A significant number of Mergers remain unsuccessful, because companies do not employ a thorough and disciplined approach to realizing Post-Merger Integration Synergies. In reasons for failure, we hear remarks like:
- Targets were set several months earlier by the top management without consulting the line managers, or taking ground realities into consideration.
- Assumption base for setting targets was untested.
- Targets were met but the timeframe for achieving them made them ineffective—in terms of diminished returns, shareholder disappointment, or depressed share value.
- Desired Synergies were achieved but at a very high cost or fairly weakened morale.
A disciplined and rational approach to pursuing Merger Synergies is key to successful Post-Merger Integration (PMI). Companies that authenticate and set pragmatic yet ambitious Post-Merger Integration Synergy targets do the following to exceed targets and achieve substantial share price premium and a significant Competitive Advantage:
- Advise Integration Leaders on how to aim high.
- Give managers—responsible for achieving targets—a say in target-setting process.
- Create detailed plans with built-in accountabilities.
- Pursue their targets aggressively.
Successful PMI Synergies—be it in Cost Optimization, Strategic Sourcing, Greater Revenues or any other Cost or Revenue realm—have the common characteristic of leaders pursuing synergies with speed, rigor, discipline, and pragmatism with lots of analysis, planning, preparation, and fine-tuning before the close.
Success can be ensured time and again if the 6 Strategies for Post-Merger Integration Synergies are followed to the letter:
- Link Due Diligence (DD) and Post-Merger Integration (PMI)
- Leverage Clean Teams
- Establish Stretch Targets
- Rapidly Iterate to Targets
- Pursue Both Revenue and Cost Synergies
- Institute Performance Management
Implementation of the 6 Synergy Strategies involves adopting High-Engagement and Rapid Iteration approach which yields effective Stretch Target Validation and High Level of Line Accountability.
Let us delve a little deeper into 2 of these PMI Synergy Strategies.
Link Due Diligence (DD) and Post-Merger Integration (PMI)
Linking DD to PMI ensures realistic estimates on part of the DD team thus avoiding formulation of broad-brushed and imprecise Synergies. Linking also guarantees greater amount of ownership and accountability at the same time enabling more compelling Stretch Targets. Linking of DD to PMI is necessary because:
- Under pressure to complete the M&A, Due Diligence teams frame assumptions with little knowledge of the levers influencing Synergies or the challenges involved in achieving them.
- Due Diligence teams typically project more value in Cost Reduction and enhanced Revenues based on erroneous assumptions—without taking into account either the Operating Model (of the former entities and the freshly created one) or the difference / overlap in Customer Base.
Successful Mergers ensure a harmonized hand-off from Due Diligence teams to Integration Planning teams by ensuring the following:
- Placing members of the Mergers and Acquisition team on the Post-Merger Integration (PMI) team to produce a greater degree of ownership and continuity.
- Involving Business Unit Heads in target setting at the Due Diligence stage and ensuring ownership and accountability.
- Linking of Due Diligence and PMI to enable setting of more profound Stretch Targets.
- Analyzing and detailing drivers of saving at a high-level for creating Synergy Targets and Ranges which make later improvements possible based on subsequent information. These targets and ranges enable evaluation of potential gains from new company’s Operating Model.
Leverage Clean Teams
Clean team is an independent group that is tasked with the collection and analysis of sensitive company data—pre-closure—with the guidance of management. Clean team may comprise of third-party members or employees who can be reassigned out of business in case of deal failure eradicating the risk of compromising confidential information. Clean team is formed by legal contract based on protocols agreed to by both company’s legal departments. Clean teams help by:
- Accelerating PMI planning.
- Enabling the acquiring company to have a clearer picture of the target company without violating anti-trust regulation or confidentiality agreements.
- Assessing risks and enabling companies to achieve Synergies faster.
- Keeping sensitive information of both sides safe—pre-closure—yet embark on planning and preparation even before close in order to save precious time and keep customer confidence high.
- Aiding companies accomplish 3 core integration activities before closing—compiling wide-range baseline data, vetting Synergy targets, and preparing options for key decisions.
