things that we can do:

Do:  

Protect the target’s ESG strategy and leverage their know-how by issuing clear mandate and policy decisions that are coherent.
Ensure that there’s a clearly defined program, platform and resources for the target to work with the acquirer to bring about the necessary change.

 E.g., Rotation programs through the target, so that acquirer employees can experience first-hand what it means to be a more sustainable business, so that they can implement their learnings in the acquirer business.

Institute communities of practice as more and more people gain exposure and greater support is needed to keep the community alive.

Implement advocacy programs and celebrate successes openly.

Balance the long-term vision with the short-term so that change does not compromise the BAU. 
Mitigate risk through pilot programs that prove the concept in a smaller environment representative of the larger and in the event of scaling up be sure to have appropriate business contingency plans in place in order to protect BAU.

Scenario 3: Both target and acquirer have comparable ESG standards, and the combined entity presents the opportunity to create a more sustainable business model.

As two entities come together to revisit their business portfolios, this is indeed the opportune moment to draw on their joint experiences and their market intelligence to work out their growth strategy. Be it the creation of new products, new market entry or the pursuit of new customer segments, the ground is fertile to sow and nurture new ideas that are more sustainability oriented – thus opening up the way to explore emerging trends, new markets with unmet needs.

Do:

Join forces and take the time to learn from each other – combine your joint savoir-faire, team, data and processes; prioritise the adoption of the best of both worlds before redundancies.
Challenge yourselves by pushing the bar on what you can achieve on the ESG spectrum. Combine market intelligence, fuel aspirations, and design a long-term vision that is coherent with the kind of world we would like for the next generation.

Regardless of the scenario, the process of integration, which has til lately been driven by a short-term view toward topline and bottom–line growth, is no longer enough. Increasingly we all have to take into account the wider impact of our decisions, e.g., is it right to save cost at the expense of the environment or society, as is often the case when supply chain decisions are made during the integration process. The typical one-dimensional monetary take on value creation in M&A is no longer fit for purpose, and so far the excuse has been that it is too hard to change the equation. While it may be difficult to quantify the actual damage inflicted upon the environment or society, we must start somewhere and endeavor to make these issues an integral part of the decision-making process.  

“typical one-dimensional monetary take on value creation in M&A is no longer fit for purpose”

We can take inspiration from companies such as Puma/Kering, Novo Nordisk and Philips, who have pioneered the work on environmental P&L, EP&L. Allocating a notional value to environmental and societal damage, however arbitrary it may seem, is a step in the right direction – a methodology that can be adopted in post–M&A processes to draw attention to the impact of our decisions. For example, can we include a notional cost to the environment and society when we capture synergies? Can we introduce sustainability KPIs in each of the functions and businesses? What can we do to make sustainability top of mind in the project management structure as integration teams come together? 

Conclusion

The old notion that we have to sacrifice at least some financial gain in order to be a more sustainable business is being challenged and investors are wising up to the fact that they have to re-adjust their investment horizon to a longer term. As this thinking becomes more pervasive, it will (and has already) influence the art and science of post-merger integration. Not so astonishingly, in recent years there has been the emergence of academic research papers indicating a strong correlation between demonstrable ESG commitments of acquirers and the success rate of their post-merger integration processes. While the proof is not (yet) overwhelming, it is only the beginning – as post-merger integration professionals, let’s put our heads together and look for opportunities and ways to introduce sustainability–based decisions with effective measures and KPIs to follow.

Krish Buchet
France Associate Partner GPMIP

About the author

Krish Buchet is a post-merger integration expert with Global PMI Partners. She has in the course of her career been responsible for the implementation of corporate-wide compliance measures such as the UK anti-bribery and corruption law across a multinational corporation with several business units. She was not only responsible for raising the ESG standards but also the implementation of new business models incorporating the circular economy methodology in acquisitions, hence instituting a real step change in the ESG strategy.

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.