We need a more colorful classification system for how companies go about the merger integration process. You know, a new nomenclature. So I sat down and did some reflection.
Going through my memory bank, I pulled up some of the most common patterns I’ve seen as companies are acquired and merged. Since so many deals go bad due to a mangled integration, I decided to start by categorizing the dysfunctional approaches.
Here, in no particular order, are my top four.
“Hair on Fire”
This is a fire-fighting approach to merger integration where management, reacting to the tyranny of the urgent, lurches from crisis to crisis. For lack of planning and discipline, impulse rules …
Nobody in their right mind expects merger integration to be a trouble-free process. Simply put, combining organizations is a scratchy drill. In my 30+ years of experience I’ve never witnessed a zero-defects integration and, in fact, trying to get it perfect can be one of the biggest mistakes of all.
So, the question is, how can you discern the “normal” problems from the warning signs that signal major risk? What should scare you the most?
Our checklist covers the top ten danger signs that indicate serious trouble. Take a hard look at your merger and make a check mark by the critical distress signals that are surfacing in your organization.
Keep in mind, these problems feed on one another. And as the saying goes, “Disaster accelerates.” Turning around a troubled integration gets tough, and any three check marks …
By Price Pritchett
Employees find lots to gripe about when they’re being acquired and merged. Looking back across my three decades of consulting on M&A, though, one complaint stands out clearly as people’s #1 gripe.
It goes like this: “Why don’t they move faster? Why is the integration taking so long?”
I honestly cannot think of a single client I've worked with where the integration proceeded too rapidly to suit people in general. Fast they can live with, but across the board, people hate slow.
Merger integration is sort of like taking your family on a road trip, where the kids are hounding you constantly with the question, “Are we there yet?”
And the longer the drive, the more the mood sours. People want you to wrap it up! They’re …
The journey from “deal announcement” to “integration complete” is a hazardous trip. You expect problems. But the most treacherous terrain often takes executives by surprise.
Let’s divide the merging process into three phases to illustrate the integration pathway:
Phase 1 begins when the deal closes and typically runs through the first two or three months of integration. Sometimes the time frame is conceived as Day 1 through the first 100 days. This period is intense, with many decisions and critical actions as the consolidation process is mobilized. People are scrambling, on high alert. Things are off-balance but moving fast. Uncertainty spikes. You might guess this to be the riskiest time, but bigger challenges lie ahead.
Phase 2 is the shakiest point in the integration process, the lowest point in Death Valley, and typically top management doesn’t see it coming ...
A merger is a major distraction for people in the acquired organization. It interferes with their work focus and undermines job commitment. This, plus the destabilization that is simply generic to mergers, causes productivity to take a damaging hit during the transition period.
Our experience indicates that employee productivity in a newly acquired or merged company gets cut in half during the first several months of an integration. Some companies do better than this, of course, but almost always there is a sharp decline in productivity during the early stages.
Sagging productivity would be enough of a problem, but it leads to a secondary dilemma: failure feeds on itself. When employees see obvious slippage in organizational momentum, they often interpret that as evidence that it’s a “bad merger” or that top management is doing a poor job of handling the situation.
Interestingly, the destabilization caused by a merger powerfully increases the energy level in a company. But unless that energy gets channeled along productive lines, it’s a destructive force that can sabotage corporate effectiveness.
We recommend these 7 ground rules to follow ...
People often overrate themselves, not in rocket science, but in other areas of their lives more familiar to them. For example:
- Some 90% of Americans rate their driving skills as above average.
- About the same percentage of people think they're more popular or more likely to succeed than the average person.
- In one study, ¼ of the respondents rated themselves in the top one percent in terms of leadership ability.
Obviously, a lot of those people are seriously wrong.
The same level of misguided beliefs shows up when corporate executives rate their skills at merger integration. I’ve watched it for three decades now, and the pattern stays the same.
In his book, Everything is Obvious (Once You Know the Answer), Duncan Watts writes, “The sad fact is that we’re actually much better at planning the flight path of an interplanetary rocket than we are at managing the economy, merging two corporations (my italics), or even predicting how many copies of a book will sell.”
He goes on to point out that rocket science seems hard, while problems having to do with people seem like they ought to be just a matter of common sense. Trouble is, merging people and cultures confronts us with a very different kind of ...
While you wrestle with that question for a minute, think about how much money is at stake. Then consider the number of people in the two companies ... all the careers that are involved ... the lives you’re playing with here. You might also reflect on how all the other stakeholders are watching intently—your customers, suppliers, bankers, the public who owns your stock. And, of course, the press may be hanging around just aching for a hot story about how things are going wrong. Your competition would love to make a field day out of this.
Obviously there is a lot on the line here. The next few months aren’t going to be a day at the beach.
