Session Information:

Value Creation in Merger & Acquisition Integration

• Integration planning - what's left after closing
• Prioritizing what matters post-integration
• Where value is created post-integration
• Key points for post-acquisition integration

Session Transcript:

Hello I'm Tony Benedict I'm president of the association of business process management professionals and I'm going to talk about value creation and mergers and acquisitions primarily acquisition integration um I'm going to kind of go through this in about 30 minutes there's a lot of material.

So I'll try to really highlight the key points I'll talk about some trends the type the deal types uh what really matters in pre-closed planning and integration planning what is a realistic timeline and then really I'll focus on some lessons learned across multiple industries.

So I am is on the rise especially in certain industries healthcare in particular technology and business services are super hot right now uh middle market any industry and in particular uh middle market industrials havoc stuff like that um despite the uh high rate of mergers and acquisitions believe it or not there is still a high failure rate the median is about 70.

I've seen anywhere from 50 to 90 with a median of about 70. 70 will fail within two years and it really occurs during post integration so after the deals close the the acquirer is starting to integrate the target company lots of reasons for failure uh one of the big ones is culture mismatch uh culture can destroy a company you've heard the comment uh culture eats strategy for breakfast well it can also ruin a merger um another reason is you didn't know you didn't know.

What you didn't know i mean you found something out um after you uh closed the deal many many times financial synergies don't materialize um you know they look good on paper but the reality was a lot different and um you know you did it for the wrong reasons um and it made it high risk you know somebody's ego it was just a bad idea or it sounded good uh a 100-day plan is only the start it is not the answer to improving your success rate okay um this is what a typical integration playbook or m a playbook looks like there's deal development due diligence closing and integration.

I'm going to focus on closing which is what I'll call pre-closing planning and then integration which is post acquisition uh integration um but there are a lot of different deal types so when you do a deal there's a deal team they usually have an investment thesis uh across the top you see the three columns there's typical what they call tuck-ins this is uh you're buying a company.

That's similar to you you just want to get bigger and consolidate a geography or a region you want to grow economies of scale extend your sales reach integration in terms of the amount is very high for these types of deals it's a full integration it's it's every functional area um some of them are just new businesses where you want to get into a new business in an existing geography where you operate so it's kind of more of a combination these can be you know in terms of level of integration moderate to high uh typically you do what they call shared services you know finance HR.

You know etc. in the back office um the key value drivers are uh cross-selling um cultural transfer skills whatever new value proposition and then you have what's called the new geography this is maybe diversification or conglomerate type of a situation where you're acquiring r d or technology um you're trying to preserve sort of the cash cow it gets you into a new geography with a higher growth potential it's a new value proposition.

You know typically you let the company run on its own like it was before so level of integration is low to moderate these can also fail though for the reasons mentioned earlier now the m a playbook is not necessarily linear but it tends to kind of uh project that way again a lot of things are done in parallel due diligence is done with pre-closing planning you know that sort of thing um once you get past due diligence which tends to be all the financial and the legal stuff um now you're in post diligence pre-close planning um you know what's the final price.

You're gonna pay what's the final agreement look like um you know you're you're really starting your transition planning you know what what is the level of integration here uh what are key processes for your integration plan you should start a cultural assessment at this point most companies do not do this okay they do not do it i would say anywhere from 10 to 20 percent will do a cultural assessment at this stage um or they'll do it uh in integration but the earlier the better you want to know as much as you can about the culture sometimes they'll.

If it's private equity they'll send an operating partner in and they'll try to do their own assessment I would recommend a formal assessment you should select your commercial integration lead I'll spend some time on on this identify your functional team leads for HR supply chain marketing.

you know finance etc. and then develop your communication strategy and plan uh and I'll get into this as well um this is an integration complexity grid this is what uh I would recommend you do again in pre-close planning you know there's uh characteristics of complexity.

You could add your own here but you know there's the size of the transaction so there's a dollar amount uh dollar value purchase price there's employee size uh if it's a company or a business unit there's a location uh in terms of distance from your corporate office um there's also how many locations are you talking about um as well as are there international locations and you can see the low versus high and you're scoring between one and five five being high uh there's a level of cost reduction you could do a percent of sales you could look at uh uh percent of sg a whatever um percent of sales tends to be the most common.

