2 0 0 8
With capital markets still constricted, an increasing number of private
equity sponsors are pursuing smaller tuck-in or add-on
transactions. This coupled with an expected increase in §363
“auction sales” during the new default cycle, should keep
acquisition activity at fairly healthy levels even as transaction
volumes inevitably fall.
Most executives and investors would agree that M&A transactions are difficult to negotiate and close but that successful merger integration is even more challenging. As such, executives are routinely faced with a myriad of decisions on the extent of merger integration activity that is necessary and achievable to yield the targeted benefits of a transaction. There are many “flavors”, if you will, of M&A transactions, each having its own unique considerations and complexities in terms of merger integration.
Merger integration is a critical component of the M&A process. Buyers and targets, bankers, equity sponsors, hedge funds and capital markets all realize that M&A is about value creation. Without proper merger integration planning and execution the possibility of value destruction is ever present. The true value created by a transaction is not only framed by its financial terms and conditions but by the efficient execution of its strategy and a laser-like focus on critical business issues from the day the transaction closes through the first year of operations. Merger integration is scalable and executives need to be mindful not to rush into full blown integration execution, especially for middle market companies, but rather make time prior to the close to develop a merger integration blueprint that includes:
1. Re-confirming the strategic intent of the transaction and determining acquisition objectives beyond the obvious (e.g. market expansion, cost reductions)
2. Firming-up transaction synergies and timing. Where specifically will synergies come from? Which assets can be divested? How much capital can be freed up?
3. Determining the incremental revenue opportunities and related costs
4. Developing a blueprint for the new organization that frames in sufficient detail the organizational design and outlines the operating model implications given the legal entity structure.
M&A Transaction “Flavors” — Full, robust merger of a company
— Carve-out or carve-in of a division or subsidiary from the parent company
— Strategic acquisition that supports the acquisition of new customers or the expansion of existing customer relationships
— Strategic acquisition that enhances product channels or expands product line and/or services growth
— Strategic acquisition that expands geographic presence
— Strategic acquisition that expands buyer’s penetration into new business segments
— Non-strategic acquisition that supports top-line revenue and EBITDA growth
K E Y L E S S O N S L E A R N E D I N
E X E C U T I N G S U C C E S S F U L
M E R G E R I N T E G R AT I O N
TRENDWA
TCH
For more information about our Merger Integration services please visit
www.fticonsulting.com/mergerintegration.
This article was written by Michael F. Murphy, Senior Managing Director in FTI’s Corporate Finance (Merger Integration Services) Group in Denver, David Smalstig, Senior Managing Director in FTI’s Corporate Finance (Transaction Advisory Services) Group in Chicago and Victoria L. Creason, Managing Director in FTI’s Corporate Finance Group in Chicago. The opinions, facts, and conclusions contained herein are those of the authors or the sources cited and not those of
FTI Consulting, Inc.
MERGER INTEGRATION CONTACTS
DENVER, CO Michael Murphy +1 303.689.8847 [email protected] Chris LeWand +1 303.689.8839 [email protected] LONDON, UK Stephen Welch +44 (0)203.077.0554 [email protected] CHICAGO, IL Victoria Creason +1 312.252.9324 [email protected]
Detailed merger integration planning should begin upon completion of this blueprint. Regardless of the transaction’s “flavor” and the complexity of the integration required, we offer a number of object lessons for executing successful merger integration that are associated with both sell-side and buy-side deals.
You Can’t Start Planning Soon Enough
Many executives ask, “When the appropriate time to begin merger integration is, and how much integration is needed?” We believe merger integration planning is scalable based on the objectives of a transaction and should begin after the Letter of Intent but prior to the execution of a Definitive Purchase Agreement (see Exhibit A). Merger integration planning should be incorporated into the due diligence process in order to assess the company’s ability to execute upon this critical aspect of the deal.
Exhibit A – Scalable Merger Integration Planning
and Execution
* actual time varies based in size and complexity of transaction.
During this time period it is important to identify and discuss key integration considerations, which include time sensitive issues, regulatory issues, tax considerations, Sarbanes Oxley, governance, IT systems, supply chain, divestiture/consolidation alternatives, and human resource issues. In addition, this is also the time to identify potential improvement alternatives, such as shared services, outsourcing, facility/asset rationalization, product/market rationalization, supply chain consolidation, and key IT platforms. When discussing these considerations and alternatives, executives and investors should continually balance them against “customer satisfaction” and business plan attainment in terms of risk/reward tradeoffs. Another aspect to address during this timeframe is whether the need for Transition Service Agreements1with the seller exists, and if so, to develop them accordingly to support the transaction.
