Category: M&A Integration

Five Secrets of Successful Post-Acquisition Integrations

Success in post-acquisition integration is essential to the success of any M&A. Even if the strategy behind the acquisition is brilliant, it must also have brilliant leadership in execution to achieve success. Based on our experience and research, we have identified five critical success factors for leaders in post-acquisition integration, in implementing organizational change and integrating new organizations.

These factors are:

  1. Communication, communication, communication
  2. Maintaining stabilities
  3. Integration of management processes and systems
  4. Organization design
  5. Winning hearts and minds

Communication

In post appraisals of acquisition integrations, the one item which stands out is communication. Employees say there was not enough communication, even when those leading the acquisition think “we over-communicated”. In planning an acquisition, it is important to remember that communication is a critical element. Too often communications are thought of after the fact, and become a “bolt on” to the overall integration planning. That is an often-fatal mistake. Communication provides stability, which is essential to people during change.

Communication is the primary tool of leaders. The leaders must see communications as coming first and be in the forefront, rather than an afterthought. Communications and those delivering the communicating must be authentic, committed, and passionate about success of the business. The employees must see high levels of congruence and consistency between their leader’s ways of being, communications and actions.

Maintaining Stabilities

An often-overlooked element in successful change is maintaining stabilities during the change. This is important for all individuals experiencing change. Those leading organizations during acquisitions can assist their people by talking about the importance of maintaining personal stabilities as well as reinforcing organizational commitments, policies, practices and values.

Acquisitions are stressful for all concerned. There is tremendous uncertainty for employees on both sides of the deal. Some people benefit from reinforcing of boundaries and controls during these times of change and uncertainty. Clarity of policies serves as a “safety rail” to people during change. As an example of why reinforcing policies is useful, I have seen that during this period of uncertainty sales people consider making “special deals” with customers as a means of gaining favor and possibly a new job. These “special deals” are usually discovered at some point, and create an awkward situation between the company and its customers.

Once the acquisition closes, it is important to rapidly clarify policies and processes for the new organization. An effective way to accomplish this is to have process simplification / work elimination sessions to streamline policies that work best for the new company. I have facilitated a number of there around the globe, and have found it to be excellent tool for bringing the two organizations together to focus on how they can “win together”. It also brings to the surface other integration issues which need to be dealt with. Following alignment on policies and processes, it is important to quickly get communication out to every employee. Clarity on policies and practices is important for maintaining stabilities.

Integration of Management Processes and Systems

Successfully integrating management processes and systems is both a people and technical issue. This is the area where post-acquisition integration projects “hit the rocks”. I am often surprised how invested people are in these processes and systems. So much so that any change occurs like a personal affront and attack. People often complain about these processes and systems, and then become upset by any attempt to change them. By its nature, an acquisition means that people in at least one of the companies will be upset by the changing of management processes and systems. It is often seen as the real communication about winners and losers, which of course is deadly in post-acquisition integrations.

As part of planning the integration process, it is useful to rapidly identify those processes which must be addressed. This includes identification of processes to be eliminated or retired, reports which will be retired, and meetings that will be eliminated. Streamlining processes from the perspective of the customer will improve the business and help manage issues with customers. As an example, if the two organizations have common customers, how will sales relations, pricing, inventory numbers and supply agreements be handled? This information allows the customers to experience the workability of the combined organizations, rather than waiting to see if it will actually work out.

Integrating management systems is often a huge challenge. There are two types of management systems to consider:

  • Policy based, e.g., benefits, compensation, etc.
  • Computer systems, e.g., As one company uses Oracle while the other SAP. There are often good business reasons for these differences. Planning the integration of computerized systems is crucial for success.

Organization design

Organizations have designs which determine how they function. Coming into an acquisition, the two organizations each had a unique organizational design. Hence the importance of examining the existing organizational designs in order to create new organizational alignment to be used going forward.

