M&A success drivers – the closing dinner aftermath

The closing dinner can be the last sweet memory of a M&A. Every year, buyers leave considerable amounts of value on the table due to failure in the integration process. Here some guidelines to successful business combinations.

1. Igniting integration. Success of a business combination has little to do with the fairness of the purchase price of the target. It is rather what happens after the closing dinner that matters. In one word: integration. Indeed, failure is pretty sure if the unifying companies do not quickly converge towards the same business culture. Integration, however, has many meanings. Any business function, such as corporate governance, operations, finance, IT, legal affairs, compliance, HR, procurement, technology, communications, cybersecurity needs to be successfully combined.

2. Pursuing deal rationale. There is no single route to successful integration. Indeed, the shape of the integration process should reflect the rationale of the business combination. Although sometimes deals are driven by the purpose of seeking glory or just getting bigger, a business combination should fall within a carefully thought-through growth strategy. Rationale can be found in geographical expansion, product diversification, vertical integration, economy of scale, access to technology or know how, acquisition of a brand, and many other types of synergies.

3. Scanning the horizon. The business combination should always be part of a broader plan. Having the endgame in mind, the integration process may serve the purpose of preparing the combined business for new challenges, such as designing an IPO, structuring a bigger merger, attracting investors, defending the market share, planning an exit, etc.

4. Starting from the governance. The core decision about integration regards corporate governance. According to recent statistics, key drivers for successful integration include executive leadership, integration teams and communications. So picking the right managers for the job is essential. Those guys eventually should have a role at the board level, so we can conclude that defining corporate governance is the first step towards a successful integration process.

5. Picking the right people. But here is the issue: as a business lawyer, many times I had to ask clients how they wanted to shape the board of directors of the acquired company, just to find out that they had no plan. Or worse: where companies are not independent from their shareholders, we may see the tendency to pack boards with shareholders’ representatives, regardless of their background or knowledge of that business. When families are involved, the degree of intrusion can be particularly severe and even accelerate integration failure. In general, many CEOs happen to be dragged by inertia and resolve to replicate their companies’ current governance schemes, so to completely replace the existing board members, or to keep things as they are and leave the old directors in charge of the target company. In the majority of the cases, both approaches eventually prove to be not efficient, if not risky. The key here is to go back to the rationale of the business combination. To make some examples, in acquisitions driven by economies of scale and vertical integrations, the managers of the buyer should know their business dynamics well enough to take the lead of the operations at the acquired company, so that there could be little or no involvement of past directors. However, when the deal has to do with product diversification or access to new technologies or know-how, involving those who know that business or tech would prevent value dispersion and facilitate integration. Then, when the deal rationale is geographical expansion, the buyer may be forced to trust the local managers of the target company as they are familiar with the dynamics of the local commercial, industrial and legal environmental.

6. Addressing competition risks. Letting managers go may trigger competition issues. Notably, attention should be paid on those executives who manage commercial contacts, technical know-how or development plans. In a perfect world, the business due diligence should have detected such risks through an appropriate management appraisal, while the legal due diligence should have revealed the possible lack of non-competition covenants in the relevant employment agreements, so that non-competition arrangements with those managers could be put in place as pre-closing obligations of the seller. Otherwise, the same investigations and remedies should be carried out and implemented after closing, bearing in mind that the managers will be probably in a position to negotiate better terms in their non-competition arrangements.

7. Preventing retention side-effects. On the other side, retaining past managers could lead to other concerns. Here you never know whether those directors will be faithful to the new owners, to the previous owners, or just to themselves. Past managers may try covering up accounting, tax or legal issues, especially if those issues are addressed by the usual set of representations and warranties provided for by the acquisition agreements. Same considerations apply to other post-closing aspects of M&A deals, including earn out arrangements or net debt/working capital reconciliation. Where past managers remain in charge with broad powers, such as in case of geographical expansion, then the risk is that they start (or continue) working for themselves rather than for the buyer. Of course, buyers should avoid leaving too much power in the hands of the past managers to mitigate such risks. Also, establishing control bodies, such as internal and/or external auditors, as well as appointing a new CFO in charge of treasury management, will help controlling such risks.

8. Planning the integration process. Choosing the composition of the target company’s management is just the first step. The integration leader’s first task will be building a team, comprising managers from both companies, in charge of the various aspects of the integration process. In large companies, the team may be represented at the board level with an integration committee inside the board. Including consultants in the team can make the difference in terms of availability of resources, process planning and monitoring. Once set, the team should focus on developing the integration plan, having in mind that the main guidelines of the business integration should be already in the brain of the buyer well before closing the deal. Drivers of the integration plan should be timing, reporting, internal and external communications and incentives. Notably, external communications with all the target’s stakeholders are key for the success of the plan. Unhappy clients, suppliers, workers can effectively contribute to slowing the integration process down.

9. Unleashing the power of incentives. Having in mind that a slow integration could be the deal killer, incentives for the integration team are key. Pursuing the double purpose of securing an efficient process and testing the managers of the acquired entity, incentives are a clear message that managers will be accountable for results. To determine if the process is on schedule, the incentive agreements should refer to milestones, while targets of cost reduction, improved manufacturing capacity or higher sales could be used as the key performance indicators of the efficiency of the process. Incentives will be also a powerful tool to ensure that the target company managers are committed to the new owners.

10. Managing transitional services. The umbilical cord between the seller and the target company may be thicker than expected, to a point where in the immediate post-closing period the target company could not be managed without the support of its former parent. Intercompany outsourcing may involve various functions such as IT, procurement and legal. Of course, buyers should aim at cutting the bond with the former parent sooner rather than later. However, managing transitional services may prove tricky even for a forward-looking buyer. Indeed, through the provision of services the seller may retain a degree of control on the target company and, in the worse case, be able to influence price adjustment reconciliations or earn out mechanisms, hide violations of representations & warranties or extract commercial know-how from the company. Moreover, the provision of services should come in a package with the transfer of know-how, including training of the target company’s personnel. Also, the efficiency of the transitional services should be ensured through service level agreements. Last, transitional services should be kept at the minimum in terms of duration to put pressure on the integration process. Therefore, transitional services should be managed in a manner such to prevent misuse, facilitate knowledge transfer, ensure efficiency and minimize integration timing.


Copyright Giorgio Mariani 2016. All rights are reserved.

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