It’s not uncommon, especially for inexperienced acquirers, to get caught up in the transaction process and the exhilaration of closing the deal. Finance personnel who get entangled in the deal-making whirlwind then lose sight of what comes next for the entire company: post-merger integration, possible divestitures, and attempting to realise both cost and revenue synergies.
“It’s quite exciting and distracting, but acquiring a business is a lot of work,” said Christopher Kummer, president of the Institute of Mergers, Acquisitions and Alliances, a research organisation in Zurich, Switzerland. You first need to identify a target, negotiate a deal price, and do your due diligence, “but nothing compares to what comes after you acquire the business”, he added. “That’s what a lot of people underestimate.”
Post-merger integration, or PMI, is a complicated process, and there is no one-size-fits-all solution. It includes melding people from two different organisations and two distinct cultures, and outlining a step-by-step integration plan. It means revising one’s payroll system for the new staff, updating websites, and paying for employee training. It involves informing customers and suppliers about changes.
And, finally, it can entail divesting recently purchased assets if they don’t fit into your company’s strategic plan or core competencies. These assets can include people, though in this age of low unemployment (and in Europe, regulatory restrictions), layoffs are near the bottom of the cost-cutting list. Companies, particularly larger ones, may also decide to divest warehouses, machinery, product lines — or segments of the business, which can be sold, spun off into separate entities, or shut down completely.
“It is less common to divest immediately post-merger,” said David Braun, founder and CEO of M&A advisory firm Capstone Strategic Inc., in McLean, Virginia, and author of Successful Acquisitions: A Proven Plan for Strategic Growth. “But it should be on the radar.”
Divestitures are also less likely following small to midsize deals, since the focus is on expansion, not downsizing. “If you go through all the effort and put all the money on the table, and then just try to leverage some cost synergies, it’s not worth it,” noted Christoph Rohloff, managing partner of Frankfurter Gruppe, a merger-integration management consultancy in Neu-Isenburg, Germany.
Some acquirers, like regional senior living provider Immanuel, typically don’t divest assets post-deal, since the company buys stand-alone senior living facilities that come with built-in personnel. “Our strategy is about revenue and market share growth,” said Eric Gurley, president and CEO of the Omaha, Nebraska-based business, which has completed four acquisitions to date. “We’ve learned that we have to pause and integrate with the new organisation and their management.”
For many financial leaders, though, PMI is an afterthought — and the acquisition that held so much promise can fail on many levels. According to the 2018 Deal Value Curve Study by Grant Thornton, which surveyed CEOs, CFOs, managing directors, and other high-level executives, only 14% of all deals surpass their early expectations for income or rate of return.
So how do companies simultaneously integrate, cut costs, and propel revenue growth? Braun and others offer the following advice for ensuring that post-merger integration — including divesting, when necessary — goes smoothly:
Determine your motive. Before you complete the deal, know what you are buying, what you hope to get out of it, and how it will impact your business model. “Identify investments that will be required in addition to cost savings,” Braun said.
Look for revenue synergies. Many small to midsize acquirers look primarily at cost cutting — such as purchasing efficiencies, layoffs, divestitures — during the due diligence or post-deal phase, while putting less focus on revenue synergies that add to your company’s growth, skillset, or technology portfolio. Ask yourself, is this a lateral or vertical acquisition, and “what revenue or technology synergies are you looking for?” Rohloff advised.
Don’t get blindsided. With acquisitions come unexpected outlays, such as outdated software licences or website and branding changes. Mergers can also create duplication, in everything from personnel to technology to office locations. Formulate a post-deal strategy that can “guide you on what to do with the redundancies” and help you scale down if necessary, Rohloff said.
Create a 100-day integration plan. “The moment you acquire a business, people will look at you and say, ‘What is your plan now?’” said Kummer. “If you don’t have a plan you can communicate, that creates an atmosphere of distrust.” So before the deal closes, design a 100-day integration road map, and be forthright with employees and stakeholders, Braun advised. The plan can help alleviate chaos and avoid a scenario where “you’re doing this in firefighting mode in comparison to a planned mode”, he said. “One of the benefits of the 100-day plan is, yes, you will identify your cost savings — but the value is in the ability to identify your revenue growth.”
Create a team. Establish an integration crew early on. Pull key people from functional areas — finance, sales, marketing, IT, human resources, legal, customer service — and get them “involved in the planning way before you get to the execution”, Braun advised. It’s particularly crucial, he said, for finance and HR personnel “to have a seat at the table early in the process”, since they don’t have the benefit of time (for such things as payroll, health benefits, and even some cost-cutting measures). And always have an internal project manager who runs the integration.
Assess potential divestitures. Several months post-deal your company may realise it does not want a product line or unit that was recently acquired. “If a certain segment in your business does not play into your core competencies, then you should divest it,” advised Rohloff. First, though, evaluate whether there’s a market for what you want to sell. Ask yourself, Kummer said, who will buy. And do you want to sell it as a stand-alone entity, or enter into a service agreement, whereby the buyer will continue to support your company?
Walk in the buyer’s shoes. If you plan to sell any part of your business — whether it’s machinery, real estate, or a segment — “Identify what it is that you are divesting, and be very clear,” Braun said. “Get it cleaned up and organised, so it’s easy for a potential buyer to buy that business you want to divest.”
Be speedy. Once a deal has closed you have a short window to integrate and get employees — both old and new — on board. If too much time elapses, Braun noted, employees can lose faith and start pushing back, and key people — those you did not want to lose — may leave prematurely if they become impatient. So stick to your integration plan, and maintain the momentum that is necessary to be successful. “PMI winners move quickly, and PMI losers dither,” he said.
— Cheryl Meyer is a freelance writer based in the US. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.