Merger and Acquisition Readiness:

Transcription

1 June 2010 Performance Merger and Acquisition Readiness: Preparing for the Resumption of M&A Activity The Unique Alternative to the Big Four

2 As the lull in merger and acquisition (M&A) activity nears an end and deal-making resumes, both strategic buyers and private equity group investors naturally will focus on identifying potential opportunities and closing quickly. Before proceeding, however, they would be wise to assess their integration capabilities and identify ways to improve how they integrate acquisitions. A thorough and objective evaluation now, as activity resumes, will enhance the chances for success in future transactions.

3 Merger and Acquisition Readiness: Preparing for the Resumption of M&A Activity The tight credit markets of the past 18 to 24 months brought M&A activity to a halt for most companies private equity groups as well as strategic buyers as they rode out the storm and waited for conditions to improve. As credit begins to ease and M&A activity resumes, savvy investors are recognizing that now is the time to prepare for future transactions by conducting an M&A integration audit. An examination of internal capabilities for integrating information systems, operations, sales, and corporate cultures can identify weaknesses and gaps, which in turn can lead companies to take actions to help position themselves for success as deal-making resumes. Trends Few organizations would attempt an acquisition without conducting comprehensive financial due diligence about their target. But many companies enter into such transactions with incomplete or ineffective plans for thoroughly integrating the two entities after the ink on the transaction agreements has dried. In today s high-stakes world, where turbulent economic forces have wreaked havoc on corporate balance sheets and made capital even more precious, M&A integration the art of assimilating one organization into another efficiently and effectively has become as important as the art of the deal itself. This concept has always been a key consideration for strategic acquirers, who look to achieve synergies and economies among their merged organizations. What is recognized less often, however, is the important role successful integration plays in private equity group transactions. After a prolonged lull triggered by problems in the credit markets and the general global economic slowdown, the pace of M&A activity is once again picking up. According to The New York Times, Thomson Reuters reports that worldwide deal volumes swelled to about $564 billion for the three months ended March 31, 2010, an 18.4 percent increase over the first quarter of The increase in activity is seen in both strategic and private equity transactions. The Thomson Reuters report noted that leveraged buyout firms struck about $31.7 billion worth of deals during the first quarter of 2010, amounting to about 5.6 percent of all merger activity worldwide. 2 Moreover, most indicators point to a continuation of the upward trend in activity. A survey conducted by Brunswick Group LLC of top bankers and lawyers who orchestrate mergers and acquisitions found that 78 percent of respondents expect M&A activity to continue to increase a sharp reversal from 2009, when only 29 percent foresaw signs of recovery. 3 The various signs pointing to continued increases in M&A activity in the coming months reinforce the importance of conducting a thorough evaluation of the business s integration capabilities, regardless of whether that business is a strategic acquirer looking for growth opportunities or a private equity group preparing to expand its portfolio. 3

4 Crowe Horwath LLP Challenges Even in good times, successful acquisitions are rare. Research conducted over the years has shown that between 50 percent and 80 percent of all mergers fail. 4 In Crowe Horwath LLP s experience, the reasons for these failures usually boil down to weaknesses in postmerger strategy, infrastructure, and execution. While organizations easily can decide that they will improve their integration focus and performance the next time around, very few have the discipline and expertise to embark on the critical, inwardly focused task of performing a self-assessment of integration capabilities during the period of inactivity between acquisitions. With M&A activity resuming, companies that have been on the sidelines need to evaluate and refine their M&A integration capabilities. Successful execution of future integrations is more important than ever in the wake of the scarcity of cash and credit that brought dealmaking to a halt. Moreover, the impact a slow recovery has on earnings growth makes growing via a successful integration increasingly important. Solutions Companies can assess their readiness for future M&A transactions by conducting an M&A integration audit before the market for acquisitions returns fully to its former level of activity. An M&A integration audit typically examines six dimensions of a company s readiness: 1. The level of corporate leadership s involvement in the integration. History shows that, like many significant organizational changes, successful integrations start with clear, confident, and engaged leadership. M&A leaders often can lose focus after the deal closes, but winning integrations usually are characterized by executive sponsorship, accountable leadership, and the inclusion of key stakeholders throughout the deal cycle. Very early in the process, even before due diligence begins, leaders should establish and communicate a clear direction for the transaction, including their vision for the future integrated organization. Not only should leaders use this direction as a charter for the integration teams to follow, they should also employ it as a vehicle to demonstrate how the acquisition represents the company s strategy in action. For a private equity acquisition, the leaders should have a clear picture of what the new company will contribute to their overall portfolio of companies and how it will return long-term value to investors. 4

