Daimler and Chrysler, Microsoft and Nokia, and Google and Motorola are all examples of big names that thought they’d be stronger together. Instead, the mergers and acquisitions (M&A) involving these giants amounted to far less than the sum of their parts.
A successful M&A deal requires more than two good names or even just two strong businesses. The failure rate is high and almost invariably a result of poor integration. A litany of factors leads to this, but they essentially can be drilled down into poor preparation and poorer follow-through.
The post-acquisition phase is often the most crucial in ensuring such deals don’t fall apart while the ink is still wet.
That phase is where the logic and theory that led to the deal meet practical reality. Failure often comes not from the deal itself being poorly thought out but rather from how the integration phase is approached.
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“There are three key areas that can contribute to failure in the post-acquisition integration phase,” says Ian Whitefoot, partner at Deloitte Advisory. “A lack of understanding of value levels of the business, losing momentum post-close, and approaching integration as a process rather than an opportunity. Integration is where deal strategy is put to the test and transformed into reality.”
Preparation for integration needs to happen during the M&A process. If you wait for the deal to close legally, you are already fighting an uphill battle. The due diligence process is where those involved in the deal should be able to identify integration risks and opportunities.
This gives the assorted stakeholders a chance to put together an integration plan before the two companies begin operating together formally.
“Ideally, integration planning should be a component of all stages of the M&A process from origination to deal close,” says Whitefoot.
In reality, a buyer should be considering integration as a core element of the process before they even make the first approach.
“From the very outset and even before a target has been identified, a buyer should have integration in mind, how they would see that working and what their best strategy is to achieve that,” says Adrian Benson, partner and head of corporate and M&A at Dillon Eustace.
The post-close period is easily the riskiest. The sheer amount of work put into closing the deal and the relief that comes with it can distract from the fragility of such a time. Risks like talent departing and uncertainty over the future can quickly result in a drop in value.
“When the deal is done and M&A and legal advisers have moved on, the proud new owners are left with their investment. A quick start is crucial so that each day value is being delivered and IRR [internal rate of return] isn’t lost. The initial six months is the window where change friction is at its lowest,” says Whitefoot.
“High performers need to be engaged, or you run the risk that they become disenfranchised.”
This is where communication becomes vital in the process. Two different company cultures are being merged and that can get messy. The intangible nature of this can often lead to its importance being undervalued.
“Cultural and people-related factors, whilst intangible, are equally critical to the success of an integration and must be carefully assessed to understand the full risk and opportunity profile of the deal,” says Whitefoot.
That’s why it is critical that leadership from the top down takes a disciplined approach that engages the newly merged entity’s staff.
“Having a strong leader with strong interpersonal and communication skills with overall responsibility for implementation, setting clear integration goals and deadlines, and keeping momentum are all critical to successful post-acquisition integration,” says Benson.
Naturally, experience can play a big role in whether or not an integration is managed successfully. Those who have the battle scars of managing prior integrations are better prepared for the challenges ahead.
“Serial acquirers excel at tailoring their governance approach based on the nature and scale of the transaction. While every deal has its unique complexities, experienced acquirers develop robust frameworks and playbooks to manage M&A transactions effectively,” says Whitefoot.
While everyone has their first time being involved in M&A activity, it doesn’t need to end poorly. By learning from the mistakes of those that went before you and embracing the accountability required of leadership, integration can be a pillar on which the new business stands proudly.
