PMI Series - 1. Be choiceful: not everything has to be merged at the same time

Summary: M&A transactions have a very high failure rate. Mainly due to failing to integrate the two parties involved. To achieve success, it's important to drop the P in Post-Merger Integration and consider integration as a holistic process. Ideally starting when formulating the strategic rationale of a transaction. We’ve seen that top performers prioritize merger integration projects and follow BrightWolves’ six principles for successful integration. Today, we’ll dive into the first principle.

Principle 1: Clear choices

Not everything has to be merged at the same time

Making clear choices in post-merger integration is essential to ensure that the integration process is successful. Without clear objectives and a well-defined plan, companies risk losing focus, wasting resources, and failing to achieve their desired outcomes. Making clear choices is hard but has numerous benefits:

• Effective resource allocation: By making clear choices about what to integrate and when, companies can prioritize their efforts and allocate resources effectively, ensuring that they achieve their goals within the required time frame.

  
  

• Slice the elephant: It can be overwhelming for companies to try to tackle all of these activities simultaneously. By making clear choices about what to integrate and when, companies can break down the integration process into manageable parts, making it easier to execute and manage.

  
  

• Mitigate risk: Making clear choices in post-merger integration helps to manage risk. Mergers and acquisitions involve a degree of uncertainty, and there is always a risk that the integration process will not go as planned. By making clear choices about what to integrate and when, companies can reduce their exposure to risk by focusing on the most critical activities first. This approach allows companies to test their assumptions, identify potential issues, and adjust their plans accordingly before committing to more significant investments or activities.

  
  

All of this requires a thoughtful approach that balances the need to merge quickly with the need to leave no opportunities unexplored.

1. Clearly pinpoint your integration objective

First and foremost, companies need to identify what they hope to achieve through the merger or acquisition and then use this as a guiding principle when deciding what to integrate and when.

One thing is clear: the NewCo must increase shareholder value faster than if the companies were separate.

Increasing shareholder value can happen in many ways. The key strategic rationales of most M&A deals fall into the following 8 categories:

• Costs: realize efficiencies of scale via consolidation (i.e. merger of Exxon & Mobile in 1998)

• Channels: access new distribution channels (i.e. retail outlets, a direct sales force, a website: Walmart acquiring the Indian e-commerce platform Flipkart in 2018)

• Content: sell new products/services (i.e. Danone acquiring Alpro in 2016)

• Customers: reach more customers in a certain segment (i.e. Belgian Telco Proximus acquiring Mobile Vikings in 2021)

• Countries: expand territories in cross border deals (i.e. merger of Germany-based Daimler and US-based Chrysler in 1998)

• Capabilities: acquire top talent and/or technology (i.e. Disney’s acquisition of Pixar in 2006)

• Capital: increase cash or access to capital markets (i.e. M&A’s financed by cash deals vs. stock deals)

• Capacity: increase the available volume of operations (i.e. Sainsbury’s buying home retail group in 2016)

  
  

The chosen integration objective will influence your integration plan. For example, if the objective is to realize cost savings through the merger, then the integration plan should prioritize activities that will deliver the most significant cost savings, such as consolidating back-office functions or streamlining supply chains. For example, if the objective is to improve customer service, then the integration plan should prioritize activities that will have the most significant impact on customer service, such as integrating customer databases and call centers.

2. Draw up a full list of activities & initiatives that will need to be integrated

Before setting up your integration plan, we recommend to compile a list of all the activities that qualify to be integrated in one way or another. Out of our previous post merger integration activities, we’ve learned they mostly fall under the following functional chapters (with each time some examples of initiatives):

• Legal: legal entity structure, registration, …

• Finance: reconciliation of balance sheets & financial statements, order to cash processes & tooling, billing tools, …

• Sales: Sales force integration, managing important accounts, customer contract rationalization, …

• Marketing: new brand, new website, new GTM materials, …

• IT systems & tooling: Application integration or rationalization, data, hardware, cutover planning, …

• HR: org design (starting with top layers N-1 first, then N-2, employee migration, benefits harmonization, talent retainment & avoidance of knowledge drain, culture & values…

• Supply chain: supplier follow up, factory rationalization, …

• Real estate: Location strategy, access strategies, …

• Shared services optimization: Optimization of overhead, Marketing, Communication, IT, finance, …

3. Prioritize these initiatives based on effort vs. impact

Companies should assess the potential impact of each integration activity and prioritize those that will have the most significant impact on achieving their integration objectives. This involves dividing the initiatives into four categories: major projects, must-do quick wins, thankless tasks & and fill-in jobs (see figure 1)

Figure 1 - Effort Impact Matrix

4. Sequence integration activities logically in a clear timeline with clear responsibility

Now we have prioritized our integration activities, we recommend to sequence them logically, ensuring that each activity builds on the previous one and sets the stage for the next. This approach allows companies to manage risk effectively, test their assumptions, and adjust their plans as necessary before moving on to more significant activities.

Next we set up workstreams and map out the interdependencies between different tasks. It's essential to decide on the project management approach, define the responsibles for each activity in a clear RACI, and include the planning and timing of different phases of the integration process.

Typical milestones for merger integration include:

• Pre-day 1 (during Due Diligence phase)

• Day 1 readiness checklist : merge core business functionality, command and control protocols, set up communication and coordination between separate business processes, key employee retention, …

• Day 90: complete staffing and structure decisions, realize low hanging fruit synergies, defined full integration timelines, budgets, targets & customer retention plans

• First year to full integration: long term cost synergies and revenue synergies, manage-out business process and system integration projects, cultural alignment, …

By following the approach described above, BrightWolves was able to designed and implement for a Major Belgian energy player an organizational model that led to +35% efficiency gain within operational teams, and +15% in support staff.

Next week, we’ll dive into our second principle, Controlled speed.

See you then!

Need help setting up your M&A for success? BrightWolves offers consulting services along the full M&A spectrum: ranging from helping to define your M&A strategy, to target screening & selection, commercial due diligence, deal closing and post-merger integration. Do not hesitate to reach out to our expert, Joris Vanthienen