Organizational design is a concept that is undergoing considerable change. For many the term, organizational design was considered to be synonymous with structure. Managers often think the place to start thinking about organizational design is to identify the desired structure, with key positions. Organizational structure is important, yet is probably the last factor to consider rather than the first. Instead, we recommend using design thinking to assist in developing the new organizational design. Design thinking begins with an inquiry such as:

  • What are these organizations designed to accomplish today?
  • What changes can we already see occurring, e.g., customers’ preferences, competitors, digitation of the industries, market dynamics, etc.?
  • What organizational design will best serve us in the future?
  • How can we create this new design which best fits our needs?
  • What future and strategic intent shapes our thinking about this design?
  • Who should be involved in creating this design?

Winning Hearts & Minds

People engagement and mobilization ultimately requires winning the hearts and minds of all stakeholders. Absent that, meaningful change does not occur. Engagement seldom occurs until the person has handled their question of “what is the impact of this on me” and “what do I feel/think about these changes”. At the same time, having the opportunity to be involved and participate is an important opportunity for becoming engaged. Winning hearts and minds is a reflection of leadership, for both the full engagement of the mind and the full-on commitment of the heart can only be achieved by a leader who is fostering this kind of ownership and engagement in this major change effort.

 

Half of M&A transactions fail to create value. Ever wonder why? Download our whitepaper ‘The Conundrum of People in M&A’, and understand the critical elements that impact mergers and acquisitions success or failure.

In it, you will learn:

  • Eight common flaws in decision-making often made by executives in M&A transactions
  • Why the integration process is so critical
  • Tactics in organizing, planning, and communicating that lead to successful integrations
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The ‘Right Person, Right Job’ Process in Post-Acquisition Integration

A critical element of success in post-acquisition integration is identifying the right jobs to drive performance and then selecting the right people for those jobs. Selecting people for key positions in the new organization is among the most critical steps in the integration process. These choices are key to determining if the acquisition is accretive in value. It also provides the foundation for future success of the business and adopting a powerful organizational culture. At KingChapman, we think about how leaders can succeed in dealing with the Conundrum of People in M&A. In over thirty years of consulting in acquisitions, we find that getting the right person in the right job is critical to future success. It provides an excellent opportunity for leadership in bringing two or more organizations together. Placing the right people in the right jobs is also crucial communication to people in all organizations regarding their leader’s commitments and values.

In tandem with our clients, we have developed a “Right Person, Right Job” process for leaders to use in populating new organizations. How a selection process is conducted is a vivid illustration of the executives/managers commitments regarding the future of the organization. If the organizational design reflects no new thinking and people selected are the usual suspects, it is a clear demonstration that nothing will change. If, on the other hand, the organizational design reflects the new future created via the acquisition, then it demonstrates their commitment to a robust future for the organization that is exciting for people in the organization. Further, if finding the right people for the jobs is deliberate, with open conversations of personal values, then people will see that the selection process is consistent with the commitment to future success. As with all our work, the focus is on creating a powerful future, developing strategies for that future and delivering exceptional business results. This provides the context for this leadership process.

Invented Future

Getting the right people in the right job requires leadership commitment to creating a powerful, Invented Future for the business. This Invented Future provides the context for thinking about organizational design, organizational structure, and selecting the “right” people to go into those positions. If that commitment is not explicit, then that is the place to start. A robust, Invented Future needs to be created prior to taking any other actions. Without an Invented Future, the design of the new organization will invariably be based on the past. That is, the past of the organization which is making the acquisition. The flaw in relying on past-based designs is that future success of the combined organizations depends on creating a new future which is more powerful than was possible prior to the acquisition. There is a strong tendency to assume that an Invented Future is not needed since the organization making the acquisition had sufficiently strong organizational design, people and resources to execute the growth strategies. This mindset assumes the existing future is sufficient is a mistake which will hamper success in integrating the acquisition and creating growth.

Organizational Design

Thinking from this invented future provides a platform for developing an organizational design consistent with that future, rather than the past. Organizational design begins with the identification of the design elements and principles which are important given the Invented Future. Teasing out these elements is best done in a conversation with others about the Invented Future and strategies for achieving that Invented Future. In these conversations, keep asking what are the elements or principles of design we need for our organization?

As an example, continued innovation is often a key element in an organization’s strategy. If approached from a design standpoint, the useful question is “How can we build amazing innovation into our organization?” By delving into that question, endless opportunities will emerge. In contrast, if innovation is considered from perspective of organizational structure, the predictable response is we need an executive in charge of innovation and an innovation department. While this structural approach may seem logical, the probability of success is low.

