5 Post-Merger Integration Strategies for SMEs

 Avoiding a merger calamity akin to HP-Autonomy’s is no easy task. While the stakes are a bit lower for an SME merger, it still requires thorough due diligence, robust risk assessments, realistic synergy expectations, a roadmap for integration, and clear communication with all stakeholders.

There is, of course, no one-size-fits-all for post-merger integration (PMI) which depends in large part on deal type – stand-alone, tuck-in, absorption or transformational. For example, a typical integration strategy for stand-alone deals is to gain control of the cash and leave all operations separate – a significantly easier approach than full operational integration.

However, the following research-informed strategies can serve as a foundation for developing your PMI plan, regardless of deal type.

1. Conduct comprehensive pre-merger due diligence.

The importance of comprehensive pre-merger due diligence cannot be understated for later integration efforts. Due diligence can:

• Provide crucial insights into the target company’s operations, culture, and financials.
• Uncover hidden liabilities or compliance issues, such as outstanding debts or tax bills.
• Uncover any well-disguised “creative accounting”.
• Identify synergies and risks early on.
• Inform realistic valuations and deal structuring.

In fact, due diligence appears to be taking longer than ever before: new research from Bayes Business School has found that the due diligence process typically took 64 per cent longer over the last decade than for deals in a similar analysis published in 2013. Causal factors may include the new regulatory environment such as the GDPR, the heightened importance of ESG, political uncertainty, and increased digitisation.

Some high-profile due diligence and integration failures are also serving as cautionary tales for dealmakers, such as the HP-Autonomy disaster which has resurfaced in media headlines in recent months.

Hewlett-Packard (HP) $11.7bn acquisition of Autonomy was designed to spearhead HP’s transformation from a hardware-focused company into a software and enterprise services leader. However, the deal quickly became a textbook example of the critical importance of comprehensive pre-merger due diligence.

Flagging revenue post-acquisition soon prompted an internal investigation during which HP uncovered that Autonomy had been artificially inflating its software licensing revenue by selling hardware at a loss and then booking the sales as software licensing revenue. Unsurprisingly, the anticipated synergies were not forthcoming. Instead, HP reportedly incurred losses to the tune of $4 billion as a result of the Autonomy acquisition.

2. Develop an integration/synergy plan, detailing key priorities, realistic timelines, KPIs, and risks.

Mergers can yield significant synergies, ranging from cost savings and increased market share, through to improved capabilities and revenue enhancements via cross-selling opportunities. However, these synergies will not materialise by themselves.

A comprehensive synergy plan should:

• Identify specific synergy targets and KPIs.
• Develop action plans with expected timelines and milestones.
• Identify key risks and make a mitigation plan.
• Establish a way of tracking and reporting on progress.

KPIs might be financial metrics, such as cost savings and revenue growth, operational metrics such as productivity improvements and other efficiencies, or strategic metrics such as market share gains or innovation capabilities.

“What gets measured gets done.” 

Indeed, a 2017 survey by PwC found that among dealmakers who achieve their synergy expectations, using KPIs is slightly more common: 72% of top performers and 60% of low performers apply KPIs in order to measure synergy realisation.

As for integration risks, these might include disruption to “Business-As-Usual”, culture clashes, uncertainty for staff, and technology integration problems.

Mitigation might involve identifying key client accounts and relationships to maintain, determining communication strategies with key stakeholders, and deciding on the best technology stack for the newly formed entity and establishing where training gaps amongst staff exist.

3. Prioritise cultural integration to avoid organisational brain drain.

The human factor can make or break a merger. The Amazon and Whole Foods merger, for example, famously almost floundered due to cultural compatibilities: Amazon’s ethos emphasises efficiency and technology, whereas Whole Foods was built on a more idealistic set of values, such as “team member growth and happiness”. As the post-merger integration got underway, stories emerged of crushed employee morale and staff resignations.

Beyond anecdotes, the research also bears out the importance of cultural fit: the 2017 survey by PwC found that 93% of successful dealmakers considered cultural fit in comparison to just 67% of unsuccessful dealmakers.

