This is the third in a three part series on mergers and acquisitions.
In the first article we dealt with making contact, the Deed of Confidentiality so that you can secure preliminary and subsequently detailed due diligence information, the forming of an M&A Committee and a Due Diligence Committee. The second article dealt with the detailed due diligence. This article deals with phase 3 of the M&A - implementation.
Before you begin
Once a proposed M&A proceeds through due diligence and there is still a "green light" at this point, you should have started drafting your Heads of Agreement, a living document which your merger manager will update as needs be and will concern a variety of important things that you have assented to along the way. It becomes the "bible" of your M&A and keeps you on track and usually leads to the signing of formal contracts. However, be warned, the importance of a Heads of Agreement is that it guides the transaction right up until settlement day, and it is often only shortly before settlement day that the formal transaction and practice agreements are entered into. Thus the importance of recording of all of the essential agreements in a Heads of Agreement.
Having completed your detailed due diligence and settled any outstanding issues that may arise from that process, it is important to ensure that all formal contractual arrangements are put in place before the two parties merge. This includes the new entity structure agreements under which you will practice. If the two parties cannot reach agreement so that formal contracts can be signed, then you know you are facing huge problems.
Your Merger Project Team
Implementation of a merger will usually be allocated to a merger project team. The biggest mistake that can be made is forgetting that your existing finance and administration team already have full time occupations. Handing a merger project to them could be doubling or tripling their work load. Where this has been done, I have found that a merger project team can be working long hours, and on some occasions, 7 days a week, particularly if the merger implementation time frame is limited.
Your merger project team will develop a "Merger Project Plan". It will map due dates and progress notes against each topic. Relevant topics for a merger project plan comprise:
- Merger funding/agreements.
- Integration of systems
There can be an enormous amount of work in each of those categories. When the M&A occurs, there are: the logistics of integrating difference computer systems, acquiring new systems to cater for the new entity, training staff on new systems, moving staff from one office to another, setting up a new general ledger structure, new employee numbers, department numbers, updating the payroll, amending the budgets, updating online authorities, winding down old entities, transferring ownership of assets, setting up discrete cost centres so that goodwill "earn out" provisions can be calculated monthly, setting up any necessary discrete accounts so that you can meet the obligations under the acquisition agreement and so forth.
Issues to consider
Do you have time to carry out a thorough investigation in relation to the acquisition of new systems? Are you able to co-ordinate sufficient "buy in" by the combined staff to new systems? It can be catastrophic to buy a system that is not compatible or that is not user friendly. Mergers and acquisitions are stressful; new systems, new people, new policies and procedures all add great stress and anxiety to the newly combined workforce.
M&As are generally about people and cultural fit. You want all of your people to stay with you. You want them to work with you towards a common successful goal. You do not want people who "take the money and run". You want a combined workforce who is there for the long haul and are all committed to the success of the merged identity. Accordingly, achieving an excellent implementation means being considerate to the new workforce, especially when you are introducing new systems. When integrating systems, the cleanliness of the information being inputted is important. Bad information in leads to bad information out.
The introduction of any new system will entail upfront monetary expense, but also considerable diversion of time and resources within the whole organisation to learn about the new system. It is a very extensive undertaking. Poor planning can result in aborting new systems and that can be disastrous and be money down the drain.
Your merger project team are therefore very important and a big mistake is underestimating the extra workload that is placed upon them. That needs to be considered because you have to have the time and resources for a proper implementation. If you do not, you will "cut corners" and increase your risk of error.
You need to avoid conflicts of interest. You cannot necessarily assume conflicts can be managed. You may need to consult very closely with key clients. You therefore need an accurate client list and an appropriate analysis needs to be made.
The newly merged entity will need a figurehead. Quite often there will be an M&A celebration. Invitations will be sent to clients. Speeches will need to be made and the correct message must be communicated. Clients, as well as your staff, are key stakeholders to the success of the organisation. No doubt you will need to project a contemporary focus towards the merger.
You will need to make important firm announcements and explain to the staff:
- What is the news?
- Who is the party the subject of the M&A?
- What will be the merged firm name be?
- What is going to change?
- What will be the firm's structure?
- How will the merger happen?
- Which offices will be closed?
- Where will be the principal place of location?
- New contracts of employment
- Details of any major IT upgrades and timing
- Telephone system upgrades
- New document management systems
- Any new accounting systems
- Merger retreats
- Client function as a merged entity
- How will the market be informed?
- What will I say to people if I am asked about the merger?
- Communication (regular merger newsletter)
It will be necessary to impose deadlines for staff to accept, for example, offers of employment so that the total workforce can be under consistent employments contracts. Many entities may not have written employment contracts. They may not have restraints of trade and IP protection clauses. All of this should be updated so there is consistency and fairness.
If a key player happens to be overseas at the time important merger documents have to be signed, make sure that a remaining partner is given a power of attorney to execute these documents so there is no last minute "hold up". Make sure that any key business structure documents are executed if merger settlement is to occur. If there are serious difficulties in having the final agreement signed, the merger should not proceed because, once the transaction occurs, it is usually impossible to agree on something that cannot be agreed by the due date. You then kick off your merger with a "festering unresolvable problem". Not a good way to start.
A check list of high level merger process once due diligence has given the "green light" might be as follows:
- Merger project manager works with partners of both firms to construct a draft internal structure for the merged entity.
- Merger committee approves internal structure.
- Meeting of full partnership of proposed merged firm to ratify internal structure.
- Confidential and co-ordinated announcements to all staff of both firms.
- External announcement to the market.
- Merger project manager/human resource managers to meet with staff of both firms as relevant.
- Merger committee reviews list of key merger issues.
- Merger committee agrees on proposed merger date.
- Merger project manager prepares the draft merger project plan, human resources plan and communication plan.
- Merger committee approves the draft merger project plan, human resources plan and communication plan.
- Meeting of full partnership of proposed merged entity to ratify the merger project plan, human resources plan and communication plan.
- The merger project manager proceeds to manage the merger in accordance with the ratified plan and regularly meets with the merger committee.
It is desirable, therefore, to have your high level merger process agreed in principle. The detail is documented in the merger project plan.
You will need to prepare a Client Information Memorandum to be used as a reference source when discussing the merger with clients. This would cover such topics as:
- The merger in brief
- Information about the entities
- What will change?
- What will stay the same?
- Post merger outcomes
You will need to have prepared press releases and be prepared for interviews in industry magazines and so forth. Be prepared for the questions that will be asked.
A newer, stronger, better firm
Finally, every merger is different. Each merger implementation must be developed to the needs of each discrete merger. You cannot develop a process "off the shelf". This is because people and personalities are involved; different systems and different work practices. Like anything in life, the better the plan, the better the outcome. The better the planning, the less surprises. In short, plan your work and work your plan.
I wish you the best of luck.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.