Proactive planning for post-merger integration in the US
September 2015 | SPOTLIGHT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
Far too many business combinations are not successful. There are various reasons for the failure of a transaction and, while hindsight is 20/20, a common reason is failing to plan for post-merger integration at the outset of the deal. Integration of an acquired business becomes more difficult when the transaction crosses national borders and presents cultural differences.
The following observations focus on issues that arise when parties to an acquisition have different structures, business methods or cultures rather than the technical aspects of merging businesses.
Structuring the transaction
The best time to begin successful post-closing integration is during the initial transaction structuring. With a foreign (non-US) acquirer, the US entity and its management that continues with the company after closing will want to continue to be consulted and have a say in significant decisions. In most cases, when the US entity is not the dominant party, the US management will not expect to have a veto right or control the board, but they will want their ideas on significant issues considered.
Parties should take the time to include US management on the board of directors or critical decision-making bodies pertaining to the acquired business. This can be beneficial for several reasons, not least of which is helping them feel a part of the ‘team’. US management knows the US operations that were acquired, the US market and US business practices. They may have insights that can facilitate the success of the merged entity in the US market. Getting the management of an acquired or merged entity to buy into the direction of the company can be very helpful as new strategies and procedures are adopted.
Furthermore, the acquirer should grant management incentives rewarding US management for effectively exercising the authority granted to them. Most US executives expect to be granted an equity incentive for their contributions to the company. This is particularly the case in the technology industry. An equity interest will incentivise US management to work for the success of the company and make their equity interest more valuable. Granting US management equity incentives will also help to make them feel like they are sharing in the success or failure of the combined company as part of the team.
US management should also be offered employment agreements that include robust job descriptions involving decision-making authority. At the executive level, US management is often offered an employment agreement that includes a description of the job, the executive’s responsibilities (including reporting responsibilities) and authority to make decisions. It is often poorly received when an executive job description is not clearly defined or when decision-making authority is dependent on the board or, even worse, on someone at the foreign parent company.
Non-US acquirers must also consider the hierarchical structure of the new business. Many US companies are trending toward low governance or diffuse governance structures. Corporate structures are becoming flatter (particularly in the technology industry) and more decisions are being made at the division level rather than centrally. Increasingly, more hierarchical structures that are imposed by foreign parent companies are less effective with US management.
Employment practices that comply with applicable US laws must be utilised. US management and employees expect that the employer-employee relationship will be shaped by the law of the state in which the company is doing business. By carefully complying with applicable state law, the foreign owner will demonstrate to US management and US employees that it intends to operate within applicable legal requirements while creating a comfortable working environment for US employees.
Negotiating the transaction
The way a foreign buyer or merger partner negotiates the transaction has a profound effect on how effectively the US company and personnel is integrated after closing the transaction.
The US team will believe that the way that the foreign team negotiates the transaction is the way that the foreign parent company will behave after closing. It may be the case that the integration team will approach its task very differently from the way that the negotiation team handles the deal. However, US management will not have confidence in the future of the merged entity if the foreign negotiating team shows indifference to the needs and positions of US owners or management, or demonstrates a lack of understanding of the US business environment or knowledge of the US industry in which the merged entity will do business.
Hard bargaining is acceptable in the US but arbitrary or unreasonable negotiating is not. An aggressive negotiator is respected in the US when the reasons for his positions are understood. But when a negotiator takes a position that the US owner or management deems arbitrary or unreasonable, the US party will believe that the foreign owner will run the business in an arbitrary or unreasonable way. This could lead to US management feeling like they are not on the team and becoming less invested in the success of the merged entity.
Buyers should adopt a ‘win-win’ approach in the negotiation process, not an ‘I win, you lose’ approach. It is very much the ethic and ethos in US business that both sides look for ways to come to a deal that includes terms that are important to both sides. Often one party to negotiations will concede on a point because it is not important to that party but very important to the other. In exchange, it will be expected that the other party will be flexible on a term that is not important to it. US businessmen expect that neither party to a transaction will get all that they desired, but that the terms of the transaction will preserve the key terms and conditions that are important to each party.
