During boom times, M&A activity can be one of the most challenging strategies for organizations to successfully execute, often with high rates of failures. In a challenging environment, say, of rising inflation and interest rates, that challenge becomes even greater. And while pre-deal activities, including a robust M&A strategy, thorough due diligence and analysis, and optimal deal structuring are no doubt key to a successful transaction, the truth is, the value of your transaction is either realized or lost post Day 1 of the deal.
As we look at integration, there are five key success factors vital to helping you realize value. As important as each of these factors are, they are neither mutually exclusive nor collectively exhaustive. Focusing on all of them collectively, rather than on one or two, will greatly increase the chance of success for your integration efforts and the value of the overall deal.
There are three broad value levers to a deal: cost, capital and revenue. Understanding how and where these levers impact and drive broader business goals and objectives is fundamental to a successful deal. As a target is identified, and the process moves toward a purchase agreement and ultimately deal closure, taking an investment-led approach to prioritization directly informs the integration roadmap. Having a plan is the first step, and next is gaining leadership alignment early in the planning process. Not including key leaders creates a risk of not getting buy-in on the deal and the value opportunity, potentially resulting in setback in terms of value capture.
The deal thesis and overarching M&A strategy should directly inform the broad integration approach and objectives after the transaction is final. Scenario modeling across the value levers — cost, capital and revenue — helps clarify how the timing and scope of integration impacts deal value realization. Key objectives, coupled with scenario modeling and risk mitigation, are major factors that should be layered into the integration roadmap. That roadmap should not only have a heavy focus on Day 1 preparation, but also should identify the integration objectives for Day-100 and beyond. Continuing to communicate and build leadership and stakeholder alignment through the process will be critical to effectively executing the integration roadmap.
Roles and decision rights during integration should not be taken for granted. A focused and structured approach to governance is a must so your organization can efficiently implement changes. Decision of sizes and degrees of complexities will rapidly hit the organization, and having the appropriate decision framework to drive efficient and effective decision making is vital. Further, business continuity must be a priority, as adding the challenge of change and the heavy burden of integration can wreak havoc on the organization. Governance and strong integration management can help bring order to what can often turn into chaos.
A defined Integration Management Office (IMO) is an important construct that, if set up and managed effectively, can bring structure and order. An IMO can accelerate integration and mitigate business continuity and other integration risks. The IMO need not be resourced with full-time support, but ought to have clear accountability, broad decision rights and effectively represent the organization. Too much governance can also slow down the process and lead to misalignment. Setting up the governance structure and key roles ahead of integration efforts can help ensure the model is the right fit for your organization.
An organization’s mission and vision, coupled with its norms and the supporting day-to-day activities and business practices, define its culture. Business leaders generally articulate mission and vision with ease but are challenged with managing how work gets done. According to a McKinsey study, 95% of executives describe cultural fit as critical to the success of integration, yet 25% cite a lack of cultural cohesion and alignment as the primary reason for integration fail.
Different cultures need not be a deal-breaker and, if planned for effectively, can be a value driver. It’s important to identify and understand key cultural gaps and the associated risks early. Assessing culture can begin as early as the due diligence process through strategic one-on-one interviews. As the deal is executed, organizational surveys and diagnostics can be important tools to capture opportunities and challenges to address during integration. With better visibility, you can develop an effective Organizational Change Management (OCM) plan to address key gaps and risks. OCM tends to be dramatically undervalued by organizations. Investing in building the internal capability, or external support, can be a tremendous value enabler.
Customer success and retention is often overlooked during the transaction process, with acquired customers being an afterthought. Even the slightest sales or operational misstep can quickly erode customer loyalty leading to revenue loss. Planning for Day 1 and beyond, customer success and retention should go beyond the customer itself. It’s easy to overlook planning for the services, activities, resources and technology used to manage and support customers, causing costly disruptions.
Planning for customer success and retention should begin by identifying and assessing key risks during the diligence process. Coming out of diligence, establish a customer focused integration strategy and approach. As the IMO is stood up, identifying a team/role charged with customer transition and success is critical. Not only will a customer success team ensure valued relationships remain intact, but it will be key in understanding how strategy, technology, organization and process will optimally support customer relationships in the future.
How will transactions be made and what financial and operational visibility will you need on Day 1? How will transactions and reporting optimally look in the future? According to a study conducted by Bain & Co., 50% of business components are technology enabled. Understanding how key customer, financial and operational systems and data will be integrated is not only important to near-term business continuity, but is also a significant driver of longer-term value realization. Not appropriately planning for future technology needs can result in unexpected costs and business risks down the road.
Effective IT planning should start with a thorough IT due diligence process. IT due diligence assesses your target’s data, systems, infrastructure and security. The IT diligence process will identify and highlight risks and priorities, ultimately informing the IT integration roadmap. While many organizations may choose to keep multiple disparate systems rather than embarking on an expensive technology integration process, understanding the eco-system of low-code, low-complexity, “bolt-on” applications available to mitigate disparate data and system architecture issues can help unlock efficiencies and optimize reporting.
Despite the ups and downs of the economic environment, M&A will continue to be valuable to business growth and to investors. With the deal market becoming increasingly competitive and complex, making reactive, “gut” decisions as they relate to Day 1 and beyond can jeopardize your business and expected deal value. Use the above success factors, as well as many others, to help your stakeholders and investors maximize value by properly planning for a smooth integration ahead of time.
Contact John Cavalier at jcavalier@cohenco.com or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.