Five success factors for M&A integrations

2020 didn’t see the expected number of mergers and acquisitions, for obvious reasons. Deals ground to a halt in the first part of the year, but M&A rebounded in late 2020 to hit $3.6tn, according to the Financial Times. For the first part of 2020, the main reason was that most companies were unable assess the risk; whereas lately, publicly traded companies are trading at ballooned valuations or even all-time highs, so ensuring successful mergers and acquisitions is more difficult. Hopefully, the last months of 2020, when activity picked up, have prepared us for an active M&A season in 2021.

While M&As are on the agenda of every board member worldwide, they don’t always provide the desired synergies. In this article, we share five success factors that increase the chance that synergies are realized. We base these factors on the successful and unsuccessful integrations we have encountered over the years, no matter the size of the companies involved.

Perform proper IT due diligence at the start

Without proper IT due diligence pre- or at least post-merger, there is a huge risk that financial, compliance, and legal issues will pop up. This can mitigate any synergy benefits or even undo an entire post-merger integration. With today’s business relying heavily on IT, it is key to focus on information systems and information management. Costs for IT restructuring can make the business case less attractive. Also, companies engaging in cross-Atlantic mergers should consider the specific laws and regulations that define how information management should be performed. For US-based companies this is the Sarbanes-Oxley Act (SOX), while for companies working with European customers it is the General Data Protection Regulation (GDPR). SOX requires that publicly held companies have business continuity plans in place. This means their European subcompanies should have them in place as well. The GDPR, on the other hand, mandates that companies know where their customer data resides.

Base the synergies that are to be realized on clear strategic decisions

Synergy means that two companies combined will be greater than the sum of their parts. Synergies are most often the reason that mergers and acquisitions take place, but realizing them is easier said than done. To increase the probability that synergies will be realized down the line, it is important that they are clear from the start. By setting clear strategic decisions and expected outcomes upon which the merger is based, executives ensure that the synergies will naturally follow for both parties, mainly because the guidance regarding where the integration projects should go in the future is established. Linking the synergies to KPIs can help track whether progress is still in line with strategic goals.

Have a digital perspective on integrations

In current market conditions, accelerating digital transformation is key for improving profitability and growth. That’s why you should have a digital perspective on the integration. When two companies merge, their infrastructures, processes, etc. are not yet aligned. To ensure that these will successfully integrate to the required level (depending on strategic decisions), think about the applications, agility, scalability, and how both parties can exchange digital capabilities. Validate whether the application landscape aligns with digital ambitions. What resource capabilities support the ambitions and which capabilities are to be added? In other words, use IT modernization to ensure that business transformation takes place during the integration. For example, when agility and scalability are preferred, focus on consolidating multiple ERP systems into one ERP system and align the business processes of both companies. This also ensures scalability and ease-of-transition for future mergers. Don’t take any shortcuts while running these projects – such as moving workloads without proper analysis – due to business continuity risk. IT modernization is difficult work; it also is an ongoing project. You’re never fully modernized because people, processes, and technology are always changing. But a PMI provides a great opportunity to use the momentum to better align them.

Embed change management in each project or workstream instead of separating it as a responsibility

Culture eats strategy for breakfast. Each project or workstream lead should understand and feel that they are responsible for successful change management. There shouldn’t be a separate change management stream that can take accountability away from other streams. To successfully integrate two companies, their people and cultures, effective communication and giving employees ownership in projects is key. Using the leadership skills of an executive can have a positive effect on change; for example, have the CIO of the acquiring company provide the introduction and the strategic reasoning before a principles workshop. This can help both sides understand each other and the overarching vision. Ensuring that employees can interact and get to know each other through workshops on specific topics is key in bridging fears and motivations. Highlighting cultural differences upfront can take away a lot of misunderstanding.

Define clear principles and follow up on them

More often than not, IT managers try to use integrations to finance state-of-the-art and over-priced solutions that do not provide value to the transformation. Clear principles help to avoid such situations. Principles are fundamental statements that function as guidelines for integrations. They are key in bringing different parties together and should be prepared via executives’ alignment meetings. Always be very rigorous in setting correct and unambiguous principles, otherwise alignment and behavior could deteriorate along the way. To ensure principles are applied, make sure that they are embedded in the governance. This can be done in a couple of ways – for example, by deciding about these at board level and continuously carrying them out in workshops. When performing further integration projects, the principles should be taken as standards by the steering committee. When there are many integration projects, put a quality board in place to check if principles are applied when decisions are made or agree to only discharge a project team when principles have been successfully validated. By doing this you’ll also benefit from increased financial control, considering that a lot of capital is made available for mergers and acquisitions.

We look forward to having a conversation with you around these success factors. Please reach out to Ludvig Daae or Maarten Mees ten Oever 

This blog was co-authored by Maarten Mees ten Oever.