Post-Merger Integration: Our View of Pitfalls & Critical Success Factors

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1 Post-Merger Integration: Our View of Pitfalls & Critical Success Factors In an age of growing disruption, superior integration capabilities skills will give you a competitive edge. Unprecedented disruptive forces on businesses are increasing the importance of acquisitions and their subsequent integrations. As the UK experiences an exceptional level of mergers and acquisitions across a diverse range of industries, strong integration capability is becoming a strategic requirement for many players.

2 01 Post-Merger Integration Growing disruptive forces A recent McKinsey report 1 challenges long-standing intuition about business models and their relatively predictable, evolutionary change. The impact from several major disruptive forces demands a fresh take on what makes a successful business strategy. The rise of emerging markets, an aging world population, the growing impact of technology on the forces of market competition, and accelerating flows of trade, capital, people, and data are predicted to have an impact thousands of times greater than the Industrial Revolution had in its time. Within the UK market, important trends have emerged within and across sectors which are contributing to the current wave of mergers and acquisitions. Organisations are having to review their business models due to prompts ranging from the emergence of Challenger Banks and Fin Tech in Financial Services, to the formation of communications super-groups in telecommunications and media. Delivering integration results This age of increasing business disruption makes the specific set of capabilities required for success more important than ever. These range from the ability to identify acquisition targets and pursue deals through to execution, to the skills needed to deliver successful integration - and ultimately results. In our experience across a wide range of sectors, mergers and acquisitions which fail to deliver results tend to fall at one or more of three key hurdles: 1 IDEA 2 JUSTIFICATION Poor strategic thinking Bad deal making 1. THE QUALITY OF STRATEGIC THINKING. At the idea stage, is there a clear articulation of the business strategy, the desired outcome, the integration approaches considered and the approach selected? Wasting management time on a poorly thought out deal leaves a company more exposed to competitors for no gain. The figure opposite outlines integration approaches ranging from preservation to transformation. 2. CONSIDERATION OF THE POST-DEAL PLAN. Pre-deal due diligence and negotiation need to be focused on securing a deal that enables the implementation to deliver real, observable value. The foundation for effective integration can be laid by getting the due diligence right. This means addressing both the strategic case and also the cost and feasibility of implementation. Undertaking as much post-deal planning as possible before the deal closes will help to establish whether or not the deal really stacks up. Once the deal is complete, high energy levels and a rapid pace of implementation are needed. 1 No Ordinary Disruption: The Four Global Forces Breaking All The Trends Richard Dobbs, James Manyika, Jonathan Woetzel

3 Post-Merger Integration 02 Integration approaches The best merger candidates tend to be willing partners with complementary business lines whose post-merger management structure is agreed to in advance. HIGH Absorption Acquired company conforms to acquirer - Cultural Assimilation Transformation Both companies find new ways of operating - Cultural Transformation Degree of change in acquired company Best of both Addictive from both sides - Cultural integration Preservation Reverse Merger LOW Acquired co. retains its independence - Cultural Autonomy Unusual case of acquired co. dictating terms - Cultural Assimilation HIGH Degree of change in acquiring company 3 INTEGRATION RESULT Failed integration Value not realised 3. INTEGRATION MANAGEMENT. The implementation work needs to remain clearly focused on the deal objectives and the logic for the transaction. Implementation is when much of the hard work of bringing business operations and workforces together becomes real, and is in practice where many deals ultimately succeed or fail. The more important the people aspects of a deal, the more challenging this may be.

4 03 Post-Merger Integration Critical integration success factors Assuming success at the idea and due diligence stages, and drawing on our experience of complex integration programme management, we espouse seven golden rules that are woven into our proven approach. The nature of the integration will determine the level of change required in each organisation and the associated effort required to deliver that change. 1 ALIGN STRATEGIC RATIONALE AND INTEGRATION APPROACH Establish a vision for the future and agree on degree of integration. Clearly define and establish goals for both the overall acquisition and the integration program required to deliver the expected benefits. 2 PLAN AHEAD OF THE DEAL The focus of pre-deal planning should not only be on the strategic case for integration. Take sufficient time for planning to identify potential integration issues and mitigation during the due diligence phase or earlier. 3 ESTABLISH VISIBLE LEADERSHIP FOCUS AND COMMITMENT Executive management must understand and react to the high level of visible engagement required in a high-profile integration. As importantly, leadership in both organisations must communicate with consistent clarity of purpose. 4 IDENTIFY AND MOBILISE A HIGH CALIBRE JOINT TEAM Allocate and mobilise a dedicated integration team of top performers from both organisations, with clear responsibilities to lead efficient integration planning and execution. At the same time, ensure continued focus on BAU activities. 5 COMBINE RIGOUR AND FLEXIBILITY Ensure clear governance of functional and geographical workstreams and tightly managed joint project plans with a focus on critical initiatives. Combine this rigour with the ability to be flexible in the face of challenges, keeping eyes on the prize, i.e. deal value. 6 COMMUNICATE AND LEAD CHANGE A holistic, comprehensive communications approach is needed to manage market scrutiny and avoid rumour mills. By involving stakeholders in the change and building awareness, understanding and commitment to it, leaders can help pull people towards the future. 7 INCENTIVES ALIGNED TO DESIRED OUTCOMES Reward in the combined organisation should be linked to successful implementation of the desired behaviours and underlying value drivers of the deal. These must be based on desired future, not historic, performance.

5 Post-Merger Integration 04 Improving internal capabilities Compiling a list of integration success factors may be straightforward: ensuring that best practice is followed is less so. The challenge of building integration capabilities whilst protecting business as usual is a balancing act. We believe that a company that actively builds up integration skills in its best people, and brings that experience to bear on the whole deal lifecycle, will select better deals and execute them better. Managing an integration is excellent training for dealing with major disruption. For example, designing and making major changes to the business operating model whilst protecting business-as-usual can give deep and broad insights into the operational strengths and weaknesses of both the parent and acquired businesses. Give your emerging leaders integration roles as part of their professional development. Let them experience this form of business disruption first hand, and build skills to manage their way through this. For example, give them responsibilities for: Business operating model definition to understand how to identify a suitable target end state and/or how to plan the transition to it in stages and at pace; Synergy identification and ownership responsibilities which will leave them better-placed for future value creation and protection exercises; STRATEGY INFORM ACQUISITION CAPABILITIES BUILD INTERNAL Day 1 and Day 100 planning to understand the challenges of turning a high-level vision into detailed, comprehensive and achievable plans. RETAIN EXPERIENCE AND SKILLS Conclusion Integration success is critical for initiatives of such strategic importance. In an age of growing disruption, it is even more important that acquisitions can be used for nimble, possibly radical, adjustments to business models. Organisations will have an ever greater need for the skills to balance protecting business as usual with delivering integration and possibly transformational change. We recommend being very clear about the capabilities you need and - where possible investing in your best people to deliver this.

6 Gate One is a Business Transformation consultancy that specialises in the design and delivery of complex business change. We have a simple cause: to make your organisation better. We work in small teams embedded seamlessly alongside your own people. We have the knowledge, experience and approach to get to the crux of problems quickly, shape intelligent solutions and deliver tangible, lasting results which can be felt quickly. To find out more please contact us +44 (0) info@gateone.co.uk