It’s not enough to be busy—you have to be busy doing the right things. The situation is very unforgiving ...
How can you tell if a merger is being mismanaged? You will see several of these major problems and the costs that accompany them:
Bailing out by managers and executives is one of the first signals that a merger is being mismanaged. Typically, some of the best talent is the first to go. And their leaving more than likely means that somebody ...
There’s an old line that says, “If mama ain’t happy, nobody’s happy.” Adapting that notion to the world of M&A, I’d say, “If Sales ain’t happy, nobody’s happy.”
You can screw up the integration process in many ways and still have a successful merger, but the deal fails if you foul up at merging the sales forces.
Sales brings money in the door . . . or not. And that’s why Sales integration is the make-or-break issue.
Mergers are always based on a financial logic, and that’s how they’re ultimately graded—not on a “morale” logic, or “culture compatibility” quotient, or other random metrics. In the final analysis, the results that count are about money. If your sales people are churning out killer results, that alone can protect the deal from becoming a victim of most integration sins …
The following missteps occur even in well-run companies with highly capable executives at the helm:
1. Lack of a clearly defined Integration Manager.
Make sure one person is put in charge of the integration effort. Assigning individual accountability and responsibility is one of the best ways to make sure things get done. Some organizations choose one person from each organization to serve as co-leaders in the process. While this may seem equitable, it can lead to confusion as to who has formal sign-off over a given task or activity, or who is ultimately responsible for the success or failure of the transition effort. Generally, it’s a good idea to make sure that individuals from both organizations are present on the team, but it works best when only one person is in charge...
- Paying too much. Some companies feel they have to overpay to block a competitive bid or to protect their turf. But when too much is paid, it can kill any chance to achieve a satisfactory return on investment.
- Lack of strategic clarity. Companies often acquire for the wrong or unclear reasons. For instance, organizations may catch deal fever. They get caught up in a buying frenzy because other companies are making acquisitions. As a result, they do not realistically analyze how a deal will create value.
- Slow decision-making ...
The shockwaves from a merger can badly disrupt day-to-day operations. The tremors start when employees worry about how they’ll be affected by the deal, fret over a myriad of integration problems, and commonly waste time waiting for answers or just being confused about how to proceed with their work. Overall, business suffers.
By Price Pritchett
A man walks into a bar and says, “Give me a beer before problems start!” He downs it and orders another, saying, “Give me a beer before problems start!” The bartender looks confused. This goes on for a while and after the fifth beer, the bartender—now totally perplexed—asks the man, “When are you going to pay for these beers?” The man says, “Ah, now the problems start.”
Of course, the trouble began with the first beer. It was just a lot bigger problem by beer number five.
The joke reminds me of acquirers who buy a company but persuade themselves that it’s best to hold off for a year or two before integrating it with their existing operations. The argument usually goes something like this ...
Even though your deal may look great, you should be aware of some of the common post merger integration challenges you may face. So let’s take a look at what could prove to be very painful if you don’t manage your merger properly.
- “Wait and See” attitude. This is another one that, on the surface, can look pretty harmless. But when normally confident and assertive people take a tentative, safe stance, it can slow down decisions, actions, and customer responsiveness. And although it seems perfectly natural for people to adopt a slower, more cautious approach during times of uncertainty, the end-result may be low productivity.
- Complexity. Integrating more than what needs to be integrated, at least initially, can over-complicate things. The combination process will be harder than it needs to be if ...
A flawed integration process can be terribly expensive, yet the costs of the mistakes are seldom measured by acquirers. Nobody tracks the damage…nobody is held accountable. The integration process just grinds along while mediocrity drains value out of the deal in broad daylight.
- Lack of Pre-Planning: When integrations fall short of their objectives, inadequate pre-close planning contributes to the failures more than half of the time.
- No Formal M&A Integration Strategy: Acquirers should define a clear integration strategy early and before their teams begin to develop plans...
- Tight timeline, limited information gathering leads to organizational/infrastructure decisions and less than optimal outcomes
- Inconsistent communications to the stakeholders between the two companies
- Disruptions in the business due to systems issues
- Loss of key employees and contractors leading up to and during transition …
The webinar reveals:
- Why culture incompatibility makes a good scapegoat
- What failed marriages have in common with failed mergers
- How cultural diversity can be an asset, not a liability
- What successful deal makers do when major integration problems are anticipated
- How high premiums increase the likelihood of large shareholder losses
- Why most companies do not hire outside consultants to conduct cultural due diligence
Risk Assessment Questions
- What are the most sensitive areas of the business that might be prone to disruption?
- Are major IT system integrations required to realize synergy benefits or operational efficiencies?
- Are there any key managers or salespeople that might leave as a result of the deal?
