Post Merger Integration: Why a Conduit is an Essential Part of Success
Having spent a good part of my career on both sides of the table, assessing and executing M&A deals spanning several continents, I came to the realization that regardless of the industry, geography and regulatory environment, the hardest part of a transaction, its Achilles’ heel, is not the getting to the dotted line. What nobody in an advisory service or corporate development position will tell you is that post-deal execution and integration are the most critical elements leading to the success of a transaction. So why doesn’t anybody talk about it? Frankly, it is not considered part of deal making per se and it is not exciting and fast-paced as are other parts of the transaction.
A Harvard study concluded some years ago that almost nobody understands how to identify targets that could transform a company, how much to pay for them, and how to integrate them. Study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%. Why do we even bother then? If we are to draw an analogy, this sort of failure rate mirrors the divorce rates we see across the developed world, which, without claiming to be an expert in the psychology of marriage, appear to be linked – again- to execution and “post-deal integration” of each others’ expectations, wants and needs. Not rocket science, right? Yes, and that is exactly the point. M&As are also crafted and executed by humans and it begs the question- what is at the root of this inability to buy or merge with the right partner?
There is no lack of planning or strategic thinking at the transactional level, as all deals ask for a business case that outlines the rationale, objectives and synergies. But, once the other team across the table signs the purchase agreement, the minute details of how to execute on those synergies and integrate the new partner are no longer a concern of the transaction executives or the senior management. So why do so many companies outright fail at executing the post-deal integration?
The answer is of course, complicated. Many firms that acquire or partner with another company do so with the idea of executing an immediate bolt-on and seamlessly integrating the new team, its products and services, capitalize on synergies, if possible in the next one to three years after closing. But somehow, miraculously, their well-thought out plans go up in smoke in 70 to 90 percent of the cases after the deal closes. So where is the missing link? At what point does the integration go sour and why?
The majority of companies let the new team navigate the new infrastructure by themselves, comparable to teaching children how to swim by throwing them into the water and letting them figure out on their own the swimming business. Many management teams even go so far as to claim that the new teams’ navigation skills within the organization truly marks the success of the acquisition, which only reinforces their belief that the new team is an ideal acquisition and hence everybody can give themselves a new pat on the back for a successful acquisition. But these attitudes are exactly what cause the downfall of the integration. Expectations that new teams can navigate and fend for themselves whatever road block they encounter are as unrealistic, as they are misguided.
What many firms fail to acknowledge is that as with any sales transaction, execution is part science and part art. The Art factor? The “deal sponsor” – and I don’t mean here the executive who originally identified and analyzed the target and made the business case for the deal. A successful integration needs a conduit, a connector from that typically elusive stratosphere, aka the senior management, to help the new team navigate the new organization, provide them access to resources and connections they need and help integrate them in the product roadmap.
A conduit will not only help connecting the dots, but more importantly, will have the executive willpower and clout to help the new team plug in and implement their new ideas, products, services faster and without many of the hiccups along the way. It may seem “retro” to suggest the idea of a crutch, but just like picking up the phone instead of texting, tweeting or chatting in this social media-obsessed new world, having a conduit ensures a much faster and successful integration than not having one.
Is a conduit enough? Well, not quite. Here is where the science part comes in. Well before the targets in your pipeline are identified and assessed, well-defined business strategy and planning is required in order to make integration a success. As a complement to your ongoing strategic plans, you would want to develop a concise post-integration dashboard with key metrics looking not only at financial, but also post-deal milestones, such as new product development/ technological innovation, resource retention, internal communication and collaboration. In short, you would want to map what the success may look like once the new team is onboard. A good plan is only as good as its inputs and so, given that integrations are complex and come with a lot of risk, you would want to build in a good amount of flexibility in your plans. Scenario analysis to prepare for various outcomes post-acquisition, along with the strategic conduit to help move things along should help any management team feel a great deal more comfortable committing to any acquisition, regardless of size, geography or vertical.
Michaela Gifford is a successful finance leader with 12+ years of strategic planning, corporate development and modeling expertise to bear on client Mergers and Acquisitions efforts. She leads the Financial Planning and Analysis Practice Group, using her extensive language proficiency and financial modeling and analysis expertise to implement plans across multi-cultural environments, realize revenue growth and connect corporate teams in Europe, Asia, Australia and North America. She also co-leads the Mergers and Acquisitions Practice Group.
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