Post-Merger Integration – Plan and Challenges

September 9, 2022 Kevin Dabrowski

Since the year 2000, more than 790 thousand mergers and acquisitions (M&A) have been announced worldwide. Their overall known value reached over $57 trillion. In 2021, the annual deal value spiked to $5.9 trillion – the highest one so far, set amid record valuations.

However, the sad fact is – more than half of M&As underperform or fail.

In a sense, this statistic shouldn’t be surprising. Bringing together two or more organizations – each with its own, specific structure, processes, management, and culture – is a complex undertaking.

Post-Merger Integration’s (PMI) goal is to tackle this challenge. If performed well, PMI can enable your M&A to go through successfully.

 

Post-Merger Integration – Plan and Challenges

 

What is Post Merger Integration?

 

Post-Merger Integration – also called M&A Integration – is the process unifying two or more entities and their people, resources, assets, and tasks. PMI aims at synergizing organizations that were part of a merger or acquisition to ensure that the deal behind it achieves its predicted value.

Practically, Post-Merger Integration (PMI) is the final step in the M&A lifecycle. The same process is sometimes referred to as post acquisition integration.

From an IT perspective, M&S Integration is a complex endeavor.

 

Types of Post-Merger Integration

 

There are four common types of Post-Merger Integration.

 

Preservation

In the first Post-Merger Integration type, the goal is to leave the target company autonomous. Hence the name – preservation.

Typically, there’s one exception, though – financial reporting and financial processes. In most cases, it’s beneficial to integrate them.

 

Holding

In the second type, called holding, the acquiring party keeps the ownership of the target company, but doesn’t integrate it in any way.

 

Symbiosis

In the third type, the acquired company is integrated with the acquiring party – however, not fully. As a result, this process is described as a symbiosis.

Determining the level of integration lies in the competency of the acquiring entity.

 

Absorption

Lastly, in this merger type, the acquiring company fully absorbs the target company. Hence the name – absorption.

The result of this merger type – all processes, people, and resources of the target company are integrated into the acquiring company.

 

Post-Merger Integration Planning. What Are the Strategies?

 

Now, considering there are four types of Post-Merger Integration, an obvious question may pop up into your mind.

How to determine which integration type is the optimal in a given situation?

According to Dr. Karl Michael Popp, an answer can be found with help of the Haspeslagh/Jemison model, first described in 1991. The model offers two dimensions for determining which integration type will be ideal – strategic independence and the need for organizational autonomy.      

Strategic interdependence relates to value creation from sharing resources or transferring functional/management skills. Additionally, it also analyzes value creation from combining benefits.

On the other hand, the need for organizational autonomy describes the reasoning behind leaving the acquired party or its parts autonomous. From that perspective, you should consider issues like – is autonomy preservation essential to reach acquisition goals and objectives? – and similar.

As a result, if establish the acquired party would benefit from organizational autonomy, but doesn’t need strategic independence, preservation should be the way to go. Yet, if there is no need for organization autonomy, but strategic independence is a necessity, a symbiosis will be ideal. Correspondingly, if neither are important, a holding PMI type can deliver the most value.

 

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What Are the Most Common Problems? Post-Merger Integration Challenges and Risks

 

As we’ve mentioned in the intro, the sad truth is – most mergers and acquisition fail to deliver the intended value. Importantly, low-quality Post-Merger Integrations play a substantial role in this depressing statistic.

Research studies cited by Deloitte established that one of every two PMIs is categorized as “poor” or failing.Considering that a Post-Merger Integration is key in accessing the value behind a M&A, it’s not surprising that another often quoted statistic says that around 70% of deals don’t reach their full potential.

Among the reasons typically listed when discussing why Post-Merger Integrations fail are:

  • communication and transparency issues,
  • poor planning during the due diligence phase,
  • differences in corporate culture,
  • poor employee and customer engagement,
  • loss of momentum.

Finally, in regard to the loss of momentum, Lauren Dever argues that the first 100 days have a pivotal impact on the value of the M&A deal. The initial 3+ months are a time of uncertainty and anxiety, on the sides of both the acquiring and acquired party. As a result, it’s the time when management can create the first right impression, capture synergies, maximize the deal value and establish the direction for the future. At the same time, it’s also the time when the loss of value may be the greatest.

 

Post-Merger Integration Best Practices

 

So, having discussed all what can go wrong, the next natural question should be – how can we minimize these risks and make the Post-Merger Integration as efficient and valuable as possible?

One of the solutions is adopting a set of best practices.

Most of them correspond with the challenges and risked mentioned before, minimizing their impact or eliminating them entirely.

Let’s consider them in more detail.

 

Structured Communications

 

McKinsey describes merger communication the “glue that holds everything together”.

In mergers, structured communication plays a key role. They’re vital to clarify what comes next in the process, separate fact from fiction, and forge success for newly combined organizations.

Importantly, strong communications promote business continuity, ensuring that the right messages are communicated and minimizing the anxiety of team members in the process. The benefits are clear – boosted morale and retained talent.

Finally, good communication is also vital when informing and influencing stakeholders before transactions close. Thus, it’s critical to get the messaging right early on.

 

Prioritizing Culture

 

To merge two (or more) organizations, you need to review two (or more) sets of processes, financials, operations, and more. All to determine the best way to integrate (or not) the acquired entity.

Yet, amidst many other elements, company culture is a frequently overlooked component. And that’s a mistake. After all, no two organizations are alike. Even if they both agreed before the transaction that they’re a great cultural fit, there are always going to be discrepancies you should address.  

 

Dedicated Resources

 

Next, remember to dedicate resources solely to the integration process – including the cultural aspect, in addition to the operations.

It’s important to set up an integration team consisting of key leaders and contributors from each component of the new organizations. This typically includes HR, development, finance, operations, sales, and marketing.

Ideally, set aside a budget and dedicated time to create an integration strategy, establish communication protocols, and train the leadership and the rest of the staff. Research by consulting firm EY estimates that integration expenses will cost about 1% to 7% of the deal size.

 

Clearly Define the Leaders

 

In addition to the previous point, you should also remember to establish the leaders of the integration. Leadership shouldn’t be watered down, but clearly defined.

There is no one right answer as to who should be part of a PMI leadership team. The only key issue is to include people from both organizations.

Finally, you should also make sure to prepare the leadership for the task. Assess their capabilities and skills when it comes to managing change, bringing groups together, communicating goals, and identifying strategic pain points. Then provide support and training to the leadership team first. Bolster any skills gaps that arise.

 

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