In a previous post, we discussed the impact that deal team size can have on post transaction synergies. A recent report from PwC makes clear that pitfalls in the M&A process hardly disappear once the parties have determined the make-up of their deal team. Indeed, the report suggests that without early planning, rapid execution and long-term commitment to integration completion, it will be difficult for a merger or acquisition to achieve its goals and deliver value. In an era of growing workplace diversity where numerous industries are undergoing digital disruption, this can be easier said than done.
Transformational change
The question of post-deal integration has become all the more pressing due to the rise in transformational deals, meaning those that involve acquiring new markets, channels, products or operations in a way that is transformative to the fully integrated organization. 54% of Fortune 1000 survey respondents indicated the largest deal their company had completed in the previous 3 years was transformational, up from 29% of respondents in 2010.
This rise is explained by the consolidation that took place in many sectors of the economy during the global recession between 2007-2009, as well as the increasing impact of technology on everyday economic activities. As a result, companies have turned to deal making in order to obtain the capabilities needed to be competitive. However, in certain cases, this can require integrating markedly different work cultures and business models.
Strategy and execution risks are particularly acute in transformational deals, and this was borne out by the experience of M&A participants. For example, of the 78% of respondents who stated growth in market share was a very important objective for their deal, only 15% said this had been completely achieved. Further, access to new brands, products or technologies was cited as a very important deal objective by 72% of respondents, yet only 29% reported this was completely achieved. Interestingly, strategic success was more elusive for acquirers that had done over 8 deals (50%) than for companies that had done 3 deals or fewer (66%) since 2013.
Integration success leads to financial success
Companies reported that M&A transactions have had a favourable impact with respect to both profitability and cash flow, while also leading to notable progress in capturing revenue and cost synergies. According to PwC, in many cases, these positive financial outcomes can be attributed to the implementation of leading practices in M&A integration and value realization. Unsurprisingly, respondents suggested they had placed increased emphasis on certain key areas within 6 months of closing, namely leadership alignment, stakeholder communication and operating policy integration.
Companies have also turned their minds to integration at an earlier stage in the M&A process. In 2013, 44% of respondents indicated their integration team became involved at the due diligence stage, while the plurality of respondents (32%) now state the involvement begins at the deal screening stage. The earlier involvement of integration teams is another by-product of transformational deals, as executives and board members demand greater scrutiny and more careful planning before moving into new commercial spaces.
However, this earlier involvement is not enough to completely mitigate the difficulties posed by the integration of people, IT systems, go-to-market objectives, and geographies and legal entities. In particular, employee retention was highlighted as a challenge in the post-deal context, as respondents remarked upon a drop in morale and a lack of understanding of the company's future direction. To this end, deploying a cross-functional team to engage each of these areas, or better yet, designing an Integration Management Office, can help companies clear these hurdles at the appropriate time. Ultimately, deals are more likely to prove successful under the supervision of dedicated leaders and personnel.
The author would like to thank Brian Peebles, Articling Student, for his assistance in preparing this legal update.
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