It is generally well known that a significant percentage of mergers and acquisitions fail to deliver shareholder value. Despite the enormous amount of consultancy time, and years of experience that is brought to such deals, how come many M&A transactions produce disappointing results? However, it is more often the larger deals (£100m+) that run into difficulties mainly due to the increased complexity of the businesses involved.
One of the biggest pitfalls occurs where companies treat the post merger integration process or ( PMI ) as something that should begin after the deal is done. A bit like "lets get married first then get to know each other! During the implementation stage the PMI needs to be rigorously controlled but it is often the strategic and tactical choices that are made before the deal has been done - and often maybe before the bid has actually been made - that ultimately determine whether the integration will succeed. There is no standard PMI method and a merger that has been driven by cost synergies will need a different approach to one where the primary motive has been revenue growth.
In a consolidation merger, the integration needs to be rapid. If cost synergies are not realised in the first 12-24 months it is unlikely that the merger will be successful. In this instance the acquirers need to approach the merger like a takeover with a highly directive, top-down leadership structure. When it comes down to consolidation there is no such thing as a merger of equals. It is also advisable to establish a pre-merger team to identify quick wins ahead of a deal completion date so that synergies start to flow as quickly as possible after a deal is closed.
Growth mergers require a more gradual, arms length approach, with the target treated more as an equal. The top priority is to "avoid damaging change" and to maintain the growth potential, the ideas, the people and the customers of the acquired business. In the pharmaceutical industry, for example, many companies have acquired small biotech firms in order to gain access to new drug discovery technologies and have allowed these firms to remain largely independent. The same is true of IT companies with very specialist skills and work ethos/culture.
Taking an arm's-length approach, however, is not an excuse for inaction. Revenue synergies are much harder to calculate and deliver than cost savings, investors tend to be more sceptical about growth mergers and to monitor their progress closely. To satisfy investors' appetite for steady tangible progress, the integration of a growth merger should be mapped out more like a business plan, with clear milestones and deliverables. Any advances will need to be regularly communicated to all those involved as financial progress will not be visible in the short term.
In reality, most mergers are a complex hybrid of consolidation and growth although there will be a dominant strategic source of value which will define the shape of the PMI. In a growth merger, for example, high speed consolidation may be necessary in certain areas such as IT and purchasing, to reduce staff overlap. Conversely, even though speed is normally vital in a consolidation merger, there might be situations where a longer time frame is required - for example when dealing with design-to-cost activities in the manufacture of complex engineered products such as automobiles. Likewise in a cross border merger, the integration may have to move quickly in regions where there are large overlaps between the two companies, but more slowly where a single company dominates. The regulatory environment can also affect the pace. In Germany, for instance, companies are legally obliged to consult with workers' councils about staffing implications of mergers, which can delay the integration.
Mergers and acquisitions provide the opportunity to question and transform the entire business model. During a PMI, not only is there appetite for change, and usually the funds to support it, but there are often two different views of the industry, providing a potentially powerful melting pot for novel and break-through ideas. PMI can also provide a good opportunity to fix long standing problems in an acquirer's own organisation i.e. problems that executives could never afford to address before. But it is important not to get too carried away as a PMI cannot fix everything.
How do you go about setting up a PMI team?
Most companies underestimate the complexity of PMI. As a result, they often make two key mistakes. Firstly they delegate responsibility for the integration too far down the organisational hierarchy. Secondly, they try to fold the managerial tasks associated with a PMI into existing management practices and processes of the company. But successful execution of integration requires best practice management in time compression
Especially when cost savings are key. This demands top flight senior management but also a dedicated PMI team. Whilst it is recognised that in smaller deals this is not always practical there is still a clear case for defining roles and resources very carefully and allowing plenty of management time to implement the PMI.
Particular attention should be paid to selecting the team leader. He or she must be strong independent thinker, tolerant of ambiguity, and capable of making fast decisions on limited information. Moreover, he or she should be willing to wade outside their area of traditional expertise - often in circumstances of high tension.
Surrounding the PMI leader there should be a number of sub teams or working groups. Each group will play a different yet integral role in formulating specific synergy targets and ensuring that these targets are reached rapidly as possible.
At the head of the PMI team is the steering committee, which acts as the key decision making body and ensures that all aspects of the integration come together as a coherent whole. One of its most important roles is to set the top line targets and to monitor progress against these goals regularly. Depending on the size of the deal, either the CEO or business line leaders make up the steering committee.
Line teams are responsible for executing the integration in the line organisations. This is usually organised by function, business unit, and region.
Platform teams provide specialist support to core functions, such as finance and HR, and have to wear two hats at the same time. For example, the HR platform team will be responsible both for consolidating the HR organisation itself and for providing information and assistance, such as full-time-equivalent counts, to support the broader integration effort.
Most PMI efforts will also involve special issue teams. These teams are temporary units that address and resolve specific short-term issues - for instance disposing of excess property. Their remit is not to get exact answers but develop options and move on.
Finally the most critical link in the chain is the project management office, which is the heart of any real integration. The project management office that is headed by the PMI team leader, is responsible for chartering teams and tracking their progress, and for coordinating the entire PMI effort. It is also responsible for the communications team - a key component of the PMI mix,
In conclusion, it is obvious that good planning and teamwork are the most essential prerequisites for a successful merger or acquisition whether it is a mega merger or the purchase of a small business.
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