It’s a tale of two Big 4 studies. The Deloitte M&A Trends Report finds that corporate and private equity executives forsee an acceleration of M&A activity throughout 2018 “in both the number of deals and the size of the transactions.” The PWC M&A Integration Survey, meanwhile, reports on a less enthused crowd. Many F1000 executives who’ve undertaken a merger or acquisition during the last three years bemoan a lack of “high performing deals.”
Anyone else see a disconnect? We’re in search of the pot of gold promised by the merger of complementary companies, but that end-of-rainbow fortune has proven elusive. The culprit? Integration.
A recent roundtable on merger integration included participants from many leading private equity firms: Centerbridge Partners, Trilantic Capital Partners, Searchlight, The Wicks Group of Companies, Dorilton Capital, Atlas Holdlings, Yellow Wood Partners, New Mountain Capital, Partners Group Private Equity, WP Global Partners, Carlyle Equity Opportunities Fund (CEOF), and H.I.G. Middle Market Fund. Participants revealed that the integration rainbow is littered with pitfalls that can befall even the most well-matched of mergers: “A lot of executives make the mistake of believing the end of the project plan marks the end of the integration, but there’s still much more work to be done in order to achieve the real benefits of the merger. Full integration probably takes three times as long as you’d think. Acquiring companies need to have the persistence to see it all the way through. Many don’t.”
The roundtable further identified seven imperatives to integration success.
7. Size Doesn’t Matter: Or, at least, not as much you might think. “Time, effort and complexities are much more related to scope than scale.” In a scale acquisition, the buyer seeks an enlarged presence in a particular market and targets a competitor in a related sector. “Even when we are talking about two giants, this is usually a more straight-forward deal. Integration is easier if it’s an adjacency to what you have in your portfolio today.”
Scope buyers, on the other hand, often use their acquisition as a springboard into new and unfamiliar territory. “Because these deals are less about streamlining operations and exploiting cost synergies, the investment of time to win over the hearts and minds of management, to explain the vision behind the acquisition, will be far more significant.” That holds true even when the size of the companies merging would suggest otherwise. “We had a Goliath in industry A swallowing up a David in industry B. Because it was a scope deal, it was critically important for the management team to feel good about coming into a new environment, and so we spent far more time massaging the David integration than we would have suspected based on deal size alone.”
6. Start at the Beginning: Or, in deal speak that would be the at the CIM (confidential information memorandum). “Is this a time to get into the weeds on merger integration planning? No. Too much resource allocation too early on is an unsustainable model against aggregate deal success. But, the outset of the transition process is the time to make reasonable and conservative integration expectations, such as: revenue and expense synergies, operating expense and capital expenditure integration budgets, and integration timelines.”
The truth is, however, many of the initial evaluations now happen before, well, the beginning. “It’s very rare that we will get a CIM that’s the perfect fit for one of our portfolio companies around which we don’t already have a perspective. Either that’s because we always vet the market for add-on acquisitions or because, as is happening with more frequency, prospective acquisitions will actually call us with a synergy plan. For example, we just bought the number one player in a market and the number two player called us and said ‘we’re doing a couple million bucks in Ebitda, but we can deliver you more than double that through synergies and here’s a corresponding cost plan.’”
5. The PMO VIP: Who heads the PMO (Project Management Office) may be just as important a decision as whether to have one in the first place. On the latter question, having one is always the ideal state. Certainly there are those rare portfolio companies that have the internal skillset to be a self-sufficient acquisition machine, and where, given the internal dynamics and competencies of management, a PE-supplied PMO is not necessary. “But, ideally, we would have a dedicated PMO in every situation, even if it’s a small tuck-in, because you need someone bird-dogging the integration to realize the synergies and to get the basic integration stuff done. Otherwise, there’s just too much work for any sort of management team to do.”
The merger is a shiny new toy that can distract from day-in-day-out operations; the PMO ensures it does not through the creation of a separate integration entity. But, who heads that entity? Someone who is senior, well respected, and has the credibility to spearhead integration efforts. Sometimes that person can be found in either the acquiring or absorbed companies. But just as often, even when that skillset is found, the necessary bandwidth is not. In those cases, it’s best to look for either an external operations agent.
4. It’s All About The People: Therein lies the 3 most important priorities of any integration effort: people, people, people. “A successful integration boils down to keeping most of the people that I want to keep.” If retention is the name of the game, then communication is best way to play. Intuitive as it may sound, it can be difficult to keep the workforce fully aligned.
Early and ongoing communication with employees it critical to deal success. “You want to tell your people off the bat, ‘Listen, we know it’s going to be bumpy for a while, but here is what the end of the road is going to look like.’ And then you want to hug all of the people that you want to keep forever, and hug all of the people you want to keep at least through the transition.”
3. Look Who’s Talking: The question then becomes: just who is doing that hugging? There are some PE professionals that believe in the importance of institutional owner communication. That’s particularly true in a CEO transition or in a carve-out scenario. “But, for the most part, employees don’t want to hear from Mr. Wall Street PE guy. They want to hear from their CEO/management. So we plan a town hall schedule. We say to the CEO ‘sorry, not sorry, but for the next two months you will be on the road meeting with every single person face to face, communicating, our vision, our plans, their future.’ If they won’t buy in to that, we won’t buy.”
2. Have a Pen Pal: Communications, they say, is a two way street. Yes, you need ambassadors of the new message, but you also need sources for the on-the-floor, off-the-record feedback. “I call these guys my pen pals. When you go to a town hall tour with the CEO, what really happens is you take the regional leadership team out to dinner and they want to feel like the leader of their fiefdom within the organization. They like to hear themselves talk and that can be the most valuable way to hear the issues that are not bubbling to the surface.” These are the people to whom you, as intuitional owner, give your cell phone. These are the people whose calls you take.
1. Define Success: “One thing I’ve been surprised by is how people cling to structure. If you put together a very detailed governance plan, I’ve found that people respond well to being told what to do, which can be leveraged to accelerate integration activities.” It’s a fair, sound statement, but the other side to that coin is less that they love a task list, and more that they respond well to knowing what success looks like. “People like knowing they have achieved something at the end, which is why distilling success down into concrete, measurable goals is paramount. If you can measure it, you can align to it. If you can measure it, you can communicate to it. If you can measure it, you can achieve against it.”
John Jureller is managing director at Accordion, the private equity financial consulting firm focused on the Office of the CFO.