People often think that a merger or acquisition completes when the deal closes. But that's not the case. An extremely important step takes place after closing ‒ integration, the process of incorporating the incoming people, assets, and resources from the selling company into the buying company. Handled properly, integration is the capstone of a successful deal. It’s a crucial step in getting the synergy and value anticipated by the buyer in bringing the companies together. However, it’s estimated that in more than half of all M&A transactions the buying company fails to properly integrate the acquired company. Poorly handled, integration can mean great dissatisfaction on the part of the seller, the buyer, and their employees ‒ a clear sign of an unsuccessful deal.
What steps should you take to help ensure successful integration? We asked some leading members of Corum’s M&A team. Here is what they said.
According to Allan Wilson, Corum Senior Vice President, planning for integration should happen early in the M&A process, during due diligence. Wilson points out that it's vital for the seller and buyer to discuss integration plans during this period. He also notes that it’s important to establish an integration workstream as part of due diligence with representation by each organization that will be impacted by the acquisition. The integration workstream team needs to thoroughly investigate and assess the potential impacts on their organizations. Doing this can lead to early discovery of potential issues early enough to make appropriate decisions regarding the integration.
Wilson recently assisted in the sale of a small consulting company, a Corum client, to a major industrial company. As part of its due diligence, the buyer set up a workstream for integration. During their investigation, the workstream team examined various areas of the selling company, including Human Resources. They looked in detail at HR benefits such as compensation, bonus plans, medical coverage, and 401K plans. That detailed investigation uncovered a potential problem. The buyer needed to provide the incoming employees from the selling company with comparable benefits to those provided to their current employees. And that would mean a rise in the cost base of the business they were buying. It would also mean that the incoming consultants would have to increase their hourly billing rate.
Wilson recalled, "There was a lot of analysis done on the market impact of raising the rates. Would they be able to sell with these increased rates? What was the competition like? Were they going to be successful with their ability to raise it? And if they were unsuccessful, would there be major questions about the acquisition itself?" Those issues were ironed out and the deal was ultimately made. The point here is that early planning for integration can uncover potential problems at a point that they can be addressed in a timely way so that they don’t become major obstacles later on.
Good communication ‒- with management, with employees, with customers ‒ is crucial for successful integration. Communication with the key managers and executives that will be impacted by the acquisition needs to happen early in the M&A process. However, communication with employees and customers needs to happen later, typically in the last two weeks of the due diligence process.
Corum Chairman, Jon Scott, underscores the importance of good communication prior to integration. He says, "You want the communication to be clear about what is happening and when it's going to happen. If there's going to be any redundancy leading to layoffs, that needs to get announced immediately. People need to be told who is staying, who is leaving, and who may be staying for an interim period of time. In addition, if there are going to be changes in rules and guidelines, you want to be clear about when and how those will be happening. In other words, you're trying to take the unknowns out as much as possible because there is going to be a stop in people working. People are going to wonder what's going to be happening to them. And what you want to do is to eliminate as much as possible those unknowns so you can keep people focused on their jobs.”
Conversely, poor communication can be an integration killer. Wilson mentioned a case where a small software company based in the United States was sold to a giant multinational software corporation. "The key executives in the purchasing company, the ones who run the groups into which the seller's application would be included, were completely behind the acquisition. But the product managers in charge of the products in that group had not been properly briefed about the value of the acquisition and how it would fit into their products." Because of poor communication, those product managers never supported the acquisition. Worse still, Wilson says, "The buying company rewrote the application and took a year to do it. By that time, they lost the opportunity the software offered ‒ the reason why they acquired it in the first place.” The moral of this story according to Wilson is, "A buyer has to get everyone on board in support of an acquisition, and get that done before any LOI is presented. Otherwise the end result could be disastrous."