- Empowering companies to avoid / diminish confusion caused by overlap in client assignments and sales people.
- Assisting provision of clear information to customers regarding products and services thus avoiding drop in sales.
Interested in learning more about the 6 Strategies for Post-Merger Integration Synergies? You can download an editable PowerPoint on Post-Merger Integration (PMI): 6 Strategies for Synergies here on the Flevy documents marketplace.
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M&A is an extremely common strategy for growth. M&A transactions always look great on paper. This is why the buyer typically pays a 10-35% premium over the of the target company’s market value.
However, when it comes time for the Post-merger Integration (PMI), are we really able to capture the expected value? Studies show only 20% of organizations capture projected revenue synergies and only 40% capture cost synergies. Not to mention, the PMI process is typically very painful, drawn out, and politically charged, often resulting in the loss of key personnel.
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Mergers and Acquisitions (M&A) are unique and complex endeavors. These initiatives demand tailored solutions keeping in view the varying environments, ways of doing business, culture of the two combining organizations, and internal and external forces influencing the deal.
These transactions necessitate making 8 important decisions based on thorough deliberation and analysis of all relevant factors well before the integration process. These fundamental decisions and relevant factors form the 8 decision levers of Post-merger Integration (PMI). These 8 decision levers of PMI are essential for devising an optimal integration approach and, subsequently, the success of an M&A initiative:
- Form of Synergy to Be Created: Cost-cutting versus growth
- Required Pace of Integration: Quick versus steady
- Degree of Integration: Extensive versus partial
- Nature of Integration: Buyout versus a merger
- Commencement of Integration: Urgent or delayed
- Integration Project Team Organization: Clean or shared
- Decision Making Style: Implicit and prompt versus lengthy and analysis based
- Transaction Change Management: Tacit versus one that requires comprehensive actions
These decision considerations facilitate Post-merger Integration across all industries and organizations of various sizes. Let’s discuss the first 3 decision levers in detail now.
Lever 1 – Form of synergy to be created
The foremost element of a PMI is deciding on the type of synergy to be achieved through integration. The question is to either focus on achieving cost reduction or growth synergies. If cost cutting is the objective of an M&A then the leadership of the combined organization needs to outline potential costing saving opportunities across the board. This should be followed by robust communication strategy to convey the implications of the M&A program. However, if the management’s objective is to unlock growth synergies from the acquisition, then the integration is to be treated as a strategic endeavor—e.g., understanding the customer needs, evaluating market potential, generating innovative business ideas, and developing execution plans.
Lever 2 – Required pace of integration
The 2nd lever demands from the senior leadership to determine the pace most appropriate for the integration of their newly combined enterprise—i.e., to choose between a fast track and a steadier integration approach. A majority of executives believe that PMI should be executed as quickly as possible, so that upon completion of the initiative they could divert their center of attention back to business operations. This approach, however, involves decisions that aren’t backed by detailed analysis of facts and data, and is likely to face increased risks and uncertainties. On the other hand, a slower pace of integration is beneficial in case of a friendly takeover or expansion in a new domain. A steadier pace of integration works well to reduce any apprehensions, cynicism, bottlenecks, and risks due to oversight.
Lever 3 – Degree of Integration
PMI necessitates gauging the appropriate degree of integration beneficial for the organization—i.e., choosing between extensive across the board versus partial integration. An absolute focus on cost synergies warrants an extensive degree of integration across all departments and geographies. This puts extra pressure on teams in terms of work and risks dwindling enterprise focus on the customer. Committing more resources and setting the priorities right aids in offsetting the risks associated with an extensive degree of integration. A partial integration, on the other hand, is simpler, less controversial, and predominantly warrants consolidation of sales or alignment of mission-critical processes. This typically works well in takeovers requiring new products acquisition or addition of new customer segments.
Interested in learning more about the other 5 decision levers of PMI? You can download an editable PowerPoint on Post-merger Integration (PMI): 8 Levers here on the Flevy documents marketplace.