All efforts should be made to show clear lines of decision-making authority. Lack of clarity will frustrate the US team and suggest that post-closing the US management will not know the organisational route to addressing the challenges that face the company. Most US management will want to make the combined entity successful after closing and their excitement and commitment will dissipate if US management comes to believe that their initiatives will be frustrated by a murky or cumbersome decision-making process. It is important for the non-US acquirer to show how the decision making process will operate during the negotiation of the deal.
Parties should include all significant deal terms in the documents and should not expect to change or add new terms to the deal after closing. There is a difference of significance placed on written documents in different business cultures. In the US, it is expected that all significant terms of a transaction are included in the documents. Sometimes this results in complicated and long documents, which can be viewed with suspicion in some cultures. In US business culture it is expected that parties live up to their obligations as set forth in documents and not expect to include additional significant terms after closing. If the foreign party to a transaction expects that significant terms of the deal will be added or changed as the transaction progresses, the US party may come to believe that the foreign party was less than completely honest when the transaction was being negotiated.
Collaborate persistently, and communicate fully and frequently throughout the negotiation process. Communication in negotiations is very important to creating a base of trust and understanding upon which the parties can build during the integration process. Negotiating a transaction in a different language and from different cultural bases can be difficult, which is why it is important that the parties share a clear vision of the goals of the combined entity as well as the path to get there.
Create an integration plan and timeline that shows each significant post-closing task to fully integrate the acquired business. The plan and timeline should be jointly created by members of the integration team of the acquirer and of executives of the acquired business who will be responsible for integration after closing.
Post-closing integration measures
Pre- and post-closing communication and teamwork is essential to increase the likelihood of post-closing success. Integration measures should begin at the earliest stages of negotiations, continue well past transaction closing and be the responsibility of both the acquirer and the acquired business.
After closing, continue the communication and collaboration strategies that were pursued during the negotiation process. Acknowledge that the cultures are different but continually seek ways to understand and accommodate the differences. It is very possible that in the process of accommodating, the parties may find a pathway to success that was not previously considered regarding how best to proceed on a combined basis.
Distribute a memo to all employees of the acquired business that states the combined business’ shared vision of the future, as well as the joint commitment to accomplishing their shared goals. It is important that all employees of the acquired business understand that there is a shared vision for the future of the business, that they are an important part of the vision and that the new owners are committed to the combined businesses’ success.
The integration team should include key members of the negotiation team. It is often the case, even in the US, that companies have separate negotiating teams and integration teams that do not overlap. This is a mistake. If the negotiating team is effective in laying the groundwork for successful integration post-closing, then that collaborative team should continue to be involved in helping bridge the gap between negotiation and integration.
The non-US firm should review and carry out the integration measures set forth in the integration plan and timeline. After closing, consider including new members in the review and implementation process – they may have good ideas about how to integrate the acquired business. Be open to new ideas and be willing to adjust the implementation plan, but always press forward to accomplish the big picture goals set out in the integration plan.
Furthermore, management should assign a ‘buddy’ for each significant US team member. It is important that each significant US team member has someone who can facilitate communication within the combined entity, can explain procedural and cultural differences and work closely to monitor the progress of the combined entity. It can be very disconcerting to a US team if, after closing, they find themselves unsure about how to proceed inside the combined entity or how to present the new business to the US market.
Be present in the US. It is important that staff in the home office visit US operations early and often following the consummation of the transaction. Communication and collaboration is much more difficult when done over long distances and the risk of misunderstanding is significant. Hopefully, the process of building trust within the combined entity began at the earliest stages of the negotiations. That process needs to continue and deepen as the combined entity pushes towards its stated objectives. Trust can be lost unless relationships are continually cultivated.
G. Thomas Stromberg is a partner at Jenner & Block. He can be contacted on +1 (213) 239 5179 or by email: firstname.lastname@example.org.
© Financier Worldwide
G. Thomas Stromberg
Jenner & Block