Mergers and acquisitions are a time-tested way for companies to capture new markets or build market share quickly. A recent survey by advisory firm KPMG indicates an upswing in M&A activity focused on the middle market, especially toward the lower end. In 2013, for example, 81 percent of all M&A activity in the middle market centered on companies generating less than $250 million per year, a trend that KPMG believes will continue into the foreseeable future. But merging two companies into one is easier said than done: Empirical studies cited by management consultant Deloitte indicate that half of such mergers fare poorly.
But by gaining control of key risk factors for synergy, structure, human resources, and ongoing projects through a comprehensive post-merger integration (PMI) process, middle-market companies can boost their success considerably. In fact, Gerds found that when all four risk areas are sufficiently addressed, success rates reach 75 percent. Here’s what to keep in mind to emerge a winner in the M&A sweepstakes:
Plan integration prior to closing
“One of the most critical things you can do is to begin integration while you’re still doing due diligence before actually closing the deal,” says Scott Whitaker, President & CEO at Whitaker & Company, an Atlanta-based consulting firm specializing in merger and acquisition integration. ”What you want to avoid is a very hard and abrupt hand-off, where all of a sudden you’re forced to think about the integration as the ink dries on the agreement.”
Whitaker suggests creating parallel tracks toward the end of due diligence, allowing 50 to 90 days of integration preplanning prior to close. That pre-planning should be guided by strategic issues. “You can’t understand or establish the goals and objectives of the integration without understanding the deal drivers,” Whitaker cautions. “You should draft some guiding principles around key points: what brands will survive, what will be discarded, how you plan to serve each company’s customers, and so on.”
Consider culture—a lot
“The second most important thing for a successful integration are the people and the cultural components,” Whitaker says. “You need to understand the differences between the two companies—where you may share cultural traits, and where you differ. “What it’s going to take in terms of communication and change management to get people aligned and focused on the right thing?”
In all likelihood, you may need to choose between the acquiring company’s culture and that of the company being acquired. Whitaker cites the common scenario of a more mature, traditionally structured enterprise acquiring a younger startup with a flatter, more management style. “In that case, part of what you’re buying is that entrepreneurial spirt, and the last thing you want to do is quash it with an old-fashioned command-and-control structure,” he explains. “Your challenge may be to realign the acquiring company’s structure to fit the younger company.”
Address the “Me” issues right away
Whitaker calls this the Golden Rule of PMI. “Me issues include those urgent questions that every employee of the target company has,” he explains. “What’s the status of my job? Who do I report to? What’s going to change in terms of benefits? Until you’ve addressed those and gotten your new employees in a comfortable place, they’re really not going to focus on the business, and one of your biggest risks at that stage is losing business momentum. Maintaining business continuity is huge, and you can help that a lot by taking care of the “me” issues on the people side.” Part of allaying these fears, he adds, is to get the bad news, such as staff reductions, out of the way as quickly as possible so people can move on.
Focus on talent retention
“One of the biggest risks is the talent drain from the acquired company,” Whitaker says. As soon as possible, you’ve got to look across the organization that you’re acquiring for key people—those with deep subject-matter expertise, owners of long-standing customer relationships, or just those who have tribal knowledge about how things are put together.”
He recommends implementing a formal assessment process of the top two or three management levels, looking at past performance reviews or conducting aptitude tests. “Look for those key people who might be a flight risk, and proactively lock them down with a ‘stay package,’ he advises. Some of these packages could be short-term commitments, say to assist in IT transitions, while others could be more long-term.