Learning from the successes and failures of
M&A integrations – there is a key role for Law firms

Various studies estimate the failure rate of M&As to be well over 55%, or even up to 80% according to KPMG. However, this poor overall outcome hides a very positive and encouraging fact: companies that pursue an aggressive strategy as “serial acquirers” tend to be good at integrating their new businesses. This proves that not all is random when it comes to the art of integration : there are lessons to be learnt, and many common mistakes to be avoided.

The most damaging myth is the belief that, given enough time, two organisations put together will gradually develop new ways of working and end up blending into one seamless business. Why should this happen? Would it suffice to lock two individuals into one same room for them to form a solid couple for the rest of their lives? A cogent business case may act as a “logical magnet” which draws the two businesses to one another: but will they blend - or collide?

The success of an integration rests on a few imperative pillars that prepare the two organisations and accompany them on their voyage of integration. Omit one of these pillars and your integration project is likely to topple over:

· diagnosis and preparation

· detailed planning

· optimal resourcing

· clear governance

· relevant communication

· team redeployment

Diagnosis and preparation

By diagnosis, I mean much more than mere due diligence. All too often, the due diligence process assesses the target company in its present state, rather than pre-empting the challenges or value-destroying events that are likely to occur when that company undergoes a fair degree of transformation during the integration process. A well organised “data room” may detect some of the hurdles or complexities that will need to be overcome during the integration process: forewarned is forearmed. But this is not sufficient: M&As cause anxiety in companies; some of the organisation’s best resources might decide to jump ship, competitors will attempt to take advantage of the company’s temporary vulnerability, business performance may suffer. If that happens, top priority will inevitably be given to saving the results of the day-to-day business, to the detriment of the integration process which will abort and, in most cases, will be impossible to revive.

When Grand Met and Guinness merged in 1997, deputy CEO Jack Keenan warned his startled team of senior executives:“merging is like pulling out teeth – you can do it slow and painful … or quick and painful; we shall do it quick and painful”. Speed matters: the precondition for realising a fast business integration is a precise diagnosis of what needs to be achieved, and a carefully laid out implementation plan.

A successful business integration can only begin once you have determined how the information from the data room will be used, as well the commercially sensitive information which will become available only from the day the two companies are under common ownership. But much of this can be decided well ahead of that “Day One” date, making best use of the months during which the two companies await the decision of the various regulatory bodies involved in authorizing the acquisition or merger. Let us be clear: this is not about exchanging data, but about deciding how the data will be used once it becomes available. Using these accelerators effectively may require the support of legal counsel.

Three degrees of preparation :

Standardised data

Whilst we all know strict rules govern what information two companies can discuss prior to “Day One” and what constitutes “commercially sensitive information”, the format in which that information is or will be held can be discussed freely. This is hugely important because it means that all the data the two companies will need during their integration can be re-stated in pre-agreed common formats and under common definitions : accounting data, production costs, HR data, customer types, data hierarchies, and so on. By carrying out this time-consuming and painstaking activity prior to “Day One”, the two companies will be able to gain several months and jump-start their integration, comparing like-with-like data as soon as they are under common ownership.

Decision-making tools

The second degree of preparation consists in agreeing decision rules which will apply when the integration begins, for example how the products or services of the future combined portfolio will be positioned and prioritized relative to each other, where the future offices or factories will be located, how the trading terms will be harmonized, what computer systems and software suites will be retained, etc. This does not pre-empt what those decisions will be, but determines the criteria that will be considered in making those decisions.

In practice, when individuals from two companies are drawn into a workshop to develop such decision tools, many people find it difficult to contain the conversation within the limits of a conceptual model articulated around decision criteria. They may find themselves wanting to illustrate their thinking by using examples which could, potentially, transgress the limit of what information can be disclosed before “Day One”. There is a valuable role for legal counsel here: get a lawyer to attend such workshops to blow a whistle when the discussion gets “too close to the edge. This will ensure that the preparation of these integration accelerators is conducted within the letter and spirit of the Law.

