The Mystery of Integration by Al Ansari, M&A Alliance, Inc.

Transcription

1 The Mystery of Integration by Al Ansari, M&A Alliance, Inc. Copyright M&A Alliance, Inc

2 What is Integration, and how can we unravel its mystery? Integration is both art and science. In order to understand Integration, we need to understand the framework, components, and milestones within the M&A transaction. The M&A market continues to be very strong. According to Mergerstat, the number of deals worth more than US$1 billion has increased by 41% to 236 over the past twelve months (ending 2/28/07) and aggregate M&A spendings on those deals have risen by 67% to $934.1 billion. In 2006, the number of deals exceeded 12,000 transactions, of $934.4 billion. There were 167 mega deals above several billion dollars, over 7,000 deals in the middle market ($50 million to $650 million) and more than 4,000 deals under $50 million dollars. According to Mergerstat the first quarter of 2007 was also very strong with over 2,500 deals of $332.1 billion closed. Most C-level executives realize soon after their first M&A transaction, that the most challenging task is integration. The PriceWaterHouseCoopers s M&A roundtable with ten executives representing technology companies in Silicon Valley affirms that integration is no longer an afterthought. It is estimated that eight out of every ten M&A deals fail to deliver on their promised initial goals. (PWC report on M&A and integration) Executives of acquired and acquiring companies are under enormous pressure to overcome this challenge. The Integration components consist of thirteen major tracks which must work together as a whole system of integration. These tracks consist of: HR, Facility, Legal, Finance, Tax, Treasury, Accounting, Engineering, Sales, Marketing, Business development, IT and Customer Service. Each track may consist of many sub groups. For example, the IT track may include Network and telecom, security, infrastructure, application support, audit, desktop support and helpdesk. M&A milestones are diverse. The first milestone is obviously to identify the candidate company and make a preliminary evaluation. Then, come the initial meetings with the company to explore mutual interests in acquisition. After the interests have been established, the formal acquisition process begins, including negotiation of the term sheet, valuation analysis and the initial model to determine pro-forma P&L impact. Other milestones are to obtain approval from executives to proceed to the due diligence stage, complete pre-diligence activities, perform due diligence, obtain approval to sign/close, close the transaction and provide post closing integration reports to senior executives at 30, 60 and 90 days. Keep in mind, the integration should not start at the of M&A transaction, but at the beginning. The framework of any Integration consists of Change Management and Leadership Transformation, Corporate Integration (anything that faces internal employees or has an impact on them such as HR, or backend office) and Product Integration (anything that faces or impacts external customers such as Product Integration, Sales, Marketing, etc.) Copyright M&A Alliance, Inc

3 The Phases of Integration The M&A transaction is best defined by its multiple phases: quiet time, due diligence, submission of Letter Of Intent (LOI), more due diligence, negotiation of the Term Sheet and close transaction, public announcement and Integration. During each phase, there are many check lists and various teams involved. Let s explore these phases. Phase one: Quiet time Quiet time refers to a time when a high level contact is initiated from either the buyer s or the seller s side. The buyer needs to answer all the Why questions before the end of phase one. Questions may be:! Why choose M&A vs. organic growth (defensive, expansion, consolidation or acceleration acquisition)?! Why are the target acquisitions successful?! Why buy Company A vs. Company B?! Why questions regarding financial statements, such as balance sheet, P&L, tax returns, etc.! Why questions regarding Intellectual Property and legal status, such as contractual agreements The seller should also ask Why questions such as:! Why sell the! Why sell it to Company A vs. Company B (add-on value offered by acquirer)?! Why is this the optimal time to sell? Phase two: Due diligence Due diligence uncovers many aspects of the acquired-seller company. It consists of Legal, Financial, Cultural, and Operational. The due diligence period answers What questions. are: Some What questions to consider! What is the culture of the acquired! What is the Legal status of the acquired! What is the compliance and regulatory status?! What is their insurance contract?! What is the tax implication?! What is the strategic plan for the acquired! What is the integration plan, what areas of the acquired company will be integrated to the acquiring! What is the buyer s organizational chart?! What are the overheads?! What is the add-on value for their product(s)?! What is their footprint in the market?! What are their channels?! What vendors do they have?! What is the sales and marketing strategygo to market?! What does their lease/sublease look like? The Seller should also be prepared to perform its due diligence in the eyes of buyers. This should include Legal, Cultural, Financial, and Operational due diligence. The answer to Why questions make up the blueprint for a successful integration that provides executives with a clear framework, strategic approach to integration and identifies the major components.