A common misconception is that organizational design and organizational structure are the same. Both are important, yet are not the same. Organizational structure is the formal structure of accountability and usually is represented by a formal organization chart. This arrangement of boxes and lines is often where managers begin in thinking about an organization. While organizational structure is important, it is usually the last step to be taken rather than the first place to start.

Assess the Position

Begin with a clear definition of the position.

  • What is the role?
  • What are the key outcomes to be produced by this position?
  • Are there other key deliverables that should be produced by this position?

If this is a non-managerial or technical position, describe the type and importance of the technical skills required. Does this person need to be a “best-in-class” performer, or more of a journeyman?

If this is a management position, describe the expectations for the person in this position to have further advancement, i.e., is this the top or terminal position for a person in this role? If not, discuss the expectations for where the person in this role should go next, and the skills that will be required for that role. Time frame for promotion should also be discussed.

Assessing the Candidates

The people who are in consideration for the position should be discussed based on the specific requirements for the position. The background commitment is to support the managers in evaluating candidates for positions in an objective manner. The essence is that each person was given a fair hearing and discussion of his or her suitability for their fit in the revised organization. The focus is to discuss the person’s track record of producing business results and fit with the company values. Watch for the conversation drifting off to talk about what a good person they are, how important they have been in the past to the company, what role they play in the community, etc. The focus is on getting the best person for the job based on results and values.

Once the decision is made, then there can be a discussion on the extenuating circumstances, e.g., the best candidate wants to retire in the next year. Be slow to reverse selecting the best person. If none of the candidates appear to be of the caliber needed, leave the position vacant and conduct a search to find such a person.

Summary

A critical element of success in post-acquisition integration is identifying the right jobs to drive performance and then selecting the right people for those jobs. Selecting people for key positions in the new organization is among the most critical steps in the integration process. The conversations used to design, structure and populate the new organization is a vivid demonstration of leadership’s commitment to success of the post-acquisition integration as well as business success of the organization.

 

Half of M&A transactions fail to create value. Ever wonder why? Download our whitepaper ‘The Conundrum of People in M&A’, and understand the critical elements that impact mergers and acquisitions success or failure.

In it, you will learn:

  • Eight common flaws in decision-making often made by executives in M&A transactions
  • Why the integration process is so critical
  • Tactics in organizing, planning, and communicating that lead to successful integrations
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5 Ways to Destroy Value in Acquisitions

The number and size of corporate mergers and acquisitions continues to boom. The business press carries the stories of how these potential transactions could reshape markets and add value to the acquiring firm. Regardless of the enthusiasm and hype, the facts are that many of these acquisitions will not meet stated expectations, and in fact will destroy value. Further, some of these deals can be disastrous for the business. The risk is that massive shareholder destruction will occur as businesses falter; customers become disgusted and employees are dislocated. It is interesting to note that often when transactions are announced, shareholder price and value for the seller increases, while the opposite happens for the acquirers. Investors are aware of the risks of value destruction for the acquiring firm.

Creating value is not mysterious and doesn’t require the proverbial “rocket scientist” to figure out. The actions needed to create value rather than destroying value are straightforward. Yet, for a variety of reasons management teams execute these actions poorly or ignore them all together. Why? First the obvious, virtually all of the reasons for the value destruction involve people. In the passion and pressure of getting a deal done, managers forget about their people. The arrogant assumption is that people will be excited about the transaction and will “fall in line”. Often those assumptions are wrong. We call this the Conundrum of People in M&A.

This conundrum of people is where many acquisitions go off the rails. This includes dynamics during the negotiations as well as execution post-acquisition. Let’s look further at the causes:

1. Making Faulty Strategic Assumptions

A primary cause of value destruction is having an unclear strategy and picking the wrong target. Faulty strategic assumptions involve not being crystal clear about the business strategy for which making acquisitions is based. It is important to remember that making acquisitions is NOT the strategy, but rather one of the methods of executing a strategy. Unfortunately, too often executives who cannot figure out how to grow their business resort to making an acquisition. The classic line used to justify the transaction is “1+1=3”. While this phase sounds good, often the reality ends up being “1+1=1”, since an acquisition does not constitute or guarantee a growth strategy. Rather than growing the business, a failed acquisition only makes things worse.

