Why integration is key in Merger Mania.
In January alone, deals totaled $232.9 billion, marking the busiest start to the year for M&A since 2011 (only twice has U.S.-based M&A activity gotten off to such a quick pace). With favorable market conditions, including cash on corporate balance sheets and private equity dry powder at record levels, record stock indices and improving unemployment numbers, companies across a variety of sectors are looking to M&A as a strategy to fuel their growth. Yet merging or acquiring a company is by no means easy.
To be successful, M&A typically requires a well thought-out strategy, as well as due diligence not only on the financial front, but also in terms of overall operations. Integration is where companies have the opportunity to convert M&A potential into actual value, and often it determines the long-term viability of a deal. Previous research from the M&A Trends Report 2014 commissioned by Deloitte and conducted by OnResearch showed that nine out of 10 corporate executives felt at least some portion of past deals failed to generate the expected return on investment, and that over half of respondents cited failure to integrate effectively as a top area of concern in pursuing a deal.
Intrigued by this Insight, we dug deeper into the challenges and opportunities presented by integration to discover what factors really do make or break deals, and how companies increase their chances for long-term success. Deloitte's Integration Report 2015, Putting the pieces together, we surveyed over 800 U.S. executives across Industries that had either recently engaged in M&A or were planning to do so in the near future. The results revealed that while successful post-merger integration is difficult to achieve, the deals that succeed are the ones better able to overcome the challenges Inherent in the post-merger environment.
Almost 30 percent of respondents said their integration fell short of success. By having a smart and well-executed integration plan in place from the start, companies can greatly increase their chances of deal success.
The report highlights four best practices that can help a company down the road to success:
1. A formal plan with defined synergy targets The goal of capturing synergies is to create value --whether improving operating margins, enhancing the balance sheet or providing shareholder value. Yet, almost one in five executives surveyed reported their integration failed to reach initial synergy targets. It is difficult to capture synergies if you haven't defined them first, and smart integration planning from the start can lead to more clearly defined synergy goals that can serve as a blueprint for transaction success.
2. A dedicated team Identifying a dedicated "integration team" of individuals from both organizations can help create post-merger integration plans that will benefit the unified organization, without leaving anyone in the lurch. In fact, integration teams were cited by survey respondents as pivotal to the overall success of the deal. In general, the survey revealed integration teams consisted of more than 10 individuals from across functional lines. Whether the members are dedicated full-time to the team depends on their current roles and responsibilities, and the intricacies of the deal.
3. Accountability and measurement criteria According to the survey, 10 percent of executives reported they didn't even know whether or not their synergy targets were achieved. Ironically, survey respondents said that a key component of determining deal success Is measuring and achieving synergies. By using external professionals with experience in a variety of functional and operational areas, companies can create comprehensive measurement plans that will mitigate concerns that a merger or acquisition is being done too hastily for a company's financial and cultural well-being. Moreover, experienced external integration advisors can help companies establish effective measurement criteria that are designed to keep companies focused and accountable for long-term results, especially in larger, more complex deals.
4. Communications approach for internal and external stakeholders: Communication is key to merging cultures successfully, and surveyed executives named timely and transparent communications as the leading factor in aligning cultures. With this, it's important to note that early and consistent communication with employees is critical, with a particular focus on clarifying the rationale behind any merger or acquisition, and maintaining transparency with teams through the integration period. In addition to internal communications, you need to reach customers and other external stakeholders effectively to ensure any merger or acquisition will only enhance, not disrupt, the level of service they've grown accustomed to from each individual company.
Despite the challenges of post-merger integration, the deal market remains hot and M&A activity signals an optimistic bet on the future. As the global economy continues to grow and market conditions continue to be favorable, we're likely to see sustained deal activity for the foreseeable future. Yet without effective post-merger integration, deals can lead to conflict, confusion, and perhaps even dissolution after months of hard work. The journey doesn't end after a deal is done--in fact, in many ways signing on the dotted line is only the beginning. Companies would be wise to pay just as much attention to the postmerger integration period as they do to the acquisition process, as effective planning can make or break deals companies have worked so hard to achieve.
As used in this document, "Deloitte" means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.
Tom McGee is vice chairman and national managing partner, M&A Services, Deloitte LLP, overseeing services to corporate buyers and private equity investors.
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|Date:||Mar 22, 2015|
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