If developed using the above-mentioned safeguard, well defined and documented decision tools are a very valuable instrument to ensure coherence and avoid delays when those same decisions need to be made concurrently in several business units, as would be the case for example when the integration of an international business involves subsidiaries merging two by two in a number of countries.

Simulations

Without any exchange of commercially sensitive information between the two parties of the merger or acquisition, third-party advisors can be nominated to carry out a pre-analysis of this data, so that areas of particularly high complexity or risk can be identified in advance of the integration’s kick-off. This provides valuable clues when it comes to resourcing the integration project team to ensure the number and calibre of the team members are sufficient to tackle and resolve those complex issues. An example of where such analysis may be immensely helpful is the harmonization of trading terms: if the analysis reveals significant variances between the terms offered by the two integrating companies to key common customers, these need to be resolved very soon after “Day One” to prevent significant commercial risk exposure.

Here again the input of lawyers is required to delineate precisely who has access to what data, what preliminary findings can be shared prior to “Day One”, and what will happen to the data and analyses should the merger or acquisition not proceed after all!

Detailed planning

The devil is in the detail: careful planning is a prerequisite for an orderly integration, primarily due to the large number of interdependencies that need to be managed throughout the integration process. This again is work that can be prepared well in advance of the actual integration kick-off, rehearsed in a “conference room pilot” to run a simulation of the integration process, identify each of the interdependencies, and record these in the project plan. As a result, the sequencing of the deliverables will be optimised, highlighting where the integration project’s critical path lies.

Optimal resourcing

Getting the right people on the project team is a headache : not many people have that perfect mix of business knowledge, experience and ability to envisage a different future. Thinking of the project team’s resourcing well in advance pays dividends: it may take a few months for an individual to be released from his/her day job – finding a temporary successor, an interim backfill, or re-allocating this person’s duties amongst the rest of a department takes time. Starting early means that the team can be in place in time for “Day One”, or even earlier if possible.

Clear Governance

The need for clear governance sounds like a truism. And yet many business integrations fail because of a lack of clarity as to who can make what decisions and the absence of effective issue resolution procedures. We said that speed matters when integrating two businesses : swift unequivocal decision-making is necessary to allow the integration process to progress swiftly.

Relevant communication

Abundant literature has been published on “good communication”. Without delving into how to organise and run well structured and effective communication, my general observation is that most companies do not sufficiently segment their target audiences and therefore fail to capture the hearts and minds of their various stakeholder groups. All too often, the messages build on the strategic rationale for the merger of acquisition, which might be intellectually interesting but is unlikely to be of much relevance to a shop-floor worker who is more concerned about what this business integration means for his/her job, the working environment in the future etc.

Internal communications are a time-consuming exercise, and the lead-times and complexity get far worse when the exercise needs to be carried out in several languages.

Let us also remind ourselves that communication is about more than just words: body language and behaviours come into play when it comes to managing the interface with a crowd of worried or doubtful employees. The senior management team should give some thought to how they will maintain their levels of stamina and composure throughout the long integration process, and how they will “live” the future company’s stated values.

Team redeployment

Thinking about all that needs to be done to kick off an orderly and successful business integration occupies the entire mental bandwidth of most people; and yet it is key that solid processes be put in place from the onset to ensure that the individuals assigned to the integration teams have a position to return to in the future organisation once the integration is completed. This is a prerequisite if you want to be able to attract the best people onto the team, or else they will perceive the project as a career dead-end. It is also a necessary condition to be able to maintain talent in the organisation after the integration : the members of the integration team will have acquired valuable knowledge during the project and will have the best understanding of how the company operates, end-to-end.

It is possible that the line-managers of some of the integration team members will have left the organisation by the time the project is completed, and therefore responsibility for overseeing the continuity of the team members’ careers must rest with the project’s Steering Committee which is guaranteed to be in place throughout the project.

… so how do you keep it all together ?

It is clear from the above comments that there is a lot to keep in mind, plan, coordinate, execute and deliver during an business integration, all of this whilst the day-to-day business must continue. My overall observation is that this is best achieved when responsibilities for business integration and day-to-day business are segregated: this safeguards the P&L of the on-going business, ensures clarity of accountability for the on-going commercial results as well as for the success of the integration process.