Acquisitions made with faulty strategic assumptions lead to a flawed expectation of increased capability to meet customer needs, expanded geographical presence and capturing competitive advantage. Value is destroyed when the offerings of the integrated business do not lead to increased margins and sales with customers, expanded geographies, and competitive presence. The strategic error comes from faulty thinking about future events. This leads to failing to cover the cost of the acquisition and value destruction.

2. Ignoring Organizational and People Issues

A second cause of value destruction occurs in due diligence as the acquiring firm misreads the “essence” of the organization which is being targeted for acquisition. Negotiating a transaction can be like a romance, where passion obscures the stark realities of “getting married”. During this courtship both parties talking about “what could be”. Like in a romance, once the two parties are together there are often unpleasant surprises. Examples of these important organizational and people differences are:

  • Core values
  • Business models
  • Leadership styles
  • Organizational capabilities
  • Organizational cultures
  • Getting caught up in the passion of making a deal

3. Allowing Impaired Judgement

A third cause of value destruction comes from impaired judgement due to the “passion of the deal.” It is said that power is among the most potent drugs. Being part of a deal team and negotiating a transaction has seductive power which can quickly overcome “good judgement”. The passion and power are so strong that it is easy to overlook potential risks about the prospective acquisition and miss market and product changes. The dynamics and thrill of getting the deal done move to the foreground and puts good judgement and the original intent in the background.

4. Paying Too Much

Perhaps the most impactful consequence of a management team getting caught up in the passion of making a deal is paying too much for the acquisition. If the price paid for the acquired business was too high, there is no way the post-acquisition integration can overcome that mistake. It is simply a hole that is too deep to dig out of. Further, when the price paid is too high, the involved executives attempt to cover up the mistake with other “strategic moves”, which ultimately make the situation even worse. It is often said that the one mistake which cannot be overcome is paying too much. Investment bankers often earn their fees by getting the buyer to pay considerably more than they intended, and in many cases, was justifiable. Investment bankers often pressure managers into paying too much, which of course happens in the passion of the “buying fever.”

5. Allowing Poor Post-Acquisition Integration

Among the most common sources of value destruction is flawed post-acquisition integration. There is often an assumption that getting the deal closed is the hard part. That is a fatal mistake.

Summary

Creating value in acquisitions requires leadership which inspires people. This involves:

  • Creating context for challenging and listening to challenge regarding price, terms and conditions for a transaction. Leadership by those proposing the transaction as well as those involved in the deliberations is critical to mediating the temptation to overpay for a transaction in order to “win the deal”.
  • Thinking strategically about future value creation of transactions, rather than being swayed by rosy forecasts.
  • Leadership and intense commitment to successful integration!

At KingChapman we assist leaders in being vigilant regarding the people and organizational issues which ultimately determine value creation of transactions, but do not readily show up in financial models. We stand ready to explore these people and organizational issues with you.

 

Half of M&A transactions fail to create value. Ever wonder why? Download our whitepaper ‘The Conundrum of People in M&A’, and understand the critical elements that impact mergers and acquisitions success or failure.

In it, you will learn:

  • Eight common flaws in decision-making often made by executives in M&A transactions
  • Why the integration process is so critical
  • Tactics in organizing, planning, and communicating that lead to successful integrations
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Charters Are an Essential Tool in Post-Acquisition Integration Success

Seventy percent (70%) of change efforts fail to deliver the expected results, according to Changing Change Management in the July 2015 issue of McKinsey Quarterly. The low success rate is attributed in part to the limited scope of most change management techniques, which focus on control and minimizing distractions. Change management is appropriate for small, contained changes such as updating the software in an accounting department. It is not appropriate for change efforts as complicated as post-acquisition integrations, in which case change leadership techniques are required. John Kotter describes the differences in change management and change leadership as:

Change management, which is the term most everyone uses, refers to a set of basic tools or structures intended to keep any change effort under control. The goal is often to minimize the distractions and impacts of the change. Change leadership, on the other hand, concerns the driving forces, visions and processes that fuel large-scale transformation.