- Are there any past business practices that are incongruent with the Newco’s (or acquiring company’s) business strategies (for example, credit standards for new customers)? …
Comprehensive 95-page sales, marketing, and operation guide to conduct thorough, effective M&A due diligence.
One of the most difficult aspects in business evaluation is understanding and justifying forecasts of future revenues. Section I of this guide provides a micro-style analysis of marketing and sales. The section asks numerous specific questions about twenty-five company functions that, together, address the ability of a business to gain and retain profitable customers.
Sections II through VI help the analyst develop a macro evaluation of the ability of other functions and departments to deliver on marketing’s promises to customers and prospects.
Section VII acts as a strategic summary, where detailed facts gathered earlier can be consolidated into an overall perspective of the company and its relative position in the industry. The summary helps the analyst develop and support conclusions. The additional information gathered during the analysis may lead to ...
Excerpt from IT Checklist
- Systems for which management is dissatisfied. Corrective measures taken or planned
- Employees with exceptional skills in writing software, developing systems, or troubleshooting problems
- Systems manual maintained, up to date, and followed
- List of all information systems utilizing computers and their function in the business. Type of machines, software, their age, number, and location of units
- Backup and disaster recovery procedures and programs
- Level of difficulty anticipated to integrate the company’s databases into the buyer’s systems
- Policy on the issuance of mobile IT equipment to employees. List of all mobile equipment and to whom it is issued
- New information systems scheduled to be added or to replace existing systems
- Systems that use third-party software and custom-built solutions. Third-party systems under maintenance contracts
- IT employees responsible for system support and security. Security systems and practices are in place to protect the systems ...
Gather and review ligation closed (<5 yrs) to current
Determine and review budget set aside for each case
Assess the merits of current case(s)
Assess the financial exposure (Judgment & Legal Costs)
Report any key findings/concerns to the general counsel, corporate development and executive team
Contracts/Obligations Operational Contracts Review:
Review all "Standard Form Agreements" utilized by Target Co.
Review all "Operations Agreements" of Target Co. ...
8-Page HR Due Diligence Checklist:
- Organization charts and a description of management structure, including principal functional areas, headcount by area. and reporting relationships.
- Job descriptions for all major job categories and minimum education, experience, and skill levels required for each.
- Current pay ranges and recent increases.
- List current personnel (including lists of officers and directors) with hire dates, current annual salaries, bonus targets (if applicable), commission targets (if applicable), years of service with the Company, site location, highest educational degree, and prior experience ...
A penetrating look at key pressure points that impact the integration process.
- Amount of expected consolidation or integration
- Alignment/compatibility of the two organizations’ business strategies
- Extent to which the two organizations have been competitors
- Financial pressures confronting the merged organization
- Level of confusion or ambiguity regarding the merged organization’s power structure
- Geographical distance between the merging organizations …
A risk is an event that has not happened while an issue is something that has happened.
As you identify each risk, determine which integration team member will be responsible for tracking and reporting it. The owner of the risk is responsible for implementing a plan to resolve a risk if it becomes an issue.
Prioritize your integration risks based on the likelihood that they will occur and the severity of the problem if they do occur.
Issues are problems, gaps, inconsistencies, or conflicts that occur during the an M&A integration. Issues can include problems with the employees, technology, shortages, or any other problem that has a negative impact. If issues remain unresolved, the integration may suffer delays and overruns. Each issue should be monitored and assigned an owner.
The value of every business and the buyer's realized return is ultimately determined by the amount of cash flow the business is expected to generate and by the amount of risk of those cash flows occurring. Every review item described in this template is intended to be used to help prospective investors develop a sense of expectations regarding a target business' ability to generate cash flows and to sharpen the understanding of the degree of risk to which those cash flows are subject.
Risk: Agreement delayed / production dates push into busy season
Potential Impact: Integration work competing with regular work at busiest time of the year for sales, production, and fulfillment.
Mitigation Plan: Make decision on transferring production into 2022 and fulfill all else from west coast
Potential Cost Impact: Rent costs for Company A, delayed realization of production efficiencies ...
"Map synergy activities to integration work streams. You may find the synergies are not tied to a work stream and accountabilities are not assigned. Verify responsibility, timing, amounts, and CTA ... Review gaps with senior management. Bad news never gets better with age ..."
Differences in performance management between two companies can cause conflict and harsh feelings. Questions to assess this risk:
- Is there a standardized performance management program?
- How often are employees evaluated (e.g., monthly, quarterly, annually)?
- What are the rewards for exceptional performance? Consequences for poor performance? ...
"New payroll processing, redirection of legacy phone numbers, conversion of sales and customer support processes, conversion of legacy email systems, ...
The success of Day 1 often rests on having a Rapid Response team of IT professional available to address risks and issues ..."
If IT is already running at full capacity before the integration, the additional work can be overwhelming."