Part 1 explained the reasons why to do an M&A transaction (https://mgpotter.com/mergers-and-acquisitions-part-1-why/). Part 2 was on how to do it (https://mgpotter.com/mergers-and-acquisitions-part-2-how/). This blog will discuss what to do after the deal has closed. Each step of the process has the potential to result in a bad M&A, but what you do afterwards can turn a good idea into a mediocre one.
The two most important goals post transaction are integration and synergy recognition. There are post deal closing details that also need some attention, but those are mainly just after effects of the deal and PSA and financing process. Poorly integrated acquisitions can drag results down for years and cause internal divisions and fights. Poor integration also can spill over to recognition of the synergies that were expected. It is hard to recover from a deal that should not have been done (failure in the Why? stage) or a deal where you paid too much for it or were saddled with a bad Purchase/Sales Agreement (failure in the How? Process), but you can make a bad situation worse by not executing well after the transaction closes.
After the deal closes, there is a whole flurry of mainly admin items that need to get completed and, in many deals, the deal team vanishes or disbands and the regular staff and processes need to take over. This can expose a flaw in the previous steps – if you do not coordinate with the mainstream business people, then they will get a transaction dumped on their laps without the right background and details and they will get it wrong. The deal team needs to have a clear responsibility to cleanly hand over the deal to the the business as part of their deliverables.
Once you own what was bought, you need to account for it in your books. GAAP gives you up to a year to correct the accounting based on better information, but it is expected you get it right the first time, or at least very close. You also need to tie the accounting process into any post closing adjustments based on the target balance sheet and the actual closing balance sheet. In doing the accounting, your reporting team will be reviewing the accounts that are coming over and their basis under GAAP. This should have been a due diligence topic up front, but a properly written PSA will help if you find errors after the deal closes.
If you ran a financing process to pay for the M&A transaction, there might be post closing deliverables and covenants that need to be reported on and met. This is common, and the deal and financing team needs to make sure there is a clean hand-off and that the expectations are well known and planned for.
Integration
You not only have to do the initial accounting for the acquisition, you will need to account for the new business on an on-going basis. If you are a public company, you can get up to one year before the new business you bought needs to be Sarbanes-Oxley compliant, but if the target was not already a public company and subject the the auditing and reporting requirements that come along with this, then you will need to make sure that the existing staff is large enough and technically proficient enough. Accounting and reporting is normally one of the leading functions in an integration process because of the immediate reporting needs, but if this is the only integration you have planned, you will have a failed transaction.
Integration
I joined a company earlier in my career that was the product of many acquisitions, and the sub-companies were also the products of previous acquisition strategies. While working in the audit group, it was easy to see failed integration all across the company. You could instantly tell which previous company the business unit belonged to because the chart of accounts retained the same numbering scheme and the same account names. Job titles varied based on what company the business used to belong to and the different brand and company names were still used and not in a coordinated way. Our pretty new CEO (who was excellent) received even greater accolades for cleaning that problem up and saved a lot of money and finally achieved synergies that had been expected for decades in some cases. Don’t let that happen to you as a result of your M&A process.
The two most obvious places to start integration is the senior management and the company name. If you do not touch either of them, you not only are sending a message that they are not part of you, you will also bear additional expenses for the infrastructure both represent. Most business acquisitions should be done with the plane of you placing one or more senior mangement staff into the newly acquired business to run it. The three key positions to consider for this are the CEO role, the CFO role and HR. Without one or more of these positions being rapidly replaced by staff of your company, you risk ending up with a separate culture and you increase the risk of an “us vs. them” split developing.
I generally suggest changing the company name as well. It is a very public and visible sign that things have changed and you do not risk confusion in the market place about what is happening with the company after the transaction. There may be product brand names that have value, especially if the transaction is moving you into a business or country/region that you have not been in before, but that is not a typical occurrence. This does not always have to be a one-way change, maybe your own company name needs refreshing and a major M&A transaction will provide an opportunity for a rebranding event, but having many names in the market can be confusing. Even if you keep a brand name active, the actual company name can be changed.
You need to normalize the position naming conventions and the bonus and other pay conventions as well. If you buy a smaller company, many of the employees that come over from the transaction will have very inflated titles compared to the reality in the new company. Incentives usually drive behavior and you need to make sure that the targets align with what the new, combined company should be working on. Obviously, changing titles and pay can be very emotional to the people effected, but emotions will be high anyways because of the acquisition.
Reducing staff will be a key synergy item and you should do it as quickly as possible after the transaction closes. The longer you wait the harder it is to do. If done at or just after the close of the transaction, you reduce the personal nature of the cuts and you get them behind you as soon as possible.
