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Mergers and Aquisitions - Maximising Deal Value
Many readers will have experienced first hand the major corporate changes that result from a merger, acquisition or divestiture (as has the writer as well!). This experience may have been garnered in a number of ways. It may have come about through being involved in the due diligence investigations during the negotiation phase. Alternatively you may have been responsible for managing the integration post-deal or perhaps you have been on the receiving end of the management of an acquisition/integration by another organisation.
Post-deal analysis
The often frantic pace of pre-deal negotiations and the huge challenges presented by the integration of newly acquired companies can often mean that the chief emotion felt on completion of the project is “thank goodness it’s all over”. After a suitable period of rest and recuperation (particularly important after all night negotiations), the next feeling may be to look forward to the next deal. An extremely important exercise that is often overlooked, but which should be completed as soon as one deal is finalised and before another one is undertaken, is the ‘post-deal’ analysis.
- Looking back over the most recent deals in which you have been involved, what is your view on the following issues?
- Did the due diligence uncover all of the financial issues associated with the target company or were there any nasty surprises that did not surface prior to the deal being sewn up?
- Was there sufficient time to factor the issues unearthed by the due diligence investigations into the price negotiations and was the due diligence output presented to the negotiators in a concise and understandable format?
- Has the post-deal integration process uncovered issues and problem areas which, while not being deal breakers in themselves, would have significantly impacted on the willingness of your company to complete the deal? For example, have you discovered the existence of:
- cultural differences between the two organisations
- non-compatible systems and processes
- cumbersome communication systems
- a dissatisfied workforce?
- Has the post-deal integration process been managed quickly and effectively?
- Has the productivity and enthusiasm of the employee population been maintained or has there been some inward focus during the integration process where employees have been unsettled by the changes that have flowed from bringing the businesses together?
- Has the best talent in both organisations been retained or has there been a marked turnover of staff and a loss of vital talents and capabilities?
- Have the key objectives that drove the need for the merger or acquisition been achieved in practice or has the deal failed to live up to expectations in either financial or business terms?
If you can identify any of these issues as having been a factor in your most recent deal, then a review of the whole process of acquisition and integration could probably improve your organisation’s chances of optimising the benefits of a merger or acquisition. Such a review should focus primarily on the following issues.
Due diligence
There is a major need to ensure that financial due diligence work is focused on material issues, is completed within the appropriate timescale and most importantly presents the results of the investigation in a concise and understandable format. Technical due diligence reports can often obscure the underlying issues in volumes of explanations and caveats!
Non-financial due diligence, especially on the HR aspects, should focus on issues that are key drivers for the business and should take into account the particular nature of a deal.
If a company that is being acquired is going to be maintained as a separate entity with little or no integration, why spend time and effort in the due diligence process investigating the comparability of benefit and pay systems and culture with the acquiring company? Conversely, if full and complete integration of the target business into the acquiring company is fundamental to realising the objectives of the deal, then any due diligence investigation should be targeted at understanding how easily and quickly full integration can be achieved and will be critical in assessing whether the deal as proposed will be successful.
The review would look at the structure of the teams that were put together to carry out the due diligence, the project management of the exercise, the questions asked by the due diligence teams and the format of the reporting of the due diligence results. In this context, a review and overhaul of the due diligence process should produce a more streamlined and targeted investigation and avoid wasting significant amounts of time and money probing irrelevant or non-material issues.
Post-deal integration
A review of your organisation’s approach to integrating an acquired business or merging with another company could seek to achieve the following objectives for the next integration.
- Clear definition of future business objectives and the way the deal gives impulse to these. This is the major instrument senior management has for gaining the support of staff through the inevitable changes M&A will bring. The communication of the objectives needs to be powerful, plausible, repeated and consistent.
- The implementation of a clear management structure for the merger integration together with specific allocated executive responsibilities for fast turn-around on key integration decisions.
- A rational approach to organisational changes which supports the business orientation of the new entity, incorporating a clear policy for retention and re-recruitment of key employees within a roles definition and competencies framework.
- Ensuring that each of the integration teams (IT, HR, Operations, Communications, etc) has clear objectives and project plans which would include specific milestones, and where possible ownership of expected synergies. The latter point is important if savings expected from the deal are to be achieved in practice. Charging a particular integration group with achieving a specific level of savings within a specified time period should help to ensure that the synergy objectives are realised in practice.
- Effective co-ordination of the integration project ensuring all efforts of merger teams are working to the same objectives and timeframes and that cross-functional issues and team interdependencies are effectively recognised and handled.
- Ensuring that the changes required by the integration, and particularly the impact on employees, is dealt with quickly and is communicated effectively to the employee groups affected. Although a merger process can be painful, common sense would indicate that it is better to get the impact of this pain over quickly rather than dragging it out over a protracted period.
Whilst an effective due diligence process can avoid unforeseen liabilities, it is in the successful integration of an acquired business that the real value of the deal is achieved. Establishing an effective project management structure for implementing the integration of an acquired business is an essential part of a successful merger and acquisition strategy.
Watson Wyatt has developed an educational briefing Management Briefing on Merger Integration, which has been designed for senior management teams undergoing or preparing for mergers or acquisitions. Full details of this service can be obtained from your usual Watson Wyatt consultant or by sending an e:mail to David Collinson at: david.collinson@eu.watsonwyatt.com
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