Should the M&A Lifecycle include a Day 3?
To satisfy their shareholders, companies can no longer rely simply on organic growth. Fortune Magazine reported, as of June 2016, U.S. mergers and acquisitions value totaled approximately $642 billion. The Institute for Mergers, Acquisitions and Alliances reported that in 2015 companies announced over 44,000 transactions with a total value of more than $4.5 trillion. Ernst and Young anticipates in 2017 M&A deals as a growth mechanism will accelerate as over 75% of US executives have plans to complete a deal in the next 12 months, a majority of which would be under a billion dollars.
Serial acquirers (e.g. Cisco, Bayer, AT&T, Apple, and JPMorgan Chase) use a repeatable framework to manage integrating their acquisitions. As part of their strategy, they integrate the acquired companies into their business processes and infrastructures quickly to minimize transition services agreements and manage expenses. There are four types of M&A Integration Strategies, Portfolio; Consolidation; Combination; and Transformation. This blog topic focuses on Consolidation as a strategy. GFT has found that most companies are not serial acquirers nor do they have M&A Integration maturity and experience.
To help non-serial acquiring organizations, one can argue that M&A Lifecycles should include a “Day 3”. Before exploring this concept further, let’s revisit the basic lifecycle. First, key terminology – “Day 0” is deal announcement, “Day 1” is deal closing (change in ownership control), and “Day 2” is when “Buyer Co.” and “Target Co.” are integrated with transition services completed.
Second, the M&A Strategy must align with the organization’s strategic plan. Once “Buyer Co.” has identified targeted potential companies, it engages in discussions with “Seller Co.” or the Target Company directly. At this stage, “Buyer Co.” performs due diligence and runs the potential buying price, efficiency gains, revenue and integrations costs through a business case model. Assuming the business case model analysis outcome is positive and the two parties reach an agreed upon price and sign a contract, the deal is announced to the public. This is known as “Day 0”. The following are key activities running up to “Day 0”:
- 1. “Buyer Co.” forms the Integration Management Office (IMO) – This includes representation from the Buyer, Acquired Company, Seller, as well as cross functional teams.
- 2. Perform Due Diligence Analysis – This involves asking critical questions that the Integration Team needs in order to assess the scope, risks, synergies, and cost to achieve.
Next, as “Buyer Co., Seller Co. and Target Co.” march towards the closing date known as “Day 1”, a flurry of activities occur including separation of the businesses, finalization of Transition Services Agreements, more detailed due diligence of “Target Co.”, project planning and activities for both separating and integrating the businesses, etc. At “Day 1”, “Buyer Co.” pays “Seller Co.” and ownership of “Target Co.” is transferred. The key activities running up to “Day 1” are:
- 1. Continuing to perform Due Diligence Analysis in greater detail.
- 2. Determine Current State and desired End State.
- 3. Identify, Drive and Track Operational Efficiencies (synergies) and Costs to Achieve.
- 4. Certify Day 1 Readiness by preparing to operate the acquired business when the deal closes.
- 5. Management performs Change Management, Training & Communications by planning the future organizational design, the required training and communicates throughout the Integration effort.
“Day 2” is a critical date whereby the Buyer, Seller, and Target Companies are separated. “Target Co.” business, technology and people are integrated into Buyer Co. Efficiencies and revenue are being realized, but it’s “the low hanging fruit” or easy targets such as technology infrastructure, e-mail, intranet, Human Resources, Sourcing/Procurement, etc. The three key activities running up to “Day 2” are:
- 1. Plan and Execute Day 2 Integration focuses on preparing to terminate any TSAs in place with Seller and fully operate Acquired Co. as a “Buyer Co.” owned entity.
- 2. Perform Change Management, Training & Communications highlights the vision for the integrated organization and communicate the process to achieve integration.
- 3. Design Organization, Workforce Transition & Future State defines the end state operating model, skills mix and future organizational structure.
M&A Lifecycle with “Day 3”
If your organization can transition to the future state at “Day 2”, all the better. However, depending on the “Buyer Co.” M&A maturity level along with “Target Co.” organizational business process/ technology complexity, additional organizational and cost efficiencies await. Here is where I propose the concept of “Day 3”.
Think of “Day 3” as the future state of where an organization aims to be. It starts with high level planning during the detailed due diligence phase (after “Day 0”) and greater detail after “Day 1”. Governing these activities and tracking the benefits depends on the organization’s Program Management Office maturity or the Integration Management Office for continuity.
Rationalizing the following areas will bring additional cost savings and efficiencies:
- 1. Business Processes.
- 2. Applications.
- 3. Vendors.
- 4. Products/ Offerings/ Services.
- 5. Customers.
- 6. Workforce.
Once you have identified potential efficiencies and areas of growth, the journey begins. Next, prioritize the areas that do not disrupt the business yet provide the fastest payback, shortest time duration and fewest resources. Strategic investments, modernization and evolutionary changes are longer term in duration (3-5 years). As with any strategic plan there are going to be tradeoffs in investing, prioritizing and executing these projects.
Organizational Change Management and Communication
Having organizational change management expertise and agents improves the success of completing the integration and ensuring a smooth transition. It’s important to find and support the change champions while recognizing that others will be slow and may even obstruct the efforts. Remember uncertainty exists due to the integration of two companies. Management needs to understand that change disrupts the organization and communication with your people is critical.
With the organization changing, your employees will want to know about the changes. Communicate early, often and with the relevant information that you know. When leading or driving change you will certainly not know or have all the information. Ensure your people know what you know and provide additional information as it becomes available. You want to avoid the “FUD” (Fear, Uncertainty and Doubt) Factor behavior as it can paralyze running the business and transforming the organization. Use the appropriate form of communication.
Some organizations stop at “Day 2” because the integration is complete. Management decides that it operates in multiple environments with different business processes due to fatigue, time, resources and capital required to complete the integration and/or it under-estimated the investment required or overestimated the return on investment / efficiencies gained. To mitigate this challenge, dedicate a team to spend the time to perform the due diligence, blueprint the combined entities, and move quickly to separate.
Transforming to the future state creates organizational challenges such as rationalizing the product and the application portfolios, reviewing the business processes to increase productivity while reducing costs, realigning the organization to name a few. People are entrenched in the areas they work, products they support, applications used to running the business. Change is challenging. To address this, communicate the benefits, what’s in it for the individuals, and encourage the behavior of change.
The biggest “blocker” is Senior Management’s commitment to invest in performing these activities and receiving a payback in 1 – 3 years after the integration is complete. Management wants to minimize investing in integration work. They’re concerned about Shareholder Return and Stock Price. To meet this challenge, capture costs of not completing the work, people working part-time on the integration, costs of supporting different environments, processes and products/ offerings.
Organizations today cannot simply rely on organic growth so they look to M&A as a strategy to grow their revenue, gain market share or strengthen a weakness in a sector, market segment or product area. GFT experienced, as a partner with a European tier-2 financial services organization and a US based financial services solution provider, integrating two organizations which is, invariably, a complex and disruptive endeavor. Even though both “Acquired Co.” and “Buyer Co.” are separated from “Seller Co.”, additional integration work remains.
Think of “Day 3” Activities as the organization transforming into the future state. It requires investment and can last for up to 3-5 years after integration. The combined entities will eventually realize savings and cost efficiencies by reducing redundancies and rationalizing business processes, software applications, vendor management, product/offerings, and customers. However, equally vital to the integration’s success and completion is proper communication.