The Five Steps to Successful Merger Integration
By Michael Sarlitto and Dan Roman, Keiretsu Forum Chicago/Midwest Members
Business acquisition and subsequent merger integration is one of the biggest and most important challenges an organization can face. Unfortunately, estimates indicate that up to 80% of mergers and acquisitions fail to deliver anticipated shareholder value. Root cause analysis performed by SummitPoint Management on more than 200 failed mergers and acquisitions is enlightening. It reveals that acquisitions frequently fail because merged companies do not properly plan for and implement a systematic and controlled integration process.
Although merging two companies can indeed be a formidable task, there are ways to anticipate and overcome challenges, avoid common pitfalls, and position a company for M&A success. Successful merger integration planning and implementation consists of five key phases (see Figure 1) that are each designed to bring together the right leadership, resources and methods in executing a successful merger integration scope.
Figure 1: Five Phases of Merger Integration
Phase 1: Framework Development
This initial phase is strategic in nature and defines the overall process of integration. It is designed to bring a structure and focus to the merger integration process by defining objectives, identifying team players and leadership, articulating an approach, and specifying parameters and constraints. Key questions that should be answered during this phase include:
- What are our goals and what defines success for the team?
- How will we manage operations integration?
- What problems can we anticipate?
- What impact will this merger have on the competitive landscape?
It is important to begin preparation for integration at the earliest phases of the merger and acquisition deal cycle (see Figure 2). We recommended that framework development begin even before the signing of a Letter of Intent. This ensures that clearly defined objectives and a framework are in place, allowing the organization to leverage the operating information obtained during due diligence to its best advantage.
Figure 2: Implementation Timeline for the Five Phases of Merger Integration
Phase 2: Entity Analysis
The foundation for effective merger integration is a thorough entity analysis. Generally, the information necessary to successfully complete this phase can be obtained by performing operational due diligence. Operations due diligence is the methodical process of investigating and evaluating the operational details related to a potential investment or business initiative. Operations due diligence enables the discovery of most operational issues and risks material to a transaction. In this context, “operations” must include all business and work processes throughout every functional area of the organization. Limiting the assessment to only those few functions of a company that support its main activity may omit important factors that could impact merger integration and the deal’s success. Key questions addressed during this phase include:
- What do the management models of both the acquiring and selling companies look like?1
- What opportunities exist for operational improvements?
- What operational synergies can be realized?
- Are the corporate cultures compatible?
A thorough entity analysis will provide a fact base to drive integration planning and evaluation activities. Generating company-specific insights helps integration leadership understand the barriers that various execution options may pose. This baseline of information regarding similarities, differences, strengths, weaknesses, and opportunities between the two firms also serves to provide a foundation for the development of merger integration performance metrics, shown to be critical in driving effective integration team performance.
Phase 3: Integration Planning
Integration planning is purposefully separated from implementation planning because it targets strategic as opposed to tactical issues. Prior to signing a Purchase Agreement, the integration team should synthesize the information collected during the framework development and entity analysis phases and make determinations about the desired operating structures and processes for the merged company. Generally, issues such as technology requirements, human resource plans, business plans, organizational structure, common processes, and best practices are defined by the completion of the integration planning phase. Key questions answered by this phase are:
- What do we want to look like from an operational perspective?2
- How will we operate?3
- Are there key people or positions that must be maintained in order to succeed?
- How, when and at what cost will we leverage new opportunities?
It is important that the integration team have access to the legal, financial, and operational body of information assembled during the due diligence and operations assessment processes. Armed with this complete information, the integration team can make more informed choices. Ultimately, this phase defines the structure of the merged company’s operations.
Phase 4: Implementation Planning
Tactical issues for all required integration activities are addressed during the implementation planning phase of the process. During this phase, transition schedules and stub budgets are drawn up, specific and quantifiable performance measures are identified, constraints are addressed, and preparations are made for both internal and external Day 1 transition activities. Key questions addressed during this phase include:
- How do we get there?4
- What constraints exist and how will we overcome them?5
- Who will be accountable for each functional and operational component?
