MICHAEL GEBAUER, head of private equity with PILOTpartners, talks to PAUL SIEGENTHALER, a specialist business integration & transformation interim executive about his approach to successful cross-border M&A transactions
With various studies estimating the failure rate of M&As to be between 50% and 80%, what can companies do to integrate successfully when all the odds seem to be against them ?
You are right – this is a rather discouraging statistic, and yet we see repeatedly that shareholders trust their company to carry out a successful merger or acquisition, assuming all will run smoothly when in fact they should assume failure – unless “something” is done differently. And that “something” is not just down to good luck. We can observe that companies which pursue an aggressive strategy as “serial acquirers” tend to be successful at integrating their new businesses: there are lessons to be learnt, and many common mistakes to be avoided.
The most damaging myth is the belief that, given enough time, two organisations put together will gradually develop new ways of working and end up blending into one seamless business. Why should this happen? Would two individuals locked in one room spontaneously form a solid couple for the rest of their lives? A cogent business case may act as a “logical magnet” which draws the two businesses to one another, but will they blend or collide?
So what is your aim when you join an organisation to drive their business integration ?
Well, put very simply, the business case of the merger or acquisition needs to be realised as soon as possible. This means achieving the short term benefits and savings, as well as the longer term strategic benefits which result in the new merged company being worth more than the sum of its constituent parts. Speed matters – not only because the investors are eager to see early results, but also because companies embarking on an integration are vulnerable during the early stages of that voyage: unless clarity on structure, processes and ways of working is restored rapidly within the organisation, valuable employees may leave, competitors benefit from the company’s temporary vulnerability, commercial performance may begin to decline…
When Grand Met and Guinness merged in 1997, Deputy CEO Jack Keenan warned his startled team of senior executives “merging is like pulling out teeth – you can do it slow and painful … or quick and painful; we shall do it quick and painful”. And he was right.
You mention speed – but do you mean “pace”, or “race”?
It’s a difficult balance to strike! Integrate too fast and you will miss the opportunity of reassessing and re-inventing the business, and will not allow enough time and resources for communication and effective stakeholder management; the integration will be met with resistance and most probably fail. On the other hand, procrastinating on difficult decisions and allowing the integration process to drag on will undermine morale, shift focus inwardly and put the business’s results at risk.
Speed also depends on the market’s environment. Implementing the integration will be faster in Britain or Switzerland than, say, France or particularly Germany where the mandatory and complex consultation process can stretch the integration time-line quite considerably. But that is a given in those markets. I would say that regardless of the country you are operating in, most types of business should aim to have the main building blocks of their integration in place within a timeframe of one year. Past that symbolic anniversary date, many employees will get the impression they have embarked on a never ending journey, lose interest and commitment toward the project, and ultimately cause the integration to fail.
So where would you start on “Day One” to achieve speed and be assured of a fast and orderly integration?
That’s the whole point. The detailed work needs to start well before “Day One”. The prerequisite for speed is preparation. The majority of CEOs I have spoken to are unaware of how much can and should be done in advance. Typically, much of the preparation that can take place before the two companies are under common ownership only starts after the merger or acquisition transaction is completed: this delays the actual commencement of the integration process by several months. By then, pressure will have mounted significantly to get things moving, and the natural tendency will be to rush into “action” mode, ill-prepared and probably under-resourced: a sure recipe for failure.
Surely any sensible executive would prefer to rely on excellent preparation rather than embark on a journey into the unknown; but realistically given the time, resource and legal constraints, how much can be prepared in advance of “Day One”? What do you see as the key areas that need addressing?
The success of the integration rests on a few imperative pillars that prepare the two organisations and accompany them on their voyage of integration. Omit one of these pillars and your integration project is likely to topple over:
• Diagnosis and preparation
• Detailed planning
• Clear governance
• Resourcing and environment
• Team redeployment
• Communication and leadership
The first step, “Diagnosis and preparation” is sadly where most companies miss the greatest opportunity. By diagnosis, I mean much more than mere due diligence. A well organised “data room” may detect some of the hurdles and complexities that will need to be overcome during the integration process: forewarned is forearmed. But this is not sufficient. Successful business integration can only begin once you have determined how the information from the data room will be used, as well as the commercially sensitive information which will become available only from the day the two companies are under common ownership.
Why do you view this as the most significant opportunity?
It is the biggest because the aim here is twofold: firstly to gain time at the start of the integration process by completing a number of very time consuming tasks ahead of Day One, and secondly, to accelerate the pace of implementation of subsequent phases of the integration.
I like to focus on three areas:
· Data standardisation : decide on common definitions and common data structures (be it manufacturing cost data, HR data, customer data, product classification, financial data…). This allows both companies to restate their historical data in accordance with those new common definitions and templates. This is a very time consuming exercise and it pays dividends: on “Day One”, both sets of re-stated information will be ready to be analyzed on a like-with-like basis. A huge time saving.