Post-acquisition integration is a complicated form of strategic execution that requires breakthrough designs and unique organizational accountability during implementation. We think that organizing the integration as a series of well-orchestrated breakthrough projects is the optimal means of:

  • Accelerating employee engagement
  • Aligning product and service offering to capture additional customers and geographies
  • Developing additional leadership capabilities
  • Establishing new levels of organizational accountability
  • Achieving the expected financial results and value capture

The cornerstone for creating Breakthrough Projects is the Charter. The Charter provides authorization and direction for the project and the people involved. The essence of a Breakthrough Project is that it is a commitment to accomplish what is possible, but not predictable given the current circumstances. Accomplishing the Breakthroughs will demonstrate that the people in the organization as capable of accomplishing more than they, and others, previously thought they could. The accomplishments achieved by the Breakthrough Project lay the foundation for transforming the organizational culture during the midst of post-acquisition integration.

A Compelling Future is Essential

While creation of a compelling future was hopefully the basis for the acquisition, it is wise to assume that the ability to comprehend or “see” that future quickly dissipates in all the chaos surrounding closing to the transaction. A Charter for Breakthrough Projects provides a new means of seeing that future. The context for writing the Charter is from the future. The Charter authorizes and creates a project which will provide, at least in part, the path from the present to the future.

Give Them a Bigger Problem

Creating a Charter for a Breakthrough Project during post-acquisition integration also has a particularly therapeutic effect. Anxiety and uncertainty are normal during an integration, since employees from both sides are unsure of what will transpire. Creating a Charter which requires Breakthroughs serves to give this group of employees and these parts of the organizations a “bigger problem to solve”. This is one of the change leadership techniques we discovered long ago. During times of transformation, assigning a group of employees a bigger problem to solve serves to enable and engage them in a powerful way. In a typical change management approach, the focus would be on providing reassurance and attempting to control their anxiety. In change leadership, we seek to deploy their anxiety and energy in addressing big challenges which if addressed will make major contribution to the newly combined organizations.

Identify the Outcomes to be Achieved

Charters are written from perspective of a future which is completely successful. That includes success in the improved offerings to customers, organizational integration, transformed organization culture, and value capture at or beyond the expected levels. Success in acquisitions requires creating clarity of outcomes which cut across functional lines. These outcomes should be thought of as a tapestry which involves all of the organization. These outcomes identify areas that are important for the long run, such as expanding the customer base not shrinking it, expanding geographies, innovating in product and service lines, and increasing market share in areas which are growing and have higher value rather than those which are shrinking.

Summary

Most acquisitions fail to achieve the expected financial results and value capture, but it doesn’t have to be that way. If a post-acquisition integration is approached as strategic execution with key actions framed as Breakthrough Projects, the rate of success dramatically increases from the predicted 30% rate.

 

To learn more about how to plan breakthrough projects, download our white paper, “7 Elements for Chartering a Breakthrough Project”.

In it you will learn:

  • what a ‘Breakthrough Project’ is and why it’s critical to organizational transformation
  • why creating a ‘charter’ is a critical step in the process
  • the critical roles that key people must play in the project to enhance success
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Executives Seduced by Types of Synergies in Mergers and Acquisitions

Executives approach a possible transaction with the steely resolve to be disciplined in negotiations. Accountants, investment bankers and lawyers are hired to assist internal resources in this process. Then somewhere along the line, this self-imposed discipline breaks down and the prices and terms which are accepted are much less attractive than planned.

I had the pleasure of collaborating with the head of M&A practice for a premiere New York law firm. His firm specializes in mergers and acquisitions and is involved in many of the largest transactions. I asked my colleague to explain the phenomenon in which executive teams start off with a disciplined approach to price and terms, only to see that discipline erode towards the end of negotiations. My friend laughed, and then gave a colorful explanation. He said that what happens at the start of the process is that the executives give instructions to advisors that they must get the deal done on the executives’ terms. With that mandate, the lawyers begin hard negotiations with the other side. Then somewhere along the way, the instruction changes to “win the deal”. While it is seldom said “Win the deal at all costs”, that is essentially the message.