The implementation planning phase begins after signing of the Purchase Agreement and the resulting project plan must be ready for immediate execution upon deal closing. The first 100 days “post merger” is the most critical and vulnerable time period in the integration process. For this reason, the integration plan during this period should be heavily weighted with activities involving workforce communication, coordination of efforts to a central point of integration activity control, and building of strong integration team communication protocol. Success in this phase is largely influenced by the ability of leadership to set reasonable, yet aggressive, expectations and establishing a clear line of sight to the stated merger goals.
Phase 5: Implementation
This phase involves the actual integration of processes, operations, and organizational entities. During the initial transition period (first 100 days), the integration team monitors and manages integration progress in all areas of the organization, especially those areas that include “hand-offs” between functional team leaders. Particular attention should be paid to ensuring that the integration scope, schedule and budget are adhered to and that the “key enablers” identified by each functional area are addressed in a timely and efficient manner. Project-wide performance metrics are also used to measure project team performance but also to communicate, on a company-wide basis, the progress being made in executing integration activities. This phase addresses key implementation questions such as:
- How are we doing?
- What are the metrics indicating?
- What changes to the process need to be made?
By following this systematic, process-dependent approach to merger integration, your company will likely be subjected to fewer post-close integration surprises and will be better positioned for long-term success.
Avoiding Common Integration Pitfalls
Having applied this merger integration process with companies across various industries, we’ve come to recognize some common mistakes that can jeopardize integration effectiveness and impact long-term deal success. Not surprisingly, some rather small, seemingly unimportant considerations can have a major impact on success.
- Establish a process to capture and track all assumptions made in developing the objectives established during the framework development phase. Don’t be caught six months into the process and suddenly realize that no one in management or on your integration team can recall the basis for synergy numbers. A disconnect between strategy and execution could mean the difference between success and failure.
- Integration team continuity is critical. Plan on having the same team in place throughout the entire merger integration process. This assures team cohesiveness and increases efficiency.
- During the integration planning phase, devise a key employee retention program to ensure that the critical human capital identified during the operations assessment and entity analysis phase has the highest probability of remaining with the firm. Inattention to this aspect of merger integration execution is a principle cause of failure as pivotal staff often leave the company during the integration process. It is important to identify these critical resources early and execute a deliberate plan to keep them.
- Pay close attention to workforce communication and engagement strategies throughout the process, particularly in cases where the workforce includes a labor union and/or the integration involves labor negotiations. Communication of key milestones or significant events in the merger integration process must be a priority. Information should be disseminated to workers before it is made public. Develop a communications strategy that includes status reporting to employees at regular intervals throughout the process as their buy-in is a crucial component for integration success.
- Don’t forget to plan for supplier transition issues during the implementation planning phase. Handled poorly, supplier issues during implementation can lead to added costs, lost product-to-market time and bad public relations.
- Keep your eye on the prize. Many companies lose their focus on integration given its lengthy implementation process – as much a 24 months for many companies. If your integration team members also have other day-to-day duties, their integration efforts may be less than needed to achieve success. Key merger integration personnel should be identified early in the process and given the time and resources to devote to the integration process. The associated incremental cost of temporarily relieving them of certain day-to-day activities will be well offset by the enhanced quality of the integration effort.
Conclusion
Mergers and acquisitions can be a smart, strategic method for achieving key business objectives. However, the M&A path is fraught with risk. Performing operations due diligence and following a methodical, objective, and repeatable merger integration process will provide the insight needed to address both expected and unexpected integration issues and dramatically improve the probability of achieving merger objectives and long-term success.
About the Authors
Michael Sarlitto is President and Dan Roman is Vice President/General Manager of SummitPoint Management. Headquartered in Chicago, Illinois, SummitPoint Management offers operations due diligence and advisory services to firms seeking to acquire, invest in, or enhance the performance of companies. They can be contacted at 312-441-1400 or by email at msarlitto@summitpointmanagement.com and droman@summitpointmanagement.com.
1 Including structure, workforce, controls, communications, etc.
2 Such as centralized, decentralized, established centers of excellence, etc.
3 Such as process, procedures, and controls
4 Classic project management practices apply, including triple constraint management: scope, schedule and budget.
5 Such as contingency planning
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