Key considerations might include work flexibility, regional/national cultures, higher performance/sales targets culture, management styles and organisational structures. Understanding the culture of both entities is a useful place to start.

“You can’t design your new culture until you understand the culture you already have.”

While cultural integration is a long and ongoing process, short-term priorities might include:

• Identifying shared values and norms, and addressing differences.
• Determining a reporting hierarchy, roles and responsibilities.
• Keeping employees engaged by involving them in decision-making, either through employee focus groups or surveys.  

Keeping employees engaged and informed is particularly important: uncertainty and change is uncomfortable for most, whether they are in the C-suite or on the factory floor.

Moreover, human capital is one of the greatest assets of any company, and losing key talents during the integration process can jeopardise the value of the deal – particularly in the case of service companies whose major assets are their employees.

4. Capture cost-saving synergies by streamlining operations.

One of the key attractions of M&A is the cost-saving synergies that can be delivered through merged operations. These are typically realised by eliminating areas of duplication and inefficiency, and consolidating supply chains. Planning and executing these over the shortest feasible timeframe has been shown to be decisive for PMI success.

Key areas for integration include:  

• Finance, HR and customer-facing functions, such as marketing and sales.
• Management teams.
• Product management teams.
• Supply chains.
• IT systems and tech stacks.
• R&D and production (often a longer-term process).

“Do not underestimate the importance of IT and tech integration, a key enabler of other synergies.”

Do not underestimate those integrations that do not deliver the highest synergies but are nevertheless central to business-as-usual and are enablers of other synergies, such as IT and tech integration. The 2017 survey by PwC found that 54% of successful dealmaker integrate their IT function fully, compared to 27% of unsuccessful dealmakers. 

One notable failure in post-merger IT integration was during Sabadell’s acquisition of TSB from Lloyds in 2015. Sabadell’s three-year project to move TSB’s customers onto its own Proteo system, expected to save £160m a year, actually added an extra £176.4m of post-migration costs to the TSB deal due to a host of major glitches. 

While the stakes are a bit lower for SME mergers, preparing in advance for IT integration is advisable: this may involve identifying potential compatibility issues before the merger, preparing for a phased implementation to minimise disruption, and providing adequate training for employees on new systems.

5. Make a plan for capturing revenue synergies.  

Capturing revenue synergies is no walk-in-the-park: a McKinsey survey of 200 M&A executives found an average gap of 23 percent between goal and attainment.

The first step in the process should involve identifying, evaluating and prioritising opportunities for revenue synergies. These are typically grouped into three categories: where to sell, what to sell, and how to sell. For example:

• Cross-selling to existing customers (Where to sell).
• Bundled services and products (What to sell).
• Using brand leverage to promote acquired products/services (How to sell).
• Sharing of leads across salesforce (How to sell).
• Enhanced distribution channels (Where to sell).
• Expanded market reach (Where to sell).
• Rebranding or brand extensions (How to sell).
• Pooled product development and R&D resources (What to sell).
• Increased pricing power and greater leverage to negotiate lower prices with suppliers (How to sell).

Any strategy should also be built with logistics in mind. Will your salesperson and marketing team have capacity to carry a broader product portfolio? Are client relationships strong enough to exploit cross-selling opportunities, and does the company provide the right incentives for cross-selling? Can your brand carry the weight of the new product or service?

“In the short-term, management ought to pursue “low-hanging fruit” to drive revenue synergies, such as cross-selling and sharing of distribution channels.”

In the short-term, management ought to pursue “low-hanging fruit” to drive revenue synergies – that is, cross-selling and sharing of distribution channels. Indeed, according to Deloitte, 40 percent of M&A revenue synergies derive from cross-selling.

Cross-selling efforts might involve bundling products and services, pooling sales teams efforts, introducing new sales incentives (e.g. dual compensation to sales teams), improving sharing of sales leads, or cross-product or cross-service advertising.