During the integration planning timeframe, executives and investors should also distinguish between pre-merger initiatives that must be completed “Day One” and within the first 30 days after close in order to allow the combined organization to operate effectively and to minimize any immediate impact on customers versus initiatives to be completed post 30 days after the transaction closes. Post-merger planning is discussed in more detail below.
Establish a Disciplined Program Management Office (“PMO”) Successful merger integration should incorporate a disciplined PMO to oversee all pre-merger and post-merger integration activities and to serve as a conduit for the business. The governance, along with underlying processes (see Exhibit B for examples of PMO processes) provides the foundation for tracking and realizing the objectives of the M&A transaction.
Key to a successful PMO is the realization that this is not typical project management, where it is easy to underestimate the complexities and integration interdependencies. A PMO Leader should be appointed from within the organization and be an
individual who is well respected and decisive. The PMO Leader is then supported by an Executive Steering Committee--with key executive representation from both companies who collectively help set the strategic direction--and is able to answer on a regular basis any number of key questions regarding merger integration. These may include:
— Where are we in terms of our merger integration initiatives?
— How much have we spent to date?
— How much of the target benefits have been realized?
— How much more do we need to spend to achieve target benefits?
— What merger integration initiatives remain to be completed?
— What are the critical path issues to completing merger integration initiatives?
Successful executives and investors recognize the need for independent third party support that has broad and deep merger integration experience. These individuals bring a set of standard tools and templates that enable an efficient and structured process with standardization that will enable quicker and consistent transition. In addition, some executives and investors have found the need to engage other third parties who have specific business or industry specific knowledge in areas such as tax, legal and regulatory, labor,
Structuring Deal
2 weeks - 6 months*
Due Diligence
30 - 45 days*
Letter of Intent Definitive Purchases Agreement Deal Closing “ Day 0” Finalize Transaction 15 - 45 days* Post Transaction
Pre Merger Integration 30 - 60 days*
•Post Merger Integration 60 - 180 days* Scalable Merger Integration Panning and Execution
1. Transaction Service Agreements are typically utilized to cover items such as IT support, continuation of supply agreements, accounting support and financial reporting, benefits, etc.
Exhibit B – Examples of Underlying PMO Processes
— Identifies and tracks key performance metrics to achieve
target benefits
— Consistent planning across integration initiatives
— Provides a roadmap for priorities
— Monitors progress
— Provides early warning signals of initiatives in trouble
— Manages integration initiative dependencies and milestones
between competing initiatives — Arbitrates issue resolution
— Fosters cooperation and flexibility across multiple initiatives
— Identifies and addresses cultural issues head-on and avoids
culture conflicts.
— Facilitates resource allocation--both human and financial
benefits, IT, and change management that help the organization to focus and drive issues with faster results.
Keep Your Eye on the Top Line
Executives and investors are often distracted with closing the M&A transaction and subsequently integrating the combined organization. They often lose focus on the actual running of the business, which can often result in lost sales. It is critical that management balance these activities with the concerns that customers may have about the new ownership/organization. We recommend companies pro-actively engage its customers to gain support and commitment and address their concerns in an effort to avoid a potential loss of sales in the months post-closing.
You Can’t Over-Communicate
A comprehensive communication plan should be developed to ensure clear and consistent messages to both internal and external
stakeholders. The communication plan should be proactive and clearly communicate the overall strategy, integration planning initiatives and create an accurate expectation setting.
Often the lack of effective and consistent communication leads certain stakeholders, especially employees, to develop their own perceptions of the overall strategic objectives of the transaction, which are often negative. Executives and investors need to pay close attention to these perceived issues that can create unforeseen disruptions to the integration process without valid reason. The development of the communication plan should include: 1. finding out what is on people’s minds; 2. understanding their fears and concerns, as well as perceptions and expectations; 3. collecting suggestions from both internal and external stakeholders; and 4. understanding cultural differences.
Carefully Prioritize Integration Initiatives
Integration initiatives should be prioritized based on operational relevance and return on investment (“ROI”). In other words, those initiatives that have high operating relevance with a high ROI should have highest priority. Even those initiatives with high operating relevance but a lower ROI should receive high priority in that these initiatives are often driven by other factors, such as regulatory or statutory requirements. Initiatives with low operating relevance and low ROI should be challenged and, most likely, eliminated. It is important for executives and investors to stage and achieve some “quick wins” early on to create positive momentum and team spirit.
