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M&A levels are picking up, as both strategic and financial buyers begin to tentatively regain their confidence in a market that many believe has finally bottomed out. But when acquiring, these buyers often have to act at speed, particularly so when the target is distressed. However, it is important that buyers do not try to rush the due diligence process in an attempt to ensure a close. Also, just as important is the need for a thorough and realistic integration plan, aimed at bringing two companies together, in the least disruptive and most cost-effective manner.
Many buyers still harbour unrealistic assumptions as to the ease of achieving synergies and combining overlapping operations. This has been made clear by the faltering of a number of recent synergy-based mergers, which ultimately failed to realise target savings because of inadequate integration resources and inaccurate forecasts and valuations. Therefore, while the deal negotiation phase may seem to be a sizeable task in itself, it is emphatically only the first step in achieving a successful merger.
With regards to the merging of complementary entities in particular, post-deal integration should always be a priority – even in a recession.
The importance of integration
The long-term success of most acquisitions will hinge on the buying company’s ability to integrate the target’s operations with its own existing business. This is of particular importance when the goal of the acquisition is to extend the value chain, product line and product reach. To ensure a deal is mapped out for success, several key elements should be present in all such deals. These include conducting operational due diligence (as well as financial due diligence), forecasting the future operational model, and having a strong integration roadmap, which should be ready to implement from day one – the first 90 days are crucial to synergy capture. Indeed, Jean-Pierre Bestel, the co-founder of Post Merger Integration Partners, notes that the implementation of these activities is key to M&A success, but adds that it is no guarantee. “The existence of an integration process will not necessarily enhance the probability of deal success, unless the right integration director and team are put in place with the right mandate. The director role is particularly vital, and yet many companies appoint an integration director who already has a full plate, and is expected to take on this responsibility in addition to his day job. Given the inordinate amount of time the role consumes, and the complexity of the task, the role must be full time.” He further maintains that integration management should be recognised as a separate business function, just as operations, finance and management are.
In addition, the integration director should be someone of high calibre, with proven business experience and the ability to resolve deal conflict. Companies have shown a tendency to overlook these factors when making selections in the past. The need for strong conflict resolution is particularly vital when addressing culture clashes, which can derail a deal if left unchecked. “Understanding cultural differences and having a plan for cultural integration is a make or break decision for the buyer – beware of any deal without proper cultural due diligence,” warns Dustin Seale a partner and managing director of the EMEA region at Senn Delaney. “In the Sprint-Nextel merger, for example, little attention was given to bringing the two cultures together and the result was a writedown of billions of dollars. Meanwhile in the UK, the merger of Lloyds and HBOS is heading in the same direction. On the other hand, GSK got it right and has become one of the most respected players in its industry,” he says. Of course, integration failures can, at least to some extent, be chalked up to the current environment. In recent months, several experts have described the latest round of distressed mergers as ‘shotgun marriages’, characterised by inadequate deal foundations and poor due diligence. They warn that poor ground work both prior to deal closure and while planning for integration, can be very costly, even when acquiring strong assets at below market price.
Of course, there is no set approach to integration from a cultural perspective. Sometimes, one company will absorb the culture of the other, while on others, the new organisation creates its own, fresh culture. “GSK, the merger of GlaxoWellcome and SmithKlineBeecham, is a positive example of a merged culture,” notes Mr Seale. “Reckitt-Benkiser’s acquisition of Boots Healthcare is a successful example of executing the absorption approach, while Telefonica has successfully acquired O2 using an arm’s length approach. All three required cultural understanding, clarity on the approach they planned to use, and excellent execution of that plan,” he says.
Deals such as those mentioned above have occurred in a variety of industries as no single industry is struggling to conduct post-deal integration more than any other. Although, it is worthy of note that, in the current market, financial institutions have fallen slightly behind the rest of the pack. The problem appears to stem from major stakeholders and institutional investors, whose whims have to be accommodated regardless of whether they complement the integration process. But, overall, integration issues are more prevalent in certain types of deals, rather than in certain industries. “As companies move into adjacent markets, or extend their value chain to different sets of business partners, integration becomes more complex,” explains Jeffery S. Perry, the Americas Transaction Integration Leader at Ernst & Young LLP. “Such expansion requires the building of local knowledge and increases management complexity,” he says. Ultimately, successful integrators are likely to be companies doing deals close to their core business.
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