Mergers and acquisitions are often talked about in the context of identifying targets, due diligence and ensuring legal compliance. However, the merger process doesn’t end upon deal completion.
Instead, the real work begins now because you have to integrate two separate operations into one. According to McKinsey, 70% of mergers fail, and part of the reason is companies pay too little attention to integration.
If you are planning a merger or are on the point of completing one, here’s what you need to know about the post-merger integration process.
What is post-merger integration?
Post-merger acquisition is the process of making two distinct companies one.
In the case of a merger, the process will usually involve the creation of a brand-new company.
Well-planned and executed mergers will maximise synergies to ensure the merged company can reach its expected deal value. According to a 2016 study, companies that deliver on integration will achieve 6-12% higher growth rates than those that fail.
The problem is that even though merged companies go into post-deal integration with the best intentions, their plans fall apart upon initial contact. Strictly speaking, the integration process should begin before the deal crosses the line.
Successful integrations also require investment. Numbers from PwC reveal that 59% of companies spent 6% or more of their total deal value on integration, up from 38%.
What are the key objectives of a post-merger integration?
Just like every merger is different, every integration is also different. Successful post-merger integrations can be boiled down to four core objectives, which are:
1. Maintaining momentum in business during the integration process.
2. Maximise available synergies and accelerate them.
3. Create the value outlined in the initial deal.
4. Align cultures to drive the company forward.
Business history is littered with integration failures. Perhaps the most famous example is the AOL and Time Warner merger in 2000. To this day, the reasons for failure fall to a failure to integrate operations successfully.
Even at the time, this was a deal worth $350 billion, making it one of the most substantial business failures of all time.
Who is responsible for post-merger integration?
It’s easy to assume that post-merger integration is a HR-only operation or the problem lies with executives, but this is only half true.
Neither party can do everything. Instead, this is the responsibility of every decision-maker within the merged company. In all cases, every person in a position of authority must be assigned some form of responsibility.
Ideally, a central team will also be responsible for initiating change and ensuring that all relevant steps are carried out.
Ultimately, this is a team effort.
Why post-merger integration is important
Mergers do not fail because of integration problems. They fail due to a lack of due diligence before deal completion.
For example, the $13.5 billion merger between Amazon and Whole Foods aimed to upend the U.S. grocery market. The deal soon became a catastrophe due to two businesses with completely misaligned cultures.
With proper planning, the deal either wouldn’t have gone through in the first place, or the two companies would have had a more effective integration. In essence, proper post-merger integration can achieve a variety of benefits, such as:
· Leadership team alignment to achieve expected outcomes.
· Timely realisation of deal benefits.
· Increased talent retention rates.
· Risk reduction.
· Minimal operational disruption.
· Quickfire stabilisation.
· Streamlined communication with all stakeholders.
In short, post-deal integration is critical for ensuring that a deal achieves its goals.
Types of post-merger integration
Typically, companies may decide to embark upon four types of post-merger integration. Which one is right for you largely depends on your deal structure.
Absorption – Absorption takes place when a single company absorbs the target. In most cases, this would be termed an acquisition rather than a merger.
Symbiosis – Integration only occurs within specific areas to meet the goals of the deal. In other areas, both parties remain independent.
Preservation – These types of deals involve a purchase, but the companies remain self-governing. Generally, integration is limited to certain areas, such as financial information or customer data.
Holding – In this case, a deal will involve a change of ownership, but they decide not to integrate at all. This often occurs when a company acquires another purely for deal value in an unrelated industry.
Common challenges in post-merger integration
Post-merger integration requires recognising the challenges that are likely to come your way. Most of the following challenges are relevant to all deals, meaning you should plan to overcome them as part of your post-merger planning.
Maintaining momentum
The issue afflicting all mergers is how you’re going to keep all operations up and running without any significant disruption and capitalise on the momentum your deal has generated.
Overcoming this problem means setting out your KPIs to ensure that your integration efforts aren’t causing you to fall behind.
