Getting M&A Right: The Four Integration Activities Required to Drive Value


October 26, 2016

Global merger and acquisition activity hit an all-time high in 2015 with $4.28 trillion worth of deals. These deals – all $4.28 trillion of them – were likely embarked upon with the greatest of intentions. And those intentions, everything from acquiring resources, blunting a disruptive business model, or defending against commoditization, all share one common objective: to create value.

Yet study after study puts the failure rates of mergers and acquisitions anywhere between 50 percent and 90 percent.1 It’s become commonplace, almost assumed, that acquisitions will fail to create value, even as the pace of mergers and acquisitions quickens.

The devil is in the details when it comes to unlocking the value of transactions. Greater value is possible by rigorously tending to the tiny details – beginning as early as allowed by law and extending long after it has closed – that can seem trivial against the backdrop of a billion-dollar acquisition. But those details of integration can absolutely make or break.

In 2013, “Harvard Business Review” told the cautionary tale of an acquisition that failed on account of a necktie. The authors recount the true story of a large American healthcare company acquiring a relatively small (a few hundred employees) British company with more than a century of history and health financials. The deal took the quintessentially English organization by surprise, and its employees were hesitant to suddenly become part of a large American multinational.

Unfortunately, the American healthcare company failed to take note of this cultural unease. One of the first acts of integration was to impose the American dress code – presented to the British team as more “friendly” and “approachable” – and ask employees to stop wearing ties. A handful of employees outright refused to stop wearing ties, and as other seemingly insignificant integration activities (legacy blue office walls were repainted red, for example) rolled out over the following months, others who had originally complied put their ties back on. Women, too, took to wearing suits and ties as an act of solidarity. Before long, the majority of employees were once again tie-clad.

The cultural discord suppressed value to such a degree that within two years of the acquisition the American company decided to spin off the British company.

We refuse to let a necktie steal from the value of an acquisition. So we utilize an execution strategy that incorporates four core activities that, when done consistently well, ensure positive returns from M&A. These four activities account for the details, big and (seemingly) small, that separate the M&A winners from the losers. 

1. ESTABLISH GOVERNANCE

Governance structures can take on various designs depending on the size and scope of the deal, but the most effective governance is established and involved as early as possible, and is made up of leadership from the corporate development group, as well as operations. This approach, which emphasizes early and inclusive planning, ensures a laser-straight focus on value drivers with a diverse governance team that is equally vested in a successful outcome.

While governance structures can vary widely, the objectives of the group always address three central requirements: decision-making, communication, and accountability.

  • Decision-making: Integration activities demand direction and strategy that is informed from the top. More often than not, M&A will touch all levels and layers of the organization, and effective governance demands that decisions are made at the appropriate level. Leading organizations empower operations managers by allowing decision-making to occur at the level where managers will have to live with the outcome.
  • Communication: The key to effective communication is clarity and consistency. Integration managers need to be sharp on messaging and need to keep teams informed. This should not be confused with communication volume. A weekly broadcast to the organization on deal progress is unnecessary and actually can be counterproductive to effective messaging as repetitive communications become white noise and are effectively “tuned-out.”
  • Accountability: Every integration effort needs to maintain a level of accountability in execution. This does not need to be burdensome (e.g., weekly, three-page status report), but it does need to ensure that responsibilities and roles are clearly defined, and plans are executed to design. A regular cadence of program meetings helps ensure this accountability as well as keeping lines of communication open.

Finding and empowering the right kind of governance lead, your integration manager, is no easy task. The job is 24/7, and requires precise project management skills and above-average emotional intelligence. For optimal value creation, integration managers must be brought into the process as early as possible and supported at the highest level, most often by the CEO.

A cross-functional governance team helps to prevent a “throw it over the fence” mentality from corporate development, who otherwise are no longer vested in integration activities once the deal is closed.

2. BUILD A ROADMAP TO LINK STRATEGY TO EXECUTION

Deals that fall apart post-close most often do so from a lack of discipline and adherence to the original deal value drivers. As deal excitement wanes, teams become increasingly focused on business as usual, and oftentimes integration efforts take a back seat to “running the business.” This is the harbinger of value destruction, as well-intentioned plans become marginalized through the passage of time.

Conversely, successful acquirers build roadmaps that serve as the single source of truth for the transaction lifecycle and are circulated throughout the organization to inform and guide the planning process. Though different for each deal, roadmaps, without exception, should include the following elements:

• Transaction phases such as pre-signing, pre-close, post-close, and end-state

• Central work centers, such as operations planning

• Workforce transition activities

• Transition service periods

• Legal and regulatory work efforts

To be sure, the roadmap is an executive-level view that addresses the critical milestones of the deal – not the detail that is resident within functional plans. A good “level of detail” test for any transaction roadmap is its ability to portray the sequencing and required dependencies that will impact execution.

