Integration

Why is integration, which is mixing the two businesses together after the completion, so important?

The reason is most transaction fail to deliver the value expected for the buyer.

Why is this?

In their book Why deals fail & How to Rescue Them, the authors Anna Faelten, Michael Driessen & Scott Moeller, set out the reasons. Through their research they identified three overarching issues: failure of planning, failure of communication and failure to consider the impact of people.

Now there are plenty of other reasons each of which come under one of these three headings, these might be:

• Paid too much
• Lack of shared vision
• Leadership clash
• Cultural mismatch
• Loss of key talent
• Misaligned structures
• Lack of management commitment
• Lack of employee motivation
• Poor communication
• Poor change management
• Management distraction
• Employees can walk
• Conflict especially in an earn-out
• Basic structure
• Preservation of goodwill
• Key contracts
• Property
• Banking Facilities

1. Planning

 This part of the transaction should happen way before an offer is made by the buyer. Both the buyer and the seller should be asking each other about these reasons and ascertain how they see the outcome of the transaction. Where the buyer has no clear, detailed, well-thought-out and articulated deal strategy, no planning for the integration of your business will be sufficient.

2. Communication

The buyer must be able to communicate the benefits that will arise after the transaction has completed. The authors believe the key is to ensure there is a well-prepared and well-aligned management team. Not only should synergies be identified there should be a 100-day integration plan written during due diligence and before the deal is completed.

The basis of this plan will be the outcome of the due diligence performed by the buyer. They will test the assumptions made while formulating their original offer to enhance their knowledge of the business. Moreover, there will be risks which will be evaluated as part of the due diligence process.

In my experience, the employees of both businesses especially the seller’s, should know why the owner is selling, why this route is the best course of action for the business and in what ways there will be improvements.

3. People

Culture, culture, culture. The buyer will seek to gain an appreciation of your key people. Where most of the value sits with employees, the buyer will not want to lose these key people after completion. So, during due diligence an understanding of the culture, how it fits with the buyer’s business’ practices is vital to ensure value is added once the completion has occurred.

A failure in just one of these three areas could be sufficient to make the transaction fail. All three areas must be covered. However, certain transactions may require a focus in one area more than another.

So, let us look at the three overarching reasons in a little more detail.

Where the buyer and seller can work on a common vision, this will give all the employees a clear idea of the two businesses when joined together. How it will be different, how it will operate and how it will look in the future. Just remember the employees of the seller’s business will seek to secure their future. There ought to be no need for them to polish their CVs and look elsewhere. If the buyer believes this will be the case after due diligence, then there will be either a price reduction or an earn-out structure or both.

In drawing up the 100-day integration plan some tough decisions may need to be made in order to integrate the two businesses. Such decisions will not please everybody. However, the sooner they are made and implemented there is more chance of the integration plan working.

Ideally the integration plan needs to work from day one. Now this is not always possible and the sooner it starts the sooner the employees of both businesses will be reassured as to their future.

Do synergies play a part?

KPMG’s recent survey Unlocking shareholder value; the keys to success sampled 700 cross-border deals. The survey showed that 83% of mergers failed to unlock value.

One of the main reasons for the lack of success was the inability of the buyer to deliver on the synergies promised at the time the transaction was negotiated.

The key areas targeted for synergies were revenue benefits (36%), direct operational cost reductions (39%), other (16%) and indirect operational cost reductions (9%).

The synergies which were actually delivered in the areas of revenue synergies and direct operational cost reductions were identified:

• Revenue Synergies

   

• New customers: 45%
• New markets: 42%
• Marketing: 34%
• New product development: 34%
• Customer services and back up: 32%
• Access to new distribution channels: 32%
• New products: 29%
• Sales force efficiency: 26%
• Cross selling: 25%

• Cost reductions

   

• Headcount reductions: 65%
• Buying and merchandise: 60%
• Supply chain: 60%
• Procurement: 48%
• Manufacturing: 33%
• Warehouse/Distribution: 31%
• New product development: 31%
• Research & development: 22%
• Other: 8%

In the course of due diligence, the buyer will consider the likely impact on profits and cash flow on the improvements expected to be made and may seek to renegotiate the price accordingly. As a seller it is important you recognise where these improvements will be before the negotiations start so as to be in the best position to counter any price reductions that could occur after due diligence.

Bear in mind, due diligence covers many other areas where the outcome may affect the initial offer made.

So, what is