So far this year, the world’s companies have completed 9,478 M&A deals valued at US$887.1 billion – up 23% from the first quarter of 2014 and the highest quarterly volume in eight years.
“Almost 30% of respondents said that their integration fell short of success,” the researchers report, with 18% indicating the transaction is not achieving the targeted synergies
The action has been centered in Asia, where US$221.2 billion in deals was recorded, up 38% from last year. The top ten deals include:
- Hong Kong property-based conglomerate Cheung Kong Holdings US$23.6-billion merger with ports-to-telecom associate Hutchison Whampoa
- Hutchison Whampoa’s US$15.5-billion acquisition of European telecom firm Telefonica
- China National Chemical Corp’s US$5.7-billion purchase (with Italy’s Camfin SpA) of Italian icon Pirelli
- Japan Post’s US$4.7 billion takeover of Australian transportation and logistics group Toll Holdings
In other words, mergers & acquisition into or from Asia is becoming a more competitive business. And that’s just the deal-making.
What happens the morning after? How can CFOs ensure that post-merger integration proceeds as planned, that synergy targets are met or exceeded, and that the acquisition contributes to the bottom line in the shortest time possible?
Five Focus Areas
New research by Big Four accounting firm Deloitte sheds light on this issue. Executives from 803 companies in the US were interviewed last November and December “to help determine what drives successes, what foils deals, and what companies can do preemptively during the integration period to help increase the likelihood that their deals are the successful ones.”
The findings are instructive. “Almost 30% of respondents said that their integration fell short of success,” the researchers report. Eighteen percent indicated the transaction did not achieve the targeted synergies, while 10% were not even sure if they have reached their goal.
That said, the majority – 67% – rated post-deal integration at their company as successful (5% don’t know or are not sure). And 56% said thy initial synergy targets were achieved or even exceeded, with 17% reckoning it’s too early to say one way or the other.
Typically, the integration process took no longer than two years to complete. Seven out of ten executives – 74% – said it took at most 12 months for the synergy targets to be reached, with 43% saying they realized synergies faster at six months or earlier.
A quick source of synergy is SG&A expenses. “This might entail the tough task of eliminating duplicative jobs,” says Deloitte. There is obviously no need for two finance organizations, two marketing teams, two R&D units, two HR units and so on.
Procurement is also low hanging fruit, both for direct and indirect spending. Comparing supply contracts and negotiating new prices is a relatively easy win compared with the much more difficult task of rationalizing infrastructure (e.g., closing or consolidating factories).
But companies should not forget the holistic view, Deloitte warns. By focusing solely on short-term financial synergies from SG&A and procurement, they often “overlook hidden synergies and fail to create high-performing supply chains.”
Successful integrations also synchronize operational synergies with customer and market needs of the combined entities, avoiding a situation where an expensive reworking of the supply chain is required.
“Many companies drastically underestimate the complexity, resources, communication, and management focus needed to successfully integrate and realize expected synergies,” Deloitte adds.
Technology systems play a role here. “A big chunk of planned synergy savings and integration costs often depend on well-executed IT systems integration,” notes Deloitte. “Our experience working with many IT integrations demonstrates the value of following a standardized, repeatable approach to post-merger systems integration.”
What if you want to replace the legacy systems with new leading-edge technology? “The way to proceed here is to first get a full inventory of IT assets before developing blueprints,” Deloitte counsels, “and then develop a flexible integration framework that includes contingencies.”
“Make some immediate decisions, even if they are not perfect – sitting idle is a mistake. Any adjustments can be made over time”
Whatever the approach, make sure to tailor the integration or replacement of IT systems with the goals of the deal, such as revenue synergies. At the end of the day, the decision as to how to integrate different systems or the introduction of a new one should depend on how compatible that approach is to reaching the synergy and other targets.
All this underlines why early preparation is crucial. “That might seem impossible especially since mergers of firms that compete in the same markets might not want to share confidential information about their business practices – or might face antitrust restrictions that prohibit sharing such information,” Deloitte concedes.
But companies can clear this hurdle by creating a ‘clean team’ of employees from both organizations who share confidential information. “They are usually small and are lifted from their daily duties to set pro-forma integration plans in place so they can be acted upon once the merger closes,” Deloitte explains.
What may this pro-forma integration plan look like? Drawing on its work with clients, Deloitte suggests that the plan:
Map out synergy goals. Examine the scope of the synergy targets and whether they can be delivered without disrupting day-to-day business.
Analyze corporate structures. Is there a defined decision-making process? Who is in charge?
Determine the soundness of financial data. Is the budget and timeframe sufficient to complete the execution of integration, such as the IT systems?
Ensure the integration plan is thorough. Does it embrace employee training, harmonizing incentives and other often overlooked yet important aspects?
Mesh corporate core processes. Market development, order processing, production of goods and outsourcing protocols should not diverge or conflict.
Create a management team. Determine who is in charge of the integration and name names. If integration skills are not available internally, engage external experts.
Designing the Operating Model
It is also important to focus on building the right operating model for the new entity. Don’t confuse this with the business model, which boils down to the question: ‘How do we make money?’
In contrast, the operating model answer questions such as where the company will operate, what products it will sell, which customers and segments it will target and what operations will be outsourced. “Operating models are aligned with detailed tactical capabilities (processes, systems and organization structure) but also answer the broader questions,” says Deloitte.
With an event-driven acquisition, the operating model must be established swiftly. “Make some immediate decisions, even if they are not perfect – sitting idle is a mistake,” Deloitte counsels. “Any adjustments can be made over time.”
Deloitte’s suggestions include:
- Create a small, elite team of experienced people to drive the design of the operating model. A larger group will slow the process.
- Document the model with rigor. Create clear and well-articulated directives. Communications can be delivered directly to those affected and do not need to be broadly disseminated.
- Embrace imperfection. Think of the design process as iterative, something that can take six months to a year to fully develop
- Don’t ignore customers. Contact all buyers and clients, even if they are not directly affected by the M&A deal
Importance of Communications
“One of the key actions in a post-merger scenario is a well-rehearsed communications plan,” Deloitte stresses.
Frequently, rumors stoke fears, particularly if the deal needs to be in secret or is a hostile takeover. Employees may worry about their jobs or a drastic change in company culture. Customers, suppliers and other stakeholders may wonder if they will receive the same level of service.
Deloitte’s suggestions include:
- Managers should make clear to their teams, early on and consistently, that they were chosen to stay on because of their value to the organization. Share with them the vision and goals of the transaction and the future of the company – as well as the contributions expected of them.
- Managers should address difficult questions, such as concerns about workforce reductions. But also communicate wins and recognize teams who have made achievements, no matter how small.
- A dedicated team should oversee communications with customers. Don’t forget to reach all audiences, external and internal. Disseminate the message through channels that are most likely to reach the audience.
- Make a list of must-have communications objectives and include the metrics that will indicate success. Conduct regular evaluation of the communications plan.
“It’s a strong challenge to get all of those elements done correctly,” says Tom McGee, Deloitte’s Deputy Chief Executive Officer. “But it’s far from insurmountable.”
The fact that 67% of the survey respondents say the integration plan is being successfully implemented attests to that.