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.
Figure 1: Post-merger integration process, actions, and goals
The preparation for the post-merger integration already starts during the pre-signing phase of the M&A process, as the acquiror needs to ensure the initial preparation of the first post-signing phase already during the M&A process.
Day 1 Readiness
Day one readiness must already be planned before the time of the signing of the transaction and as the first step, it is a fundamentally important part to the post-merger integration process. The goal of day one readiness mainly comprises the frictionless continuation of the day-to-day business operations without interruption or impairment, i.e., to ensure business continuity. To achieve day one readiness, critical processes such as the handling of order entries or the decision-making process must be identified, legal and contractual issues must be clarified, and a detailed cut-over plan must be drawn up (before the signing of the transaction).
First 30 Days
After successfully overcoming day one of the post-merger integration the process goes into the second phase, the first 30 days of the integration, which represent the planning phase. The integrator needs to impose a corporate strategy onto the newly acquired company. The planning phase also includes the design of the transaction strategy, including a business rationale for the combined organization, a post-merger integration scorecard (a project management tool providing both goals and measures for projects in four different perspectives including internal business, financial, innovation and learning as well as customer), and the development of an integration plan for the first (next) one hundred days, which includes a detailed strategy, goals and measures to achieve operational alignment, integrated processes, integrated systems, synergy reporting, and alignment between customers and products.
First 100 Days
The first (next) one hundred days represent the integration and design phase, during which the previously designed one hundred days plan is operatively executed. In this second phase, the acquirer needs to actively integrate their core processes into the newly acquired company. The integration and design phase also incorporates the planning of the new organizational structure as well as the design of the required technology landscape required for the combined activities of the companies. Key processes of the first 100 days include for example the definition of the to-be product portfolio as well as the assessment of current contracts with suppliers and IT providers to decide on the continuation or the replacement of the current supplier and IT landscape.
The final phase of the integration comprises the imposing of the IT landscape and the organizational structure designed during the first one hundred days. This final integration phase also comprises the transformation of the business, the ongoing optimization of the IT landscape and finally the assessment of the post-merger integration process including learnings for future integrations.
Essentially, the post-merger integration process can be divided into four dimensions: Synergies, speed of integration, culture and change management and project governance (PMO). The four previously mentioned dimensions are the key aspects to be considered while carrying out the different steps of the integration.
Figure 2: Four dimensions of post-merger integration
The start of the post-merger integration process represents a critical point in time where the easiest synergies, the so-called quick wins, should be materialized. Quick wins are usually easily attainable one-off cost reductions such as a stock reduction or the reduction of temporary employees (e.g., temporary warehousing and logistics employees).
The second level of synergies comprises the materialization of sales synergies such as growth through additional market penetration, exploitation of cross- and up-selling opportunities from increased product portfolio and supplementary customer details.
Cost synergies are the most difficult to attain, as they represent the highest most complex level of synergies usually being worked on at a later stage of the post-merger integration process. On this level, economies of scale and cost-benefits from elimination of redundancies are exploited. Further, the combined companies optimize their process management, supply chain, and reduce overhead costs.
2. Speed of Integration
Mergers and resulting post-merger integration processes distract the top management as well as the employees who are part of the clean-team and the post-merger integration team from their day-to-day business. The quicker an integration is managed, the faster the organization can benefit from its value and get back to operational tasks. Furthermore, dragging an integration on for an extended period demotivates the involved employees and reduces the effectiveness of the integration process as well as of their operative work.
Integration speed can be granted by ensuring, that the integration team is already set up and has prepared an integration strategy and timeline ahead of signing and closing of the deal. The ambition level of integration planning should be relatively high. Hence, one should not foresee more than four to six months for the integration of support functions such as finance & accounting or the human resources department. Finally, one needs to determine the optimum timeline of the integration bearing in mind, that speed generally creates a quality trade-off.
3. Culture and Change Management
Change management processes almost always cause uncertainty among the employees affected by the integration of the newly acquired company. Hence, it comes as no surprise, that several employees generally take on a defensive attitude towards the new owners, their new employer. Keeping up with fast moving markets and consumers is usually challenging enough for a company. However, also integrating new personnel, managers often underestimated the duration, the effort required and the complexity of the process. Additional friction is added through the communication of the deal with the employees, as most of them are informed about the deal long after its signing. Generally, they wait to see what the change will mean for them.
Human capital integration is a key process of post-merger integration, as compensation structures and bonus systems must be aligned, formative personnel instruments must be harmonized etc. Despite the integration of salary and bonus systems being seemingly easy, nepotism poses issues that must be dealt with during the post-merger integration process. Having communication and decision-making structures (e.g., an organizational chart) ready is a crucial part of the day one readiness.
Once the basic functions of the Human Capital management have been integrated, the often-overlooked cultural integration must be taken care of. Following an acquisition, different corporate cultures come clashing together. Consequentially, the success of the transaction depends on how well the people of the companies involved work together. Cultural integration is often underestimated and thus often not explicitly considered as part of the M&A transaction process. However, the implementation will be able to proceed much smoother, once the employees understand, that the implementation process presents an opportunity for them; communication is key. Nonetheless, the employees need to know, which company takes on the leading role in the process, if that happens too late, the integration process loses the necessary credibility.
4. Project Governance
Depending on the size of the integration, a Project Management Office (PMO) is recommended to ensure that the integration plans and planned synergies are realized. The Project Management Office should represent an independent interface between management and the operational units. Various elements of a Project Management Office toolbox are suitable for realizing the integration plans. A more detailed elaboration of the FOSTEC & Company approach of the Project Management Office and related processes can be found under our sperate PMO section.
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