The integration should be planned in advance and there should be a team set up with people from your company and the acquired company. I have done this process with and without an outside consultant. In my experience, an outside consultant helps here as in can reduce some of the emotional focus away from the acquiring company cutting to it just being a process where both sides are listened to. In reality, the consultant works for who is paying for them, but a good one will add balance and experience from prior transactions that you may simply not have.
You need to drive the integration all the way through the systems and vendors used by both companies. It is inefficient to use two different ERP vendors for too long. You should look carefully at both ERP systems and pick the best one, not just default to the acquiring company’s system, but you need to make the decision quickly and get a plan moving and then execute. You need to consolidate insurance coverage, typical hotel and airline partners, auditors and tax advisors, all the standard spending. Their may be very big savings from raw material suppliers and this needs to be integrated ASAP. You start a race against a short clock in this process because you have a lot of momentum when a transaction closes and you risk normal business distractions if you wait too long.
Synergies
Synergies are expected cost reductions and additional revenue opportunities that come with the transaction. Turning these plans into reality can make the difference between a failed or lackluster transaction and a successful one. Like integration, speed matters and it should be planned in advance. I recommend that the person running the deal team not be the one to run the synergies planning as you need to execute quickly and getting the deal closed is typically too intense at the end and you could lose valuable weeks.
As I discussed in the integration section above, synergies mean reductions in staff and you should do that as quickly as possible. A well executed plan will have some happening when the transaction closes and the rest very quickly afterwards. You need to come in and let the people go in an efficient and respectful manner. Imagine that you were in the same position as they were. No one appreciates being kept in limbo and no one wants to be given false hope and then let go anyways once some task is done. It has been my experience that people are very accepting of an M&A transaction triggering a layoff as it is not personal. They also are accepting of short term assignments as part of the integration with separation at the end of the assignment.
You need to be very thorough and remove all the duplications you can as soon as possible. If you bought another public company, you need to streamline the extra admin cost that comes with being a public company. You also need to quickly review the management teams and staffing and reduce everything to one CxO for each function. Review everything and have clear goals for the savings you expect from operations efficiencies, including supply chain rationalization and economies of scale. If there are redundant factories, arrange the closing and consolidation to happen ASAP. Speed is important to capture the momentum that comes from closing the deal and there already should have been at least a preliminary plan before the deal closed.
There probably are a lot of synergies in the sales and marketing area. The trickiest one is any increased revenue you expect from the deal. If you expected to sell their products through your channels (or vice versa or even both ways), make sure this starts happening as soon as the deal closes. Marketing materials should be planned in advance and maybe even prepared in advance. The close of the M&A will create news in the marketplace and you need to take advantage of it right away. There usually is a fair amount of redundancy in the sales forces as well and this needs to be rationalized right away. If a customer will be transitioned from one sales person to another, it should happen quickly as to avoid confusion. Make sure the process does not automatically select the staff from your company. Ensure that the best sales person is kept.
IT systems are hard to switch over right when the transaction closes, but you should try and standardize quickly and have a process working to move to the new standard across all the company. I have been involved in several transactions where the systems in the acquisition were better than the ones in the acquiring company and the switch went that way. This is an area where an outside consultant doing an objective review can really help.
Part of capturing synergies is making sure the negatives of the merger that were identified in the valuation process do not happen. If there were risks identified, have people making sure that the risks do not turn into reality. Consolidate the new business into your risk management process. Review insurance needs and make sure that it is both adequate after the M&A transaction and that you do not duplicate insurance coverage.
You’ll need a lot of help from your HR function as eliminating duplication and realigning reporting is a core part of their function. They will have to do a lot of work in pay and benefits as well and there probably will be some recruiting that will be needed as unexpected resignations occur.
There is enough additional work in capturing synergies and integrating the new business that I usually suggest that you hire an outside consultant to help. The typical company does not have sufficient experience in this process and it is a short term (3-6 months) assignment. You need to make sure that you find a qualified consultant, and your accountants or lawyers might know of ones they have worked with in the past. You also gain some impartiality in the process which can help employees accept that the chance is logical versus being imposed by the acquiring company without fully considering the merits of what was acquired. Even help in keeping an aggressive schedule would be a big benefit if the outside consultant can deliver it.
At the end of this process, make sure you measure the results compared to your expectations and some synergies and integration will stretch over 2-3 years and you do need a process to follow there.
Here a few books that I have read that helped me in the past.
Mergers and Acquisitions Integration Handbook