Post-Merger Integrations Done Right (For a Change….)
It’s virtually accepted as a universal benchmark that three-fourths of all acquisitions and mergers fail to achieve the original aspirations for the deal when they were consummated. And of the ones which are most successful, a disproportionate portion are acquisitions that are adjacent stand-alone businesses versus overlapping businesses, and so the success rate for true integrations is far worse yet. It is one of the most astounding benchmarks in all business: how can organizational leaders, who are so deeply expert in so many areas of their business, and focus on incremental percentages of improvement each year, be so consistently and utterly bad at M&A and post-merger integration? Especially when they frequently spend massive time and treasure on these deals?
To be fair and give the full benefit of the doubt, acquisitions are a far more rare event for most business leaders and rank-and-file workers than day-to-day business as usual. Acquisitions are often dramatic and upending moves that kick up major change and disruption in almost ever corner of not one, but two, businesses.
That said, for every acquisition where the very idea of the idea was ill-conceived, there are a multitude where the deal itself was a great idea and well-transacted, but the post-merger integration program execution was abysmal. And this, the critical period after the deal, is where most M&A aspirations unnecessarily go to die.
Here’s a common scenario: the leadership of both the acquirer and the target company drop tools on their day-to-day job and then engage in an all-consuming flurry of deal activity to get a deal done – management presentations, diligence, LOI’s, confirmatory diligence, deal announcements. And it is all done at arms’ length, with unfamiliar intermediaries and new future workers. Further, it is exhausting breakneck work. As soon as the deal is done, everyone develops a post-deal hangover. The leadership of both companies immediately run back to their neglected day-jobs and backlog of responsibilities, to make sure they do not blow the quarter (which can also blow up the deal terms), and perhaps they now have an earn-out in order to make the deal work for them, their shareholders, and their employees.
So most commonly, if they are integrating the acquisition target, they immediately assign what one could call “knitting teams” by business unit/function to figure out how to stitch the companies together – sales leaders should consolidate sales; product on product, etc. And it often goes terribly awry. The reason why is that these knitting efforts have unclear guidance (who stays and who goes, which products are end-of-life, which buildings stay or go?), and so the exercise is viewed by the participants as a zero-sum game. Everything people have worked on for years is suddenly on the block or not, and peoples’ jobs and careers are also more at risk than they have ever been. Or at least they feel that way. And so, the integration effort starts to stall, many decisions do not get made, synergies do not get captured. Two to three years later, there is no common culture and camaraderie; people still have their business card and swag from their original company; they still refer to the various units by their old names; and the organization starts to cement over in its non-integrated or partially integrated form. The synergies of the deal go under-realized.
If it happens enough, then some acquisitive executive leadership teams start to develop all kinds of derivative and unhealthy conclusions, such as to no longer buy synergistic companies versus embrace not-invented-here syndrome and over invest op ex and time; or they conclude post-mergers are too hard so they run acquisitions as separate stand-alone subsidiaries to avoid it. But then they struggle to capture the deal synergies for which they paid a control premium. It’s false logic. Highly synergistic acquisitions should be highly integrated. Adjacent and complementary businesses should be at least highly integrated at their interfaces and key touch-points.
When post-merger integrations go very well, typically they do because the respective leaders do NOT get a post-deal hangover, and recognize that the day the deal is announced is just the starting gun of a successful acquisition integration effort. And they realize that two critical factors determine the success or failure of most post-merger integrations, assuming the original deal made any sense, are (1) culture, and (2) a highly involved executive integration process at the start of the overall integration.
The culture point is the more obvious point. When people genuinely like each other, when they are genuinely excited to work with each other and be successful together, they will enter the new relationship with a bias to be successful and work out the integration challenges. Like family, even if they have disagreements, they know deep down they will work it out, and they will compromise for the good of the collective relationship. Culture is chemistry, not math. But there are clear actions leaders can take to help knit a culture, including
Immediately construct and announce the new org model where the acquired execs and rank and file are visibly and appropriately reflected in the org, and the key messages are established early that this is a knitting family. Employees look for clear indications of whether they have a good new home and family, and org clarity is essential.
Communicate and socialize. As soon as possible, leadership from the combined organizations should be doing all hands, town halls, site visits, weekly e-mails, and be expansive in their communications of the deal and the excitement of the new merged entity. When visiting a company site they should not just meet the employees in their own function, say engineering, but represent the entire management team and meet the entire physical location where they are in order to be as expansive as they can. They should get away from using old company names and go to common language ASAP. There should also be frequently and reasonably transparent communications on the merger progress itself; and where there are not yet answers, communicate the process and by when certain decisions will be made. If people do not know the answer to something, but they have a date by which they will know, they are more likely to be patient and wait for the answer.
The bigger lift, but far the more critical, is that the leadership of the combining entities need to immediately go into a miniature version of a strategic, org, operational, and financial planning process, including:
A white paper, clearly articulating the reason and strategy for the merger, and outlining a clear direction going forward. Even if there were a clear rationale heading into the acquisition, it often requires an update once the actual acquisition target becomes specific, and the details and imperfections of the deal become more clear. Very rarely is an acquisition truly a perfect puzzle piece fit.
The main decisions that are possible to make and upon which it is possible to be directive, should be made – senior org decision, major product and service decisions, locations, branding, etc. And where there is not enough information to make actual decisions, they should be as prescriptive as possible as to the objectives they are trying to achieve, and the decision criteria they are seeking to use in evaluating any recommendation to them. If something is already in the “no” or “cut” bucklet, even if the eventual answer is not yet know, even narrowing the integration task by making that clear is helpful. The goal is to be as directive as possible, and eliminate as much of the contention or zero-sum issues as possible before going to the integration teams.
There should be an initial top-down financial model for the post-merger company, which is a guideline the same way as annual planning starts with top down targets before the business units and functions do their bottom -up work and start to negotiate tweaks to the plan. The best way for the leadership to do this work is often in a dedicated offsite or expedited series of meetings, in order to resolve as much as possible, and offer as much guidance as possible.
Now, when the integration effort goes to the knitting functions by business unit and/or by function, after this initial executive effort and white paper, each team should have a charter and much greater clarity on major decisions and directions, and the leaders of those sub-groups can more easily get on the same side of the table on *how* to achieve the integration charter assigned.
Each integration team should enlist truly respected and influential leaders of the company; being on these teams should be viewed as an enviable assignment. And the executive team should form a very visible steering committee that has regular updates from the integration teams in some reasonable cadence, so that there is clear executive team visibility, and executive team exposure. These steering committee reviews by team are also a format in which the newly merged teams get to work together closely in a brisk decision-making environment, and where they can bond.
A well-executed post-merger integration effort is by no means a guarantee of success, but the lack of an excellent post-merger execution program is much more often the reason good deals go bad. Rather than viewing post-merger integration as painful and tactical work following the closing of strategic deals, post-mergers should be seen as foundational events in which companies have a chance to renew their culture, team energy, and commitment to each other during times of exceptional transformation to their companies. If M&A represents some of the largest moves a company can make to shape its future, post-merger integration should be among the most strategic and prioritized capabilities of any acquisitive company.
