According to a study of the “Bundesverband Mergers & Acquisitions E.V.” about 30,000 to 40,000 SMEs in Germany, Austria and Switzerland are faced with unresolved succession issues every year. In conjunction with the ongoing low interest rate environment, this creates a favorable M&A environment for both financial sponsors and strategic buyers resulting in an average of 50,000 SME transaction every year, including acquisitions and disposals for investment or divestment reasons. The main reasons for acquiring a company include cost synergies, increase of market share, exploitation of economies of scale, growth, diversification, gaining know how and entering new markets or new countries.
Despite having different motivations, all these acquirers seek to benefit from integrating the acquired company into their existing organization to benefit from their acquisition to the best of their abilities. Consequentially, post-merger integration strategy and planning are of utmost importance. Post-merger integration comprises the longest period of the M&A deal cycle and has the aim of value enhancement and optimization, in other words increasing the M&A transaction value.
Post-Merger Integration Approach
A typical post-merger integration has four phases – starting with the strategy, continuing with the transaction and transition, and ending with the transformation with the achievement of the predefined target state. A structured approach and the application of different integration and support streams should ensure a successful and efficient integration. Teams involved in the integration are given clear guidance to achieve the goal of rapid value creation for a higher return on investment with less uncertainty.
Figure 1: Post-merger integration approach
Starting points of the different streams depend on the respective deal phase. The process is initiated with the integration strategy, which defines the exact execution of the integration. Issues relating to the realization of synergies and the handling of the individual organizations and corporate culture are also discussed. With the start of the transaction phase, the focus is on identifying and exploiting synergies. It is also necessary to consider how the future organization (target operating model) of the merged company should look like. After the deal is signed, plans and actions are required to ensure the continuation of business continuity after closing (Day-1 readiness). In parallel, a change story must be developed to accompany the workforce on the cultural change process. An Integration Management Office serves as a central coordination point and temporary project management office. Optionally, post-signing clean teams can be deployed to analyze sensitive data that was legally inaccessible prior to signing.
1. Integration Strategy
The integration strategy is the first workstream in the post-merger integration process. The goal is to create a mutual understanding of the goals and challenges of all stakeholders, as well as a structure with responsibilities for the entire integration program. The leadership team must be determined to launch the program and think ahead about executing the strategy, realizing synergies, managing the organization and people, and managing cultural change. The prioritization of the action steps is in the foreground and the question of whether there will be full integration or no integration of individual strategy elements. For example, it is possible to keep the cultures of the individual companies separate or to create a new culture as part of the integration process.
2. Optimization of the Value Chain
Realizing synergy potential requires knowledge of the entire value chain of the company to be acquired. Depending on the company, the areas of market intelligence, research & development, production, sales & marketing, outbound logistics and after sales are examined. The analysis of market intelligence unit is intended to provide information on the extent to which ongoing analyses are carried out on the market, competitors, and products. In R&D and production, the issues are shortening time-to-market and “customization” options, as well as the sustainability of processing. Sales & marketing are checked for digital maturity and optimizations for outbound logistics and the after-sales process are proposed.
3. Synergies and Value Creation
Assessing whether synergies have been successfully realized requires a baseline of financials as a first step. Synergy targets are then defined and assigned to individual functional and business areas. Plans with measures and deadlines for the realization of synergy levers are also required, always with the aim of leveraging further synergies than planned. Transparent tracking and reporting systems are set up and regular reports are submitted to top management.
4. Target Operating Model & Workforce Balancing
A post-merger integration affects the organizational structure of the company. Thus, the concept of a “Target Operating Model” (TOM) as a target organization with functional teams, an organizational structure, governance guidelines, key processes, and a reporting structure are highly important. Key people must be identified to ensure business continuity. To prevent talents from leaving during the integration and transformation process, talent retention programs should be designed and launched early on. Similarly, negotiation strategies with union shops and the works council must be
Day-1-Readiness must be planned prior to the time the transaction is signed. The goal of day-one readiness is primarily to ensure the smooth continuation of day-to-day business without interruption or disruption, in other words, to ensure business continuity. To achieve Day-1-Readiness, critical processes such as order entry processing or the decision-making process must be identified, legal and contractual issues must be resolved, and a detailed cut-over plan (prior to signing the transaction) must be created.
6. Culture and Communication
An acquisition or takeover usually brings together different cultures. The aim of this integration stream is to ensure a uniform understanding of values and to involve all employees in the cultural change process. Transparency and open communication with regular feedback are important and require the development of a communication plan and a change story that can be communicated via different channels (e.g., workshops, newsletters, videos with management) to the workforce. Change agents and ambassadors have proven their worth in accompanying and anchoring the process of change in cultural behavior.
7. Integration Management Office (IMO)
The Integration Management Office (IMO) is a temporary project management office that coordinates, balances, prioritizes, and supports the substantive work of the integration teams when problems arise. Furthermore, it monitors the activities and tracks the financial impact of all initiatives and measures. As part of stakeholder management, relevant interest groups are involved and informed. The Integration Management Office works with the leadership team to drive change within the company. It is also about fostering ownership and mobilizing the workforce toward a common goal.
8. Clean Team
Clean teams can come into play after signing, providing acquirers with access to sensitive data that was legally inaccessible prior to closing. Using the information gathered, the clean team can deliver results to decision makers to plan the structure and operational processes of the merged company before the final closing of the transactions. The faster the integration can be completed, the faster the anticipated synergy effects can be realized.
Success Factors of a Post-Merger Integration
Reflecting on post-merger integrations, it is possible to identify success factors that significantly increase the success rate of an integration. Of particular importance is a clearly defined integration strategy that is supported by all teams. Mergers and the resulting post-merger integration processes distract both top management and employees who are part of the clean team and the post-merger integration team from day-to-day business. The faster an integration is completed, the sooner the company can benefit from its value and return to operational tasks. Clearly defined synergy goals form an important basis and require responsibilities to implement them. A strong Integration Management Office acts as a “pace-maker,” monitoring and reporting on progress. A workable organization needs to be created that forms a single entity out of the merged companies and ensures that talent is retained and not lost. Finally, a change process must be accepted by all those involved. Clear and open communication is a crucial success factor.
Figure 2: Success factors of a post-merger integration
The post-merger integration process is a time-consuming workflow, which requires large amounts of human capital and complex project management procedures. Consequentially, the management and employees are often unable to focus on either of their tasks, the operative management of the company and the integration of the acquired organization. In close cooperation with you, we will develop a post-merger integration strategy and support you in your execution from day one on until the complete integration of your acquired company.
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Markus Fost, MBA, is an expert in e-commerce, online business models and digital transformation, with broad experience in the fields of strategy, organisation, corporate finance and operational restructuring.Learn more