What's the type of acquisition is it just a a product add-on is it a stand-alone where you're gonna just totally tuck in the company or is it a I've heard this a lot merger of equals uh which uh i won't get into the downsides of that but uh that's uh more unicorns and rainbows than it is reality um and then your talent to retain um if there's few rep replicable skills versus many many critical skills technology expertise.

You'll see a lot of this in technology and business services or high-tech manufacturing you know semiconductor communications uh aerospace defense you know that sort of thing uh you know what's the enthusiasm is it an agreeable uh acquisition or is it a hostile takeover and then level of process and system sophistication.

So let's say a high-tech manufacturer like semiconductor for example would have a very high degree of process and system sophistication compared to say making nuts and bolts for example and then market space is it core to your business or are you stepping out of your core and adding adding something else adding a new market and then cultural cape uh compatibility.

If it's high great if it's low not very good okay so when you get through this obviously the higher the score the higher the complexity uh this is very very critical and a lot of decisions are made from each category more than you can imagine and a lot of the the decisions related to complexity tend to be ignored or assumed that it will take care of itself which is another reason for high failure rates um again pre-close planning you want to announce your commercial integration lead and your team members bring begin your uh pre-closed checklist and determine your 100-day plan.

Again if you've done a cultural assessment you should do talent assessment uh day one plan you want to validate the metrics and I'll talk about these and develop a value capture plan what i am going to say with with value creation in post acquisition integration is it's more about which metrics you choose and not necessarily all financial metrics okay develop your communication plan get it approved look at what workshops need to be developed and what training needs to be deployed what's your end game and look at transitioning organizations and optimizing integration and you know your process mapping and dependencies okay.

You should already know your level of integration at this point these are your functional work streams HR operations supply chain pricing sales and marketing i.t finance back office marketing uh you could see the degree of integration and the degree of risk okay for HR the most important thing is getting the right talent the right position uh positions uh for operations you want it integrated and optimized for producing producing cash flow.

So this is what is your business model how do you produce cash that is the most critical thing supply chain again integrated and optimized to for working capital and margin improvement and customer order throughput three key metrics so the cash flow working capital margin improvement customer order throughput four really good metrics for post acquisition integration pricing obviously optimized for margin sales optimized for cross-selling i.t is integrate to optimize your value streams procure to pay order to cash and then longer term reduce your tech debt uh finance back office is set up and leverages shared services to reduce sg a pretty simple um and marketing is one brand mindset.

Where it makes the most sense or differentiate where it can maximize margin some priority considerations these are the things that you should decide prior to day one so already talked about the uh cultural assessment you definitely want to assess current talent and if people hear that they're being bought out you will have attrition early.

So if you have shortages you need to know where they are and the and the skills and competencies that you're going to need for your organizational future state okay more importantly you need to know what you need to run the business right now if you lose a lot of people you're gonna have a heck of a time running the business right now um again it does happen i've seen it happen um for the commercial lead ideally a c-suite chief operating officer svp operations they should be your commercial lead for for all of your integration pmo and they should be accountable along with some other senior execs for all your value metrics and again.

I put a couple here i put talent retention cultural health um or some other good ones if you do your skills and companies competency assessments early the payoff is huge huge second processes understand where your problems are first then align those problems to whatever those processes are so order to cash procure to pay if it's a manufacturer forecasted production production distribution uh order fulfillment etc. and then understand your data and your gaps and information across your value streams and the two companies to look at what are the common themes that are popping up for your it systems clearly.

You want to understand technology debt if you have two different erp vendors huge technology debt but more importantly what's the it department's approach to harmonize your systems prior to acquisition and post acquisition so is there a plan what is the plan what's the timing of the plan does it close gaps in data and process misalignment what are the quick wins and then i've mentioned this again culture.

Your cultural assessment will give you a general cultural climate you'll get a sense of the urgency for integrating the acquired company start with your c-suites work your way down understand experience approach flexibility to integrating the companies go down the director levels and even frontline staff depending on uh their proximity to customers and your supply base okay very very very important uh for integration now you're in integration you're going to start your day.

