In a depressed economy, the rules relating to M&A integration can change. Paul J Siegenthaler outlines some of the main factors
For many people, the main impact a period of austerity has on business is the need for particular scrutiny on costs. I don’t subscribe to that view, because seeking cost efficiencies should be part of normal everyday discipline. Businesses are like the human body : you can choose to grow fat and subsequently endure the pain of a crash diet, or take regular exercise and remain fit. The latter is almost certainly the way shareholders would like companies to behave. In that sense, cost control and measurement of the benefits case realisation must be conducted rigorously during an M&A integration, regardless of the state of the economy.
Clearly, if an acquisition requires the injection of capital in the form of a loan or share issue investors will be less prone to throw money at the acquirer in a gloomy economy because the market’s volatility will cause the underlying business case to vary, sometimes significantly, thereby increasing the level of risk. This, I am tempted to say, is probably also a good thing, because a number of very bold mergers and take-overs, bordering on the reckless, that were allowed to go ahead and more often than not failed when all was well in the economy would not pass the test in today’s rather gloomy environment.
Beyond excellent project management and governance, strong leadership and clear communication, the key factor for success of a business integration is in-depth preparation, as this preparation is what will allow the integration to progress very fast, starting on the first day the two companies are under common ownership. If you think “outside the box”, a merger or acquisition in an age of austerity also presents a few opportunities that do not exist in better times.
As required by the law, the preparation needs to take place without any exchange of commercially sensitive data, by agreeing on definitions, re-stating data, and agreeing decision rules so that things can move fast as soon as the two companies are allowed to view each other’s data from “Day One” onwards. In many instances, the companies that are about to merge have some pre-analysis carried out by a third party such as consultants or an accounting firm, using real data to obtain an early diagnosis of the areas that are likely to require particular focus and effort. But this still remains somewhat of a theoretical exercise because the consultants and analysts will seldom have a detailed understanding of the factors that influence the data they are comparing.
In today’s age of austerity, there is a quite unique opportunity to go further into real detail, and this is because in a depressed economy, it is likely that if the merger or acquisition does not take place, the companies will separately need to tackle a “plan B” such as down-sizing or selling off non-core activities, which often means letting go of some very capable individuals. And rather than parting with these individuals whilst the merger or acquisition negotiations are still taking place, there is a potential for them to remain employed and remunerated for a few more months whilst producing immensely valuable analysis which is of mutual benefit to the company and to these individuals in a depressed economy where new jobs are hard to find.
The way to do this is to transfer these people to a “clean team” where they will, together with the advisory consultants, work with the real data from both companies to produce commercially crucial deliverables such as the future commercial terms, procurement’s list of favourite suppliers and negotiating stance with those suppliers etc. This is a much more effective and powerful way of preparing for the business integration than asking the advisory consultants to carry out the exercise alone and in a more theoretical way. But there is one proviso for being able to do this : if the merger or acquisition does not take place, the individuals who were seconded to the “clean team” will not be allowed back into their former day jobs as they have been exposed to data from a competing company, and they will therefore need to quit the company. In a booming economy, it is unlikely that good candidates would accept to take such a personal risk. When things are tough, on the other hand, those few additional months of employment provide each individual with a fantastic learning experience as well as some much needed time to find their next employer rather than dropping out of the organisation during the early phases of the down-sizing exercise. Furthermore, if as expected the merger or acquisition does go ahead, the newly formed company has the right to re-integrate the “clean team” individuals into their ranks, thereby benefitting from the improved analytical and commercial ability they will have derived from their integration preparation work.
So even in a depressed economy, there are a few win-win situations that are unlikely to present themselves at the best of times.