Employee engagement
Don’t broadcast changes to staff. Engage with them. Mergers and acquisitions are an anxious time for all. Most importantly, you want to reassure them that they have jobs and their roles won’t change dramatically.
The best way to overcome these issues is to formulate an effective communication plan and engage with your people at all points.
Senior management integration problems
Senior managers are pivotal to a successful integration, but they’re not immune from the challenges everyone else faces.
Authority figures who cannot get up to speed can derail your post-merger integration and amplify other challenges.
Culture shifts
Cultural shifts can cause massive problems. Again, most cultural compatibility issues should be anticipated before the deal crosses the line. Dismiss it at your peril.
As with other issues, the answer is communication and acting on key concerns raised by your staff.
Technological integration
Every company has its own tech stack. You may even have several custom-built solutions in your arsenal or legacy systems that you’ve yet to upgrade.
How are two different tech stacks going to work together?
The best practice to deal with this problem is to hire an external technology consultant to examine knowledge gaps and redundancies.
Implementing synergies
Achieving synergies is one of the primary motivations behind many M&A deals. Unfortunately, making this a reality is easier said than done. In most cases, synergies tend to vanish once the integration process begins.
Dealing with this challenge doesn’t mean identifying where synergies can be achieved but how to implement them.
Unfortunately, this often requires making difficult decisions, such as cutting the number of staff you’ve got.
Customer engagement
All mergers involve the personnel within your company and the people you serve outside your company.
It’s always bad customer service to not inform your customers in advance. In other words, they should know what’s going on when a deal is closed. If a merger may even be slightly controversial, you should have raised the possibility of a deal during the closing stages.
Remember, the earlier you tell your customers, the likelier they will stomach the merger and remain your customers.
When should post-merger integration planning begin?
Post-merger integration implementation may begin when the deal closes, but the actual planning should begin before you carry out your due diligence.
Your findings will dictate how you overcome the challenges unique to your deal. You’re already too late if you only appoint your change management team after the deal has closed.
This is a classic example of something that should begin as early as humanly possible.
Best practices for post-merger integration
Post-merger integrations are challenging to manage, whether you’re a new hand or an experienced operator. However, adopting certain best practices will put you in an ideal position to weather the upcoming storm.
Follow these best practices for your post-merger integration:
Start Early – The number one best practice is to start as early as possible. Begin more than six to eight weeks before closing, and you have the luxury of building a day-zero plan that will see you through to the end.
Build a Diverse Team – Appoint a team of representatives from every area of your company, whether HR, legal, executive, operational, or accounting. With a strong team behind you, you can delegate and guarantee that everyone is pushing in the same direction.
Don’t Talk But Engage – Talking to your team is one thing. Engaging with them is quite another. Establish a full-time point of contact where they can raise any concerns and hold a formal Q&A session where less urgent matters can be addressed. Moreover, ensure you act upon any concerns and take them seriously.
Focus on the Long–Term – Integration plans naturally focus on those first crucial weeks, but the best plans also look to the future. Ensure that your plan contains an evaluation of the evolution of the newly merged company.
Talk About Benefits – All stakeholders inside and outside the company will have questions. This isn’t the time to keep your cards close to your chest. Instead, communicate the benefits clearly to all to get them onboard.
Establish Firm KPIs – What’s the measure of success and failure? Detail your KPIs and develop a system for monitoring them across the timeline of your integration plan.
Adopt a Flexible Posture – Lastly, be flexible. You cannot anticipate every challenge or bump in the road. Sticking to a rigid plan will only cause problems later, so don’t be afraid to change if things aren’t going according to plan.
Post-deal integration is complex, and the majority of successful mergers involve the work of third-party UK business merger consultants along the way.
At Hilton Smythe, our team of experienced merger consultants can provide all the skills and know-how you need along the way. To learn more about what Hilton Smythe can do for you, speak to the team now.