· Decision-making tools : this is about agreeing the rules which will apply when the integration begins, for example; how the products or services of the future combined portfolio will be positioned and prioritised relative to each other, where the future offices or factories will be located, how the trading terms will be harmonised etc. This does not pre-empt what those decisions will be, but defines and prioritizes the criteria that will be considered in making those decisions. The benefit of pre-agreed and well documented decision tools is immense in companies involving a number of business units each having to go through the same integration process; this ensures coherence and avoids the need to re-invent the wheel.
· Simulations: without any exchange of commercially sensitive information between the two parties of the merger or acquisition, third party advisors can be nominated to carry out a pre-analysis of this data, so that areas of particularly high complexity or risk can be identified in advance of the integration’s kick-off. This provides valuable clues when it comes to resourcing the integration project team to ensure the number and calibre of the team members are sufficient to tackle and resolve those complex issues.
That sounds like quite a sizeable piece of preparation work. Do companies really have the time for this before “Day One”?
In most cases yes, they do. The bigger the M&A deal is, the more preparation work is required because the integration will usually involve more complexity. But let’s remember that medium or large transactions are very often subject to a long approval process by regulatory authorities – this is the time one can use to prepare and plan rather than sit and wait for the regulators’ verdict.
And more “homework” can be completed ahead of “Day One” to save more time:
• A detailed project plan (not just an outline of deliverables!), rehearsed in a ‘conference room pilot’ to run a simulation of the integration process and identify each of the interdependencies. This clarifies the sequencing of the deliverables, identifies the integration project’s critical path, and highlights the resources and skill-sets required to realize the deliverables.
• The need for clear governance sounds like a truism. And yet many business integrations fail because of a lack of clarity as to who can make what decisions, or because of the absence of effective issue resolution procedures. Decide the rules of the game and set up the necessary governance, so as to be ready as project activity begins!
• Resourcing and environment: setting up the integration team(s) is tough - not many people have that perfect mix of business knowledge, experience and ability to envisage a different future, nor the mindset to work on this type of project. It may take a few months for an individual to be released from his/her day job – finding a temporary successor, an interim backfill, or re-allocating this person’s duties amongst the rest of a department takes time. Starting the process early means that the team can be in place on ‘Day One’, or even earlier if possible. Companies are usually surprised to realise they do not have enough desks and meeting rooms, document filing systems and other such infrastructure to accommodate the project teams when the project kicks off. Why not think of these things a little in advance?
Companies often struggle to find the right individuals for this kind of large-scale project. In your experience, when suitable candidates are identified, is it difficult to get them to accept that project role? How do you view the ideal project team composition?
Much depends on how the project is presented to them. For many individuals, “project work” is synonymous with “career dead-end”. But company integration is a fantastic learning opportunity for most people, allowing them to understand the business well beyond the confines of their own functional responsibilities; these are resources you really want to keep in the company when the integration is complete. There is a big proviso however: people need to know what rules and principles will apply for their redeployment after the project. Most companies would tend to think of team redeployment at the end of the integration. I say this needs to be addressed from the onset of the project, or else your best candidates will refuse to join the integration team.
In practice, few organisations will find within their own ranks all the resources and knowledge they will need to implement a successful integration. The best performing integration teams I have worked with consist of a balanced mix of in-house resources, as well as subject matter expert consultants to provide an external perspective and inject some best practice, and finally seasoned interim contractors who can hit the ground running and supplement resource gaps in the team, or backfill internal staff who were seconded to the team.
Most of the literature and case studies on M&As point the finger at poor communication and leadership as the main causes of failed integrations. Would you agree with that point of view?
Yes, of course I do! I did mention communication and leadership amongst my six “imperative pillars” earlier. The reason I kept communication and leadership for the end is that the five other pillars only require some intelligence, rigour and business discipline to be carried out, and therefore they should be mandatory homework for the management of any serious company about to embark on a merger or significant acquisition. Whereas communication and leadership are different in that they also require a degree of “talent” beyond a mere list of ‘dos’ and ‘don’ts’. A strong, charismatic and enthusiastic leader can compensate for many imperfections of the integration process, but not all of us are born with the temperament of a charismatic leader.
Without delving into how to organise and run well structured and effective communication, my general observation is that most companies do not segment their target audiences sufficiently to ensure the content of their communication is relevant. All too often, the messages build on the strategic rationale for the merger of acquisition, which might be intellectually interesting but does not paint a relevant story for most of the company’s staff in the middle and lower echelons of the organisation. The messages cannot be a “one size fits all”.
Communication is about informing, but also about capturing people’s hearts and minds, and also listening carefully, capturing the pulse, and reacting accordingly. Sadly, too many managers forget that communication is about more than just words; body language and behaviours come into play when it comes to managing the interface with a crowd of worried or doubtful employees. The senior management team should give some thought as to how they will maintain their levels of stamina and composure throughout the long integration process and how they will “live” the future company’s stated values. Their people will expect them to “walk the talk”.