My next question was, “What happened to cause this change?” My friend said, “Simple, it becomes personal”. That is, these transactions often go from a disciplined, business approach to personal competition of who will win. How this might happen is understandable given most executives are competitive by nature. “Winning” becomes defined as closing the deal, which shapes the approach taken by advisors to the executive team. My friend described this as “The Testosterone Factor”, in which primitive forces overshadowed good judgement.

My following question was, “How does that happen”? In other words, “how is this personal competitiveness enabled and explained”. My friend laughed and said just one word, “Synergies”. This is confusing if looked at from definition of synergies:

Synergies is defined as the cooperation and interaction between two or more organizations to produce a combined effect greater than the sum of their individual effects.

The definition of synergies is the essence of value creation in acquisitions, i.e., two companies combining to create more than either could individually. How then could synergies be “misused”? My friend said that in practice the financial values assigned to synergies is often based more on what is needed to reach the desired sales price, rather than an accurate projection of what will be achieved in post-acquisition integration. Said bluntly, synergies are a “plug” inserted into the financial models to make the transaction look prudent. Hence the seduction of synergies.

Seduction of Synergies

Synergies is the “cooperation and interaction between two or more organizations to produce a combined effect greater than the sum of their individual areas”. This greater effect can be anticipated through increased geographical reach, expanded market share, improved technologies, introduction of new products and services and reduction in costs due to elimination of redundancies and stream lining operations. Perhaps the most seductive of all synergies is this latter category of cost savings. Cost saving synergies are often a primary financial basis which justifies making the acquisition. That is, the purchase price to be paid for the acquisition is justified based on expected synergies from cost savings. These cost savings are based on eliminating redundant groups and positions. This practice is so common that a classic joke says that “the word synergy is unemployment spelled backwards”.

While this practice of identifying synergies as initial cost savings continues, the data does not really support the validity of this practice. Numerous studies have reported that the expected financial savings are not achieved. Further, these expected savings are not maintained over time. Among the reasons for are:

  • The estimated cost savings are a mirage or myth. The numbers work in spreadsheets, but lack a basis in reality. Once the effort to reduce costs begins, it is discovered that the groups and functions are more intertwined with operating the business than understood by the analysts running the spreadsheets.
  • Achieving sustainable cost reductions is complicated, and requires more than slashing departments and laying off people. Unless the work being done by those departments and people is eliminated or redesigned when the positions were eliminated, the costs will creep back. If only the people doing those roles went away, the work to be done stayed, and in some cases expanded due to complications of the combined organizations.

Accommodating the Seduction of Synergies

Once the transaction closes and post-acquisition integration begins, the challenge facing the integration project managers and teams is to create and capture as much value as possible. The predictable response is to close the gap with cost reductions. This usually means cutting deeper than originally planned. While this give appearance of responsible actions, it often has the opposite impact on achieving the expected long term synergies. A classic English expression which describes this is ‘Penny wise, pound foolish”.

We believe that synergies are best achieved by creating Breakthrough Projects. These projects teams are empowered to create new thinking which will produce sustained values. If cost reduction is needed, that can be reflected in the Charter for one of these Breakthrough Projects. The team is instructed to first focus on how to reduce the unnecessary work and only then explores if headcount reductions are required. These Breakthrough Projects focus on primarily on getting costs out, rather than getting people out. When a Breakthrough Project concludes that people reductions are inevitable, then the actions related to eliminating positions is more widely supported by employees and more effectively implemented.

Summary

The reduction in self-imposed discipline is often accelerated by the seduction of the types of synergies in mergers and acquisitions. Unfounded expectations are established for value creation from the combining of the two organizations. The task of achieving these unfounded expectations falls on the post-acquisition integration project managers and teams. Using Breakthrough Projects to accelerate value creation with synergies has proved to be very successful.

 

Half of M&A transactions fail to create value. Ever wonder why? Download our whitepaper ‘The Conundrum of People in M&A’, and understand the critical elements that impact mergers and acquisitions success or failure.


In it, you will learn:

  • Eight common flaws in decision-making often made by executives in M&A transactions
  • Why the integration process is so critical
  • Tactics in organizing, planning, and communicating that lead to successful integrations
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