Protect key employees
Corum Senior Vice President Ivan Ruzic emphasizes that a good integration plan needs to mitigate risk, and certainly protecting employees through a good retention plan is part of that. He cites the following hypothetical examples of some good retention plans. "Company A is a very small company with seven employees. Their retention plan included retention bonuses for two years, a conditional bonus for full completion of R&D projects, and some profit sharing. Company B is a little bigger, with 25 employees. They had a welcome bonus for every employee that joined the acquiring company ‒ 50% on joining and 50% after twelve months if they stayed there that long. There was also a stock option plan in place for them that vested in four years. And there was a guaranteed severance plan put in place. In other words, a guarantee not to cut any of these employees for a year, but if by some circumstance the company was forced to do that, the employees would be given 12 months of severance pay. And finally, Company C, with 60 employees. They put all their key employees into their earnout plans based on milestones such as revenue. And they implemented a two-year stay bonus with a lump sum payment at the end of the two years." Of course, there are other approaches an acquiring company can put in their retention plan. But the bottom line is having a good retention plan in place as part of your integration plan.
In putting a retention plan in place, it's important to know who the key employees are in the seller's organization, that is, the employees that the buyer cannot afford to lose in the acquisition. This is information that the buyer can request from the seller in due diligence. In fact, this is something Wilson noted the buyer requested and received from his client during due diligence in a recent transaction. Knowing who those key employees are enables the buyer to put special incentives in place for them in the retention plan.
Respect cultural differences
Scott, who resides in the United Kingdom and oversees Corum's overseas operations, is well aware of how cultural differences between countries can affect integration. He notes that often cultural differences can lead to a more limited form of integration when a European company is acquired by a non-European company. He notes that the acquiring company may keep the European operations more independent. This is especially true if the acquirer doesn't already have an operation in Europe.
Labor and other issues may also dictate more limited integration. For example, French labor laws are quite strict as to what a company can or can't do. Scott says because of these restrictions it’s sometimes better to keep some degree of independence if a U.S. company acquires a French company.
Scott also advises acquirers not to change cultural norms. He says, “Take for example, the Christmas holiday. In the U.S., people will typically take two or three days off for the holiday. But in Europe, most countries essentially close for Christmas from about the 15th of December until about the 5th of January. American companies don't understand that and they think after acquiring a European company, they’re going to Americanize it. That doesn't work. What you need to do is to understand what some of the key cultural elements are and don't try to change those. You have to realize that the way we do everything in the States is not necessarily the right way or done everywhere else.”
Manage the integration
Although there are various ways to manage the integration of companies, the essential elements are participation by key people in the acquiring and acquired companies as well as having a person responsible for getting issues resolved. Scott says the best thing to do is have a team of people ‒ perhaps six people, three from the buying company and three from the acquired company ‒ to manage the integration. He adds that the team should include representatives on the buyer's side from areas that will be impacted by the acquisition. "So you have somebody from Finance, you might have somebody from Software Development, and you might have the person who can operate as the General Manager of the business unit once the acquisition happens. And then you've got people on the acquiring side. That could be a point executive from the acquiring company, or an HR executive, and maybe a third person ‒ perhaps somebody else from Software Development. You need to have those teams assigned, and they need to meet weekly. They should produce weekly reports of open issues, solved issues, and next steps. The team should also put together a blueprint, a plan for the process, that should be approved by both sides. And as issues arise, they need to be escalated. One of those parties, one of those six on each side, should be assigned the responsibility of escalating issues to get them resolved."
Regarding who should be responsible for resolving those issues, Scott says that it should be a key person on the buyer's side who is given overall responsibility for integration. He notes, "That could be an existing executive or somebody from the M&A group. It's different based on the company. But it will be the point person who as the wheels start to fall off as issues arise, can run back to their organization and try to get things resolved.”
Wilson adds that you also need an internal champion to ensure the integration plan is executed properly and meets its milestones. According to Wilson, "Within the buyer's organization there has to be one person, one change agent, who has advocated this transaction to happen. And that person has sold it internally to his peers, has gotten the approval of senior management and maybe even the Board. And that individual must ensure that the internal organization, down to a pretty low level, needs to be brought into the dialog. He (or she) needs to do an internal selling job to ensure the smoothness of the transaction."
Catch issues before they turn into problems
Scott strongly advises that the people in the integration management team need to spend a lot of time talking to the different groups impacted by the acquisition. He underscores, "Don't let things fester. Be out there talking with people. Be out there asking questions. How are things going? What are your concerns? That way you can catch issues before they turn into problems. Because in tech companies sometimes people will just hide in their office, and in integration you can't do that. You've got to be out and among the people who are going to make you successful.”