Clearing the last hurdle
Making Post-Merger Integration a success
The deal is done. As champagne flutes empty, dealmakers turn their sights to an element of the process which may be even trickier than the deal itself – integrating the businesses after the deal closes. The success of post-merger integration (“PMI”), the process in which two businesses are joined up after an M&A transaction, can make or break a deal. Issues with integration are cited as the main cause of why up to 90% of M&A transactions are deemed to “fail”. This article looks at the PMI process and how it can help acquirers maximise the value of a deal.
The most experienced dealmakers have an extensive integration plan in place well before a transaction closes.
Planning ahead
Acquirers should not wait until the deal closes before turning their minds to integrating the target into their businesses. The most experienced dealmakers have an extensive integration plan in place well before a transaction closes. The integration team should cooperate closely with the deal team throughout the due diligence process to identify potential challenges to PMI and use information from the due diligence process to inform the integration plan. If certain information cannot be shared due to competition law concerns, then it would be wise to ensure that members of the integration team are represented in the “clean team” – the team provided with access to the target’s confidential or competitively sensitive information.
Staffing the integration team
Acquirers must decide on how best to staff the integration team, and whether to split out an integration management office (ordinarily overseen by a steering committee or the board). As the biggest bottleneck in PMI is the execution of decisions, it is critical to have well-staffed and experienced integration teams driving the process. Deals can be expensive so the temptation may be to hold back on committing capital and resources to the PMI process, but this risks value being lost from the deal. Having clear reporting structures and balancing decision-seekers with decision-makers may make it easier for those executives and transaction teams who may be slightly fatigued by the deal!
Restructuring the target group
Restructuring is central to any PMI process. Acquirers should not delay planning or executing this process as it may compromise the synergies created by the deal. The acquiring company should work closely with the legal and accounting teams to decide the most optimal legal and tax structure of the merged group. Adopting a tax-efficient structure will enable acquirers to preserve tax losses, utilise tax incentives (particularly in relation to intra-group transfers), comply with local laws and consolidate tax structures.
Well-executed legal restructuring is fundamental to realising cost savings, and minimising group liabilities, after the deal is closed. Entities which are no longer necessary in the merged business should be dissolved or demerged before the governance structures of both businesses are aligned. Contracts and assets held by the target may have to be transferred around the acquirer’s group in accordance with strict legal mechanisms, often subject to the consent of a third party. Likewise, acquirers should conduct an examination of the target’s property to assess which leases can be terminated, novated or assigned, and whether the target owns any property which it will have to sell. Executing the legal restructuring often has the longest lead time and is an area where mistakes can be especially costly.
Workforce integration
In relation to employees, acquirers must consider (i) what entity will hold the employee contracts; (ii) whether changes to the workforce will be required post-completion; and (iii) whether employee groups such as trade unions been consulted throughout the merger process on any proposed changes in staff.
The movement of directors, employees and contractors can have implications on timing that should be factored into the integration plan. If personal data is being processed, a data protection team should be on hand to assist to mitigate the risks of a data breach.
Culture clashes can derail even the most promising M&A deal.
Culture integration
Culture clashes can derail even the most promising M&A deals. Successfully integrating cultures requires effective stakeholder management and clear communication of well-defined company policies. Establishing a precise vision for the acquiring group's culture after the deal's completion will enhance employee engagement and, consequently, increase the likelihood that the transaction will be seen as a success.
The integration team should question whether there are any functions or processes in the target company which are outperforming its own and, if so, ask if those can they be scaled. A degree of “reverse diligence” on its own processes will enable acquirers to use learnings from the due diligence process to better assimilate the businesses post-close. There are other matters to consider as part of PMI, such as integrating specific functions and departments, financial consolidation, harmonisation of pension plans and so on. However, getting the issues discussed above right will go a long way in implementing a successful post-merger integration.