In terms of priority, the roadmap should be created once a purchase agreement is signed and it should be the first artifact created by the deal and integration teams.

3. BLUEPRINT THE INTEGRATION

Operations blueprinting is a rigorous, iterative exercise that involves both the acquirer and the acquired and is focused on defining the state of functional operating models in each phase of the integration. The as-is blueprint is rooted in discovery. By sharing existing functional designs, each party gains a common understanding of how each organization is put together.

The Day One blueprint defines the state of the integration at the point of transaction close. Best practice dictates that this should be characterized by a minimum amount of change and only that which is required to close the deal, record revenue, and maintain stable operations. Post-close planning should be focused on rapid integration of the enterprise as well as immediate requirements and considerations that may only be possible following the close of the transaction.

The end-state blueprint defines the to-be characteristics of the combined entity and may have various end dates given the changes involved. Above all, blueprinting must begin with an integrated operating strategy that is born from the deal thesis, supported by all of the senior executives, and then is cascaded through the operational plans. Be mindful that all functions (Sales, Marketing, IT, HR, Finance, etc.) should participate in blueprinting.

4. CARE FOR THE CULTURE

People are the heart of an organization, and as the fateful necktie example proved, they can be the singular difference between M&A success and failure.

When employees learn about a deal, they consider it in light of how they believe the transaction will change the purpose of their work. They crave specific information about the part they will play in the organization’s new, integrated future. And ultimately, they seek to find trustworthiness and confidence in the new organization’s ability and intent to protect their professional fate and push the enterprise to great success.

Earning employees’ trust takes a methodical approach to caring for the culture. Each culture will require its own unique approach, but all will have fundamental elements that frame activities within the context of the human factors critical for success. A handful of valuable tools help organizations refine and deliver information to build trust and engage employees:

  • An employee promise that balances employees’ needs and aspirations with organizational objectives, and inspires employees to set sights on a new, united future.
  • Early and transparent communication.
  • Leadership workshops and focus groups focused on defining organizational structures and individual functions.
  • Comprehensive communication projects focused on merging the two parties’ communications channels and brand voices while providing consistent, cadenced leadership messaging.
  • Town halls, focus groups, and other forums for disseminating messages or creating consensus, followed quickly and consistently with action items that get employees moving in a new direction to maintain the momentum of the transaction.

From the employee promise all else flows. Managers must reinforce the new promise to employees through each phase of the transaction, ensuring consistency between what leaders say to employees and what managers ask them to do.

To do that right, the employee promise must be central to the new governance, roadmap, and blueprint. It must fuel communications, management decisions, and should be cross-checked against every executable detail: does this reinforce our employee promise in the right way?

An effective employee promise should be both detailed and realistic, and may include information related to compensation, benefits, culture, career advancement, and purpose of work.

EVOLVING TO BOOST M&A ROI

Post-spin-off, the remaining employees of the original British company were interviewed by Freek Vermeulen and Ashraf Zaman for their “Harvard Business Review” piece. In describing the significance of the dress code change, one British employee said, “It made clear to us that the Americans had no respect for our rich history. It was with great joy that we would remove our ties in the car park on a Friday afternoon as we got into our cars to drive home – sometimes via the pub. This small weekly moment of joy was about to be removed by our American owners who think they can come in and bully us with their ‘culture.'”2

In this instance the necktie was a canary bearing the ominous message of yet another impending M&A failure. A multi-functional governance team with culture at the core wouldn’t have missed it. And a strategy kept laser-focused on value drivers through roadmapping and blueprinting would have countered its negative effects.

Each M&A failure has its own version of the necktie. Integration activities that are well governed, through roadmaps and blueprints, with a careful care for culture, prevent these types of value-stealing wardrobe malfunctions, and can help invert the rate of failure for future M&A transactions worldwide.

For more information, please contact:

Greg Bradley

Global Transformation Service Line Lead

Greg.Bradley@northhighland.com

David Ehlen

Global Structural Transformation Offering Lead

David.Ehlen@northhighland.com



[1] “Why Is The Innovation-Through-Acquisition Model Not Working?”, Inc., May 17, 2016

[2] “Big Acquisitions Can Fall Apart Over Tiny Details,” Harvard Business Review, June 21, 2015

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