Capturing the full value of an M&A deal hinges on how well the newly combined company manages and executes after it closes.
Global merger and acquisition activity has accelerated, as corporations, private equity firms and others take advantage of buoyant stock prices, increasing consumer confidence and relatively low borrowing costs. Acquirers are motivated by a desire to enter new lines of business, expand their customer base, obtain new technologies and extend their geographic reach. These are all springboards to growth.
Growth through M&A is a high-stakes game. Money and careers are on the line. Customers, suppliers, bankers and stockholders are watching intently. And, of course, the media always love stories about mergers gone bad. Just ask Daimler-Benz and Chrysler or AOL and Time Warner. The best dealmakers know that success depends on more than negotiating the best price. Renowned American dealmaker Ted Forstmann once said, "You buy the wrong business at 25 percent less than you should pay for it, you will take a little longer to go broke."
Capturing the full value of a deal hinges on how well the newly combined company manages and executes after it closes. Post-merger integration is a notoriously difficult undertaking, and lack of clarity and execution in this phase is a big reason why deals fail.
Ideally, the acquiring company should begin planning the integration process even before the deal is announced. Acquisitions require a careful assessment not only of the target company, but also of the buyer's capacity to implement and build upon the larger business. This appraisal can help identify key employees, crucial projects and products, sensitive processes and matters, and differences in corporate culture. The M&A team also has to conduct vigorous compliance due diligence on the target company. Times have changed and there is much more emphasis on transparency and ethics. Regulations covering money laundering, tax avoidance, the environment and privacy also have become stricter. Acquirers don't want to buy trouble.
During the integration planning, acquirers have to ruthlessly prioritise. The key is to figure out the critical value drivers of a deal and stay focused on those without being distracted.
Culture is key
One of the key factors to deal success is cultural fit. Every company has its own culture – the shared values, standards, attitudes and beliefs that govern members of an organisation. Usually the acquirer wants to maintain its own culture. Sometimes acquirers combine best practices. Whatever the approach, the key is to commit and manage the culture actively.
Don't overlook the details
While concentrating on the value drivers like culture, it's easy to overlook all the details that go into being ready once the deal closes. The employment, legal, tax and entity considerations, particularly with multi-country operations outside established geographies, can be intimidating.
In deals that involve expansion to new countries, legal entities have to be set up in multiple jurisdictions that are ready to operate and support employees that are transferring in. Incorporating a new business in some jurisdictions can take days or weeks. Shelf companies may be an option to save time. The business entity will need a registered office to serve as the official address, and, in some jurisdictions, will need local directors.
Once the legal structures are in place and the transfer of employees occurs, an onboarding program is essential. M&A makes people nervous. They're uncertain about what the deal will mean. They wonder how they will fit into the new organisation. Key to winning their hearts and minds is making sure the more mundane human resources tasks are handled properly. Offer letters, employment contracts, labour policies and handbooks must comply with local employment laws and regulations. Benefit programs have to be integrated, and payroll and HR systems need to be updated.
Particularly during the early stages of integration, it's a priority to produce the financial synergies. Typically, corporate administrative and "back-office" functions, such as procurement, payroll, finance, HR and information technology, are opportunities for cost reduction. Slow or poorly handled integration in any of these areas can jeopardise business goals. Acquirers often underestimate the administrative resources needed for compliance.
Making sure the company and employees follow the laws, regulations, standards and ethical practices in new geographies is a complicated task. Some countries require statutory filings to be handed over in-person or contracts to be done in the native language.
When operating in a diverse global market, companies have to be mindful of cultural differences. Knowing and understanding the requirements for financial and corporate compliance can save the organisation from fines, lawsuits and reputational damage.
Maintain your focus
Fatigue often sets in after the deal closes, but acquirers need to stay focused on compliance because laws and regulations are constantly changing. In heavily regulated industries, such as healthcare and financial services, requirements for product registrations, certifications and labelling vary by country. The only way one can react quickly is to be local.
If internal resources don't have the capacity or local expertise, external compliance help from a single partner with in-depth knowledge of all the markets involved in the deal is essential. By engaging such a partner in the integration-planning stage, corporates and private equity can spot issues and potential liabilities during the risk assessment. Post-closing, the partner can help navigate ever-changing local requirements, so the newly merged company can move quickly and effectively in executing the integration plan.
Every merger involves "negative synergies," including departure of key talent, sales losses, incompatible systems, productivity declines, turf battles, and cultural friction. By having an integration plan in place when the deal closes, acquirers can limit the costs and be prepared for the unknown challenges that always arise.
Managing a merger, regardless of size, is distinctly different than managing an ongoing operation. As a method of corporate growth, acquisitions are revolutionary rather than evolutionary. It is important to recognise that uncommon growth often calls for uncommon solutions.
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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.