Value-creating merger strategies

More than two-thirds of bolt-on acquisitions don’t achieve the expected synergies, largely because buyers don’t plan the integration properly, says Jon Caforio of RSM.

Jon Caforio

The growth of add-on acquisitions has been explosive. But integrating two companies into a synergistic platform remains one of the most difficult aspects of a deal. More than 70 percent of post-merger integrations fail to capture planned synergies and value. Why? Because buyers underestimate the effort they need to truly merge two companies, and they don’t spend enough time planning the integration. As a result, the companies never fully merge.

To successfully complete the post-merger integration process, start the planning process during the due diligence phase – before the deal is completed.

The lines are frequently blurred between pre-deal synergy planning and actual day one execution, making it imperative that management and employees are ready to execute before day one in support of the value creation strategy.

Consider what needs to be ready both before and after the acquisition. When building the timeline, management has to consider plans and milestones for day one, business continuity, quick wins, the 100-day plan and long-term initiatives.

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Risk mitigation

Business continuity and risk mitigation are extremely important parts of the initial phase of the integration process and should be addressed with priority. Look into any financial changes that can affect transacting with customers on day one, and make sure regulatory approvals are in place, essential IT systems and infrastructure will function as intended, and critical financial reporting requirements can be met. Management should have an integration governance structure and workflow process in place on day one. This structure should encompass a steering committee to oversee direction, and an integration management office to drive delivery and workstream leads for all major departments to execute.

On day one, the company must be prepared to seamlessly deliver to its customers. It is essential that the plan for the combined companies is communicated clearly to all employees, both in the platform and the add-on. For employees to fully execute on the plan, they must understand it.

Customers and the marketplace should not be left out of the communication loop either. Delivering a clear message internally and externally allows management to mitigate operational and process risk. However, this takes deliberate planning. Many merged companies lose out on real value creation because they underestimate the time it takes to communicate effectively with the various parties.

Quick wins are most often the immediate operational decisions that can be capitalised on with little effort or investment. Quick wins are generally focused around integrating technology and back office functions such as finance, risk, human resources and facilities functions. But don’t overlook the front office functions of marketing, sales and customer service as well. Examples of quick wins can be as strategic as expanding the geographic reach of an existing product or service by immediately enabling the expanded sales team or as tactical as leveraging new revenue streams and services provided by the other company.

Attainable goals

There’s no question that planning for day one is time consuming, still management cannot stop there. A comprehensive plan for the first 100 days also has to be set into motion prior to day one. The first 100 days are critical because they will determine whether the transaction will indeed deliver value as the buyers intended. Goals for the first 100 days should be short-term and attainable. For the 100-day plan, management should conduct initial functional integration workshops and develop a list of initiatives that will be completed in approximately one to three months.

The first 100 days are also critical because it is when management is most likely able to effectuate change. Employees are expecting change during this period of time. Changes that are made during those first 100 days are more likely to last than changes made down the road after the first 100 days when it is common to see a return to a “business as usual” attitude.

During the first 100 days, management should confirm the merged company’s long-term integration plans, including the process and technology efforts that need to be completed. During these early phases of the integration, many different factors have to be carefully managed such as external and internal communications, change management, legal and regulatory issues, costs and financial analysis.

The first 100 days and quick wins should not be confused with long-term integration plans and transformational change. During the first 100 days, the goal is to execute projects which meet critical business requirements and capture quick-win synergies from the combined company. During this time, departments can develop their future operating models and begin to transition towards a combined state.

Long-term optimisation initiatives are put in place to capture the full synergy and value that management is expecting to achieve. Working with a strong integration management office from start to finish will facilitate the focus required to help buyers meet their long-term optimisation objections.

The integration management office provides the process, tools and resources required to orchestrate the necessary activities to capture deal value and realise an optimised future state. The buyers and senior leadership of the combined entity establish a vision for an integration from the very beginning. Without a well-coordinated effort to drive this vision into the projects being executed by individual departments, it can never be realised. Some projects may be expected to take two or three years. Those projects require extra focus to ensure they stay aligned with the value proposition of increasing EBITA, reducing risk or remaining compliant – which should translate into an increased enterprise value and successful liquidity event.

Having a well-managed post-merger integration effort from the beginning means “planning for success”.

Jon Caforio is a principal with the management and technology consulting team at RSM.

This article was sponsored by RSM and first appeared in the Operational Excellence supplement that accompanied the October 2018 issue of Private Equity International.