Post-Merger Integration (PMI)

Why the due diligence stage is crucial

Post-Merger Integration should not start after closing the deal, but already in the due diligence stage. During this stage, synergies between the buyer and target company are defined and the integration director can further assess and validate (timing of) these synergies. Integration is also picked up to ensure that the new governance, the desired management structure and control and reporting processes are put into place. To clarify the role of the integration director, we will compare the M&A transaction to buying a home – as we have done before.
 

The role of the integration director

Maybe your constructional advisor has already told you – before you signed the deal - what needs to be done in your new dream home in terms of renovations. But if you want to know the detailed costs of these alterations, you need to bring along a contractor. Likewise, when you are planning to make an acquisition, you should immediately involve your integration director to optimize the target value – not after the deal has been closed, but during the due diligence stage. Too often, synergies – and especially timing - are overvalued. Integration directors are able to see when specific synergies will materialize and how these should be reflected in the target valuation. They can also identify risks or even dis-synergies (e.g. loss of customers due to the deal) when capturing the value post transaction.
 

Setting up a “clean room”

One option to involve the integration team early on in the process is to set up a clean room pre-close. Especially with two competitors planning to merge, exchange of sensitive information is subject to strict antitrust regulations. To safeguard its independence, the “clean room” or “clean team” is a separate entity, consisting of (external) advisors and/or representatives from both the buyer and the seller (also dependent on regulatory approval). This group is able to identify the areas that the (merged) company should focus on in the first 100 days and beyond. This enables a kick-start for synergy capture and supports the aforementioned realistic value of the target, often off-setting the costs that are involved with setting up such a clean team. However, it is important to consider that if the deal somehow collapses, representatives from both companies that were installed are prohibited to return to the buying or selling party, given their exposure to sensitive competitive information and they must therefore leave the company.

Regulatory limitations

Competition concerns by a regulator are not the only thing to keep in mind when it comes to regulatory processes in M&A and PMI, especially in Telecom and Technology industries. In the telecoms market there is currently a challenge to find the right balance between achieving scale to do large investments such as 5G roll-out, and not being judged as too dominant by antitrust bodies. National governments also play a role in large Technology deals given national interests to protect critical infrastructure, such as KPN-América Móvil. In the case of KPN-América Móvil the importance of critical infrastructure was crucial in not allowing América Móvil to acquire KPN. Another example is the recent termination of the NXP-Qualcomm transaction, despite preliminary investigations by law firms and approval of the deal at an earlier stage, the Chinese government did not respond in time to ensure that the deal could be concluded. In other instances the deal can be executed, but only on the condition that a part of the company is divested, for example in the Vodafone-Ziggo transaction whereby Vodafone proactively sold their Vodafone Thuis offering to T-Mobile to prevent concerns at the regulator. To manage these situations a detailed assessment is required, whereby the involvement of company specialists that will be responsible post-transaction is key.

Integration tactics

When a transaction does obtain approval, it is important to reflect the deal rationale in integration tactics. There are various reasons to do M&A, and hence various degrees of integration: from assimilation (fully integrating and absorbing the target) to add-on (keeping the target separate). These tactics differ per situation, as explained below.
 

Full integration, partial integration, or add-on?

A target company may be acquired to transform the buyer’s core business. For instance, BMW acquired Parkmobile to move towards mobility services, and Shell acquired Sonnen in its transition towards renewable energy. In these cases, retaining identity and skills of the target company is important, which may push the acquirer towards treating these acquisition as a new business add-on and not integrating the acquired business. Also, partial integration might be an option where the back-office might be integrated, but departments like product development, sales & marketing are kept relatively standalone. Full integration may be more effective if the buyer and seller operate in similar markets. In any case, timely involving the integration director is crucial, in which aforementioned integration tactics play a major role.
 

Retaining innovation practices and key leaders

Sometimes, target companies are acquired specifically for their talent. For the majority of the acquisitions, and especially for acquisitions of innovative companies, it is crucial to retain key leadership and talent. These people should be identified and involved early in the process, preferably from Day 1, right after closing the deal. An option might also be to appoint key talent as members of the clean room, but that might be tricky given regulatory concerns (see above) and the risk of the deal not consummating and these talents being forced to leave your company. In any case a talent management strategy is crucial.

Governance

Particularly in the case of large-scale integrations, many work streams are involved, often cross-border and highly diverse. This requires clear governance by setting up an Integration Management Office (IMO) and designing integration principles based on integration tactics. The integration director will most likely be the head of the IMO, reporting to the steering committee or program board (consisting of representatives from the Executive Board). Each work stream has its own representative in the IMO, but the IMO also operates cross-functionally, to enable e.g. change management and communications. In the case of a cross-border deal, representatives from the various regions need to be installed as well. This leads to matrix integration governance structure that ensures commitment and involvement throughout the entire organization.
 

The first 100 days: prioritize synergy initiatives

In one of the earlier articles we already discussed the importance of an integration blueprint and how to prepare for Day 1. An integration blueprint is set up in the early weeks of an integration process to build alignment between both sides and to set out a roadmap for the integration. Another crucial element for the first 100 days (and beyond) is: follow the money by prioritizing synergy initiatives. For instance, in the case of a fixed mobile telco merger, focus should be on up- and cross-selling fixed and mobile offerings to households, as well as key enablers of these up- and cross-selling activities.
Clear tracking of the results (KPIs) is of high importance to ensure continuation and focus on success. As the business model of the target company (and its economics) may differ from the buyer the right KPIs are to be determined, without just using the same of the acquirer. Otherwise, management – and shareholders – may misunderstand the actual value of the newly acquired company. Clear communication about deal rationale, integration tactics and future prospects of the acquisition are pivotal here to obtain support throughout the complete integration journey.

The first 100 days are crucial to show the entire organization the synergies of the M&A deal. This creates commitment and credibility towards a successful integration going forward.
 

The M&A cycle in a nutshell

Below we have embedded a picture of the M&A lifecycle and a short description of each phase. In the coming months we will publish a series of articles on each step of the M&A lifecycle, sharing stories and thoughts about each of these phases of the M&A lifecycle to offer you insight in the entire process and help you benefit from the promised returns of a deal. In the lifecycle we will emphasise the integration of your steps and actions, and what might happen if you deal with every step in isolation.
 

Identify the Right Deal. Either through active selection of companies or business units, or by reacting to offers in the market (one-on-one or by auction). This phase involves setting corporate strategy, identifying growth areas or selling non-core activities.

Pricing and offer. Initial pricing of a company and assessing how easy or difficult integration or separation is going to be, as well as which legal and tax structure will be most suitable (and its impact on pricing).

Perform due diligence. What do we buy? It is crucial to assess the real value of the company, the presence of ‘skeletons in the closet’, financial aspects such as balance and cash flow as well as non-financial analyses (e.g. company culture, integrity, operational synergy benefits, and operational analysis of real estate).

Execution. After the due diligence phase, a Sales and Purchase Agreement is drafted, the relevant authorities are informed and consulted, and the ‘closing’ procedures are executed.

Deliver the Promised Returns. After the transaction has been completed, the expected results must be achieved – how to realise synergies and to prevent that in a future strategic re-assessment the new business will be considered as a non-core activity and be resold (without any added value).
 

More information?

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