Steps to Successful M&A Integration
Post-merger integration remains one of the most difficult challenges for acquiring companies. In fact, many stumble over their integration efforts.
Integration is especially hard work. And like most hard work in the boardroom, it’s absolutely vital. Acquirers don’t want to end up running two separate businesses because that means they would not realize the full benefits of their newly combined entity. Revenue synergies, cost savings, and enhanced profitability simply don’t happen without proper integration. And, often, it is the value of the combined entity that the lender has used to place debt on the business.
Another concern is exit routes. Imagine a business buying a handful of companies over the course of several years but not successfully integrating any of them. When it comes time to exit, it will be extremely hard for buyers to value that business. How can they? The data is not consolidated, their technology systems are all over the map, and employees are still doing their own thing.
This sort of disjointed operation won’t command the same value as a well-oiled M&A that has achieved cost savings and economies of scale thanks to common systems and a coherent market strategy. Indeed, those companies that handle integration well deliver as much as six to 12 percentage points higher total returns to shareholders than those that don’t, per McKinsey & Company.
Most enterprises have an acquisition strategy. They know which kinds of companies they want to buy and why they want to buy them—but they have no integration strategy thereafter. They have little to no idea how to successfully blend their newly acquired entities.
This is particularly common in the middle market, where companies tend to operate with limited resources. They will have an acquisition team scouting deals and conducting due diligence, but they won’t have a dedicated integration team to game plan post-deal strategies and map out all variables. Such a team is critical because effective integration efforts start long before a deal is completed. In fact, integration should start the moment a company decides to make an acquisition.
The process should begin with a few basic questions. Is the target company a cultural fit for our business? Does it have synergistic technologies we can leverage post-close? What are the key issues related to integrating the finance organizations? Can we limit the risk of losing essential talent? What will the new leadership look like? How will this acquisition impact EBITDA?
These are all integration questions. But they also have a bearing on an overall acquisition strategy—another reason it is crucial to have a defined integration team in place that works with the deal team in any due diligence process. If the integration team is involved early, it can identify various integration challenges that may impact a deal as well as factors that may drive revenue synergies and cost savings.
The integration team should be composed of core stakeholders charged with running the combined entity going forward. The team should be multidisciplinary, including representatives from IT, Finance, and HR, and handle every aspect of the overall integration process.
The last thing any acquiring company wants to do is close a deal, then wake up that night in a cold sweat wondering what in the world they will do next. By that time, it is too late. Integration cannot be done on the fly.
Before any deal is ever closed, acquirers should have adjusted and readjusted their integration strategies. They should know how to consolidate various technology systems. They should know exactly what to say to customers and suppliers about the nature of the acquisition. They should be prepared to communicate with concerned employees.
Another reason preparation is vital is that integration should be fast and thorough. Speed is essential because the quicker a business can move through the integration process, the lower their risk of losing customers to competitors during this process. Competitors will take advantage of any perceived turmoil to steal customers away.
Acquisitions often fail to deliver significant value creation when there is no coherent integration strategy. Acquirers need to start early and put the right leadership team in place to drive their M&A initiatives forward. Having an integration strategy for each deal will set the course for success long before the ink on the contract is dry.
InsightThe hardest part of any acquisition is the post-merger integration. Integration efforts should start well before a deal is completed. Put in place an integration team early in the process that can identify challenges that may impact a deal, as well as factors that may drive revenue synergies and cost savings going forward. Lenders are well advised to inquire about post-close integration activities as the details may provide comfort or expose risks.
Subject matter expertise
Managing Principal - Financial Sponsors & Financial Services Industry
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