4 Phase Three: Submission of Letter Of Intent (LOI) Once the seller has satisfied the buyer s due diligence, both parties will work on the Letter of Intent. According to Wikipidia A letter of intent or LOI is a document outlining an agreement between two or more parties before the agreement is finalized. It is essential that both parties Buyer and Seller know the scope of integration, the components of integration and the affected departments. Although the LOI usually is not a binding document upon the parties in their entirety, it often includes key points such as the deal structure, economics, post transaction management structure, representations and warranties, conditions to closing such as regulatory approvals, completion of satisfactory due diligence, termination and indemnification, shareholder meeting, indemnification and escrow, pre-closing covenants, fees and expenses, timing and nonbinding. An LOI may also be referred to as a memorandum of understanding (MOU), term sheet, or discussion sheet. Phase Four: More due diligence More due diligence prepares both buyer and seller to answer How questions such as:! How do we integrate the two cultures?! How do we integrate the product(s)?! How do we go to market?! How do we consolidate the two organizations?! How do we consolidate the finance and accounting systems?! How do we meet regulatory compliance?! How do we integrate corporate functions?! How do we combine customer support?! How do we integrate IT? The How questions are natural follow-up questions to the Why and What questions. Many integrations failed for the simple reason that they didn t have clear answers to Why and What questions. The buyer simply dived into the How to integrate the acquired company without a clear understanding of Why. It is imperative to have a clear understanding of Why questions which build the strategy and direction, followed by What questions which provide the framework and road map, before tackling the How questions the implementation and execution. Phase Five: Closing transaction Certain activities within the integration should start and finish in the very short period of time following the closing of the deal. The very success of any M&A relies on the critical first 30 days after closing. Since a significant asset of any M&A is the people, the integration team must make every effort to welcome and embrace the new organization. This requires that leadership communicate the new compelling purpose to their stakeholders, incessantly, so that everyone understands it. Change will naturally bring about fear of the unknown in the organizations; leadership and communication are critical. Activities such as communication and announcement of the new organization, clear product integration road map, HR such as payroll, benefit, insurance, retirement, etc, facility consolidation and physical security and corporate IT such as account consolidation, , efax, phone system, remote access, access to buyer/seller IT back-end like finance and reporting are the backbone of the integration. Keep in mind that all the integration activities should remain in their planning stage only and should not be executed before the green light from Legal department.

5 Phase Six: Public announcement The public announcement and integration go hand in hand. All the planning done during quiet time, pre-acquisition and due diligence will pay off during the first 30 days when the critical back-end infrastructure and HR are being integrated. The Executives and the Integration team are responsible for communicating the strategic objective of the merger or acquisition to internal employees of both the buyer and seller, to the marketplace and shareholders of both sides. The Integration team should be prepared to communicate the next phase of integration to departments which will be involved. Conclusion: M&A is an opportunity for the company to reach its strategic goal. Astutely and humanly, Integration allows a company to do something different, something out of its day-to-day tasks. Integration enables the company s employees to embrace a new company, new ideas, new culture and new organization. Answering the Why, What and How unravels the mystery of the integration And Success. Phase Seven: The following phases of integration This phase covers in details the production, marketing, sales and customer support integration. The integration team has to support both environments while the integration continues. It is critical to both companies, buyer and seller, to protect the revenue, customers, channels and partners. It is imperative to have a clear understanding (answers to all What questions) before the integration team enters this phase. The Integration consists of many components and milestones. The Integration Management Office (IMO) should be formed as early as possible to coordinate all Integration activities, identify and communicate the Why and What questions from/to executives and the rest of the company. The IMO is also responsible for identifying and engaging all groups involved with the integration and tasking them to answer the How questions through a series of workshops. Finally, the IMO is responsible for consolidating and orchestrating all the group s milestones and timetables into a master project plan reflecting the overall plan of a successful integration execution. One can never overestimate the importance of focus to a successful integration. Al Ansari is President and Founder of M&A Alliance, Inc. Al has over 15 years of M&A, Integration and IT experience in high-tech and the real estate industry. Al was a senior manager at VeriSign. During his five year tenure, he was the senior manager of operation and core member of M&A for VeriSign. Al managed integration deals ranging from $5 Million up to $21 Billion in value acquisition in Domain name, Telecom, Wireless payment, and content to name a few. Mr. Ansari was a senior Vice President of Information Technology at NAI/Brannen Goddard, the largest real estate company in the south east, serving full service commercial real estate. Mr. Ansari has an advanced Project Management certificate from Stanford University and holds an M.S. in Computer Science from MTSU. You can reach Al Ansari at ansari@mnaalliance.com