One you'll conduct integration workshops you're going to do the things we just talked about develop your action plans by functional areas and whatever I don't like the word synergy as much but think of your metrics and your value confirm uh your metric targets and align them with the teams or the functional areas uh be going begin your weekly functional integration meetings more importantly identify cross-functional dependencies you want to make sure your functional work streams are also integrated and then have your oversight meeting with status dashboards.

Your communication plan should be fully activated and your end state definition with initial metric targets and timing this is just an integration governance matrix won't spend a lot of time on it but you can see it starts at senior exec level has the committee the commercial lead you know going down to the the integration manager your functional leads etc. and it's really planning approving and consulting it's almost like a racing matrix okay and your escalation path on who has final authority for decisions um again you'll continue to do everything.

That you've already done what you want to do is have a reporting process and frequency so weekly it's the functional team leads uh finance accounting project managers and your business segment vp is fyi unless high integration complexity they should go to weeklies that's my recommendation there's a monthly cadence which is standard um and this is escalation paths and then board updates uh really I would send a board update monthly with a quarterly report out your senior commercial executive should be monitoring integration of those functional work streams.

Monthly for sure weekly if there's high integration complexity okay this is an integration timeline you know when you talk about a full m a full m a from let's say deal thesis all the way through through completion of post acquisition integration deal development due diligence usually is six to ten months if people tell you they're doing it in three months they're probably skipping a lot of things six months would be pretty good but there's a lot to go through and again.

The middle market and above in terms of size usually is a nine month sometimes more okay from closing through post acquisition integration typically it's uh 12 to 24 months if failure is going to happen it's going to happen within that time frame um on the integration you can basically see uh what what it looks like communication starts uh in in post due diligence pre-closed planning everything else is day one okay some uh lessons learned across multiple industries i would say and this is from not only my own experience but many many case studies and a lot of the published literature culture is the number one cause of failure well.

What makes up culture people people and behaviors defying culture so if you get people wrong you're you're more than likely going to get culture wrong and keep in mind people do all the work work is made up of processes so if you don't get people you won't get culture you won't get processed so your first 90 to 120 days again depending on the size of the company is get the talent right put the right people in the right positions you'll usually see executive level first working on down there may be a lot of shuffling at director levels if people don't perform you will have attrition the the mantra here is take time to hire don't wait to fire um on processes and these are all the operational the procure to pay order to cash higher to retire you know et cetera et cetera do the quick assessments on the major ones as noted earlier.

You want to draw try to drive process standardization for procure to pay in order to cash as quickly as you can change management plays a major role here again that's why communication starts early your transition planning should start early with it you shouldn't have more than five enterprise level metrics to measure here's some great examples cash flow margin talent retention cash to cash cycle for your payables customer order fulfillment if you monitor these metrics and improve them everything else will fall into place.

So if you're going to close down factories or do any of that that's a cost reduction metric which tends to be one of those synergy synergies and synergy drivers the word of caution on that is um as soon as you start telegraphing closure of facilities you're going to get talent attrition uh and not not in those facilities but you're going to get talent attrition and director level and above um more so director level so focus on the the the metrics that matter at the enterprise level yes you will close distribution centers or sales offices or consolidate but you have to have a good plan to transition people so that they know where they're going to end up.

That's the most important thing as long as people know where they're going to end up they'll stick around on your it systems typically this is 6 to 12 months it's much longer if you have a lot of technology debt if you have two erp systems or three erp systems.

It's a lot longer a lot longer focus on what you can do to optimize operations quickly without breaking anything then you want to plan out technology consolidations and standardizations and invest in accelerating your timelines.

Where you can because those savings will accrue over the longer term but this is one of those slow-moving boats across the lake if you will um you can't do it fast uh just it just doesn't happen that way and then culture you can do the right things early on and and really start building good foundations by six months but you will have to constantly stay focused on building a strong culture post acquisition.

So you'll have a culture clash from the from day one within higher and subsequently lower ranks especially if somebody's picked for a VP and somebody isn't uh or director and somebody isn't you know that kind of stuff and it could lead to exodus of talent some cases mass exit exodus of talent senior executives down to director level appointments are critical for continuity of operations i would try to make decisions as early as possible and have places for those people that aren't selected so you can have continuity of operations and accelerate integration and obviously build a new integrated company culture thank you.