Be Ruthless with Technology
One area many executives underestimate is the impact of technology on merger integration. Do not trivialize infrastructure integration but rather insist on standardization. IT initiatives should be
rationalized based on difficulty and cost, and prioritized by business user requirements rather than being driven by IT on behalf of the business users. Another key element to consider is accurately determining if IT is capable of delivering on its plan or whether outsourcing should be considered.
Empower Key Leadership and Hold Them Accountable As soon as possible, identify executives who will fill key management positions of the combined organization, including CEO, COO, CFO, CIO, Plant Managers, Sales Executives, Product/Brand Leaders, etc. Executives must be empowered to act and be held accountable for not only their operational responsibilities but the successful and timely implementation of initiatives that the merger integration planning teams develop. If necessary, key employee retention programs should be implemented early in the integration process. For organizations that establish bonus plans for key integration
executives, they should always be performance-based, measurable and back-end loaded.
The company should quickly update the annual business plan that incorporates the objectives of the M&A transactions, targeted benefits, revised growth and profitability goals, updated key performance metrics and required capital spending, with the new management team held accountable for its achievement.
Create a “New Combined Culture”
Culture issues between companies that merge are commonplace. Executives and investors often believe that their corporate success mandates that the integrated company should be folded into the acquiring organization and in the end the prevailing culture of the acquirer will dominate.
However, executives and investors should avoid creating the perception of “winners” and “losers” by selecting representatives from both organizations to help guide integration initiatives and selecting the ‘best of best’ people, processes and technology for the combined organization irrespective of which legacy organization they come from prior to the merger. One way to begin to address this issue is to appoint some senior executives from the acquired company to roles that are visible and meaningful.
In addition, executives and investors should embrace labor groups— whether or not they are under collective bargaining arrangements— and recognize the impact of these relationships on operations. Employee actions (e.g. reduction in force) should be conducted fairly, with open communications and sensitivity, and should come from both combining firms. Upon execution of these fair employee actions, it is important that these actions are conveyed throughout the combined organization as part of the communication plan.
Time Really is Money
Is it less painful to remove a bandage slowly or quickly? We think it hurts either way: A fast track merger integration is generally better than a slow and steady one because many organizations tend to lose focus after the first 120-180 days post-closing. A “100 Day Plan” is needed in order to capture and realize the value of the merger but this must be balanced against the downsides of premature execution and over-analysis.
Often companies suffer from the “ready, shoot, aim” syndrome; they do not take the requisite time to fully plan the integration before they begin execution. These companies do not utilize the proper integration processes, methodologies and tools that foster effective
communications and detailed planning among functional areas so that plans and execution tasks will be coordinated and synchronized. Conversely, executives need to avoid “paralysis by analysis”; many
companies spend so much time planning to ensure they have the “right answers” that they often miss the window of opportunity to
implement or achieve optimal results.
As such, we recommend using the 80:20 rule as a guiding principle to merger integration planning. Baseline model and process integration are important and must include elements such as organizational design, operational integration, IT systems plan & integration, product strategy & profitability analysis, and distribution channel rationalization.
In Summary
So what does this all mean to you and your organization? Our key take-aways are:
1. Take time to speak the same language in terms of common financial planning and operational metrics, with strategic and investor assumptions grounded into the updated annual business plan.
2. Start integration early but balance that with the risk of the transaction not materializing.
3. Empower management to take ownership of the successful and timely execution of identified merger integration initiatives and updated financial and operational results of the combined organization and hold them accountable.
4. Engage knowledgeable third party support that is independent and objective to help drive the merger integration process. 5. Have open and frequent dialogue with key stakeholders so your
messages are clear and consistent and express the official position of the company. Don’t allow inaccurate perceptions to become somebody’s reality.
6. Stage integration activities to align to the transaction’s strategic objectives.
7. Be realistic in terms of breath, depth and timing of integration activities so as to balance the realization of target synergies without paralyzing the organization.
8. Successful merger integration planning and execution requires dedicated resources and investment.
FTI Consulting, Inc.
is a global business advisory firm dedicated to helping organizations protect and enhance enterprise value in anincreasingly complex legal, regulatory and economic environment. With more than 3,000 professionals located in most major business centers in the world, we work closely with clients every day to anticipate, illuminate, and overcome complex business challenges in areas such as investigations, litigation, mergers and acquisitions, regulatory issues, reputation management and restructuring. More information can be found at
www.fticonsulting.com.
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