5 Merger and Acquisition Readiness: Preparing for the Resumption of M&A Activity 2. The degree to which integration is incorporated into the organization s strategic M&A framework. Companies typically embark on M&A activity with a clear idea of the financial, market, and strategic benefits of the activity. Consequently, the activity of the deal teams generally focuses on closing the deal as the board, shareholders, and market expect. Organizations that have struggled with integrations, however, know that generally the heavy lifting starts only after the deal closes. Therefore, as companies begin to form teams and plans around the M&A deal, it is critical to include the integration efforts as part of this strategic planning process. For example, their transition from due diligence to the integration planning stage of the transaction needs to be clear and explicit. This stage requires adequate resources, data capture templates, guidelines for escalating issues appropriately, and formal reports to top executives and, in the case of private equity groups, to investors and board members. An effective way to involve executives and functional area leaders and help them understand exactly what they will be facing during and after the integration is to adopt a process that 1) identifies risks and captures essential integration concerns, and 2) identifies the various elements that will need to be connected to or integrated into the new organization. 3. The impact of integration on the existing organization. While strategic buyers often focus their integration efforts on where the target company does or doesn t fit into the acquiring organization, they frequently place little emphasis on the acquisition s effect on the original organization. Integration planning should not be a one-way effort, focused only on absorbing the target. Instead, buyers should place equal emphasis on the expected, and desired, impact on the original organization. Leading integrators, for example, view acquisitions as an opportunity to change the status quo of the purchaser s existing culture and work processes. Companies embarking on M&A activity often use the opportunity to consolidate backoffice functions into a shared-services environment, migrate to a common and upgraded enterprise resource planning (ERP) platform, or drastically improve customer service performance. The integration can be a significant catalyst to invoke changes that may otherwise have been difficult to execute. Conversely, even if the purchasing organization doesn t need to make such improvements, rarely if ever does an integration leave the organization unaffected. If the target has accounting or operational processes that are unknown to the buyer, for example, the buyer must evolve to incorporate these processes into their business. Companies that fail to recognize the impact to the existing human capital, systems, corporate culture, and financial standards frequently have found completing the integration activity very difficult. 5

6 Crowe Horwath LLP 4. How integration strategies, goals, and success metrics are determined and communicated, including steps to incorporate continuous improvement for future integrations. While effective integration involves significant effort and resources, companies should approach an integration project the same way they might treat an IT system implementation or a Six Sigma-style project. For example, many times the integration efforts are delegated to the respective department heads or functional area leaders without defined strategies, goals, or success metrics for the overall integration. Leading integrators establish a clear vision that defines what the integrated organization will look like 12 months after the deal closes and they support this vision with lower-level goals and useful metrics. Goals and metrics can include synergy targets for reduced direct spend, integrated and ERP systems, and elevation of the target company s customer service to the level of the buyer s expectations. This principle applies to both strategic acquisitions and deals arranged by private equity groups. In a strategic acquisition, the buyer already has established expectations for its own business performance. The target organization not only needs to adapt to those expectations; it must also establish short-term goals to articulate the ongoing progress and success of the integration as it relates to the broader goals of the acquiring company. In private equity transactions, the buyer has defined expectations for how the acquisition will contribute to the total portfolio of companies as well as longer-term expectations involving the future exit strategy. 5. The soundness of the foundation for engaging in M&A integration activity. One of the key indicators of an organization s integration experience and aptitude is its ability to design repeatable yet flexible integration projects. Even if a company has limited experience with integrations, the ability to plan, execute, and review project performance is critical for success. Leading organizations assign clearly identified project leaders, use standardized templates and processes, and employ world-class project management methodologies to execute their integrations. These techniques not only provide management and stakeholders with proper reporting and oversight but also allow organizations to incorporate controls, tools, techniques, and resources that lead to effective management of the outcome. Typically these project management plans describe a project organization structure, with leaders and project plans broken out by functional areas as well as common themes related to people, processes, and technology. 6

7 Merger and Acquisition Readiness: Preparing for the Resumption of M&A Activity 6. Specific areas where success or opportunity occurred during previous integrations. Successful serial acquirers develop assessment tools and work plans that focus on common areas they expect to encounter in future integrations. Important for documenting and evolving the approach to integration following each integration experience, these work plans also allow management to describe goals, milestones, and critical control points that evolved from prior integrations. Using this continuous improvement approach helps organizations mature with each integration. In addition, a repeatable process that uses a standard framework can reduce the risk, inefficiency, and surprises an organization might otherwise encounter when it treats each integration independently. Conclusion There are significant tangible benefits to refining M&A integration capabilities now, when market activity is beginning to pick up. On the front end, a comprehensive M&A integration strategy can lead to more critical identification, analysis, and selection of potential target companies, by forcing leaders to consider integration concerns earlier in the M&A process. It can also contribute to more well-informed due diligence once targets have been identified. For ongoing operations, a targeted investment in an organization s processes and supporting technological tools can create a more capable platform for acquisition and decrease the complexity of future integrations. On the back end, addressing any of the opportunities identified by an evaluation of M&A integration capabilities is likely to increase the rate of integration success. With this approach, companies have a much higher probability of meeting or beating their expected synergy targets, both in terms of dollars and timing. They are much more likely to be aware of risks throughout the life cycle of the deal and more prepared to respond to them. Plus adopting this approach is likely to make their future integrations more efficient and effective. As M&A activities increase, companies that conduct an M&A integration audit to assess and improve their capabilities will find themselves better prepared to make the right deals. 7

8 Contact Information Doug Schrock, CISA, PMP, NPDP, is a principal with Crowe Horwath LLP in the Indianapolis office. He can be reached at or doug.schrock@crowehorwath.com. 1 Michael J. de la Merced, The Pace of Deal-Making Picks Up, The New York Times, April 1, 2010, 2 Ibid. 3 M&A Advisors Predict Increase in Deal Activity, Brunswick Group news release, April 14, 2010, 4 Why Do So Many Mergers Fail? Knowledge@Wharton, March 30, 2005, edu/article.cfm?articleid=1137 (registration required). When printed by Crowe Horwath LLP, this piece is printed on Mohawk Color Copy Premium, which is manufactured entirely with Green-e certified wind-generated electricity. Green-e is a registered trademark of Center for Resource Solutions. Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separate and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a member of Crowe Horwath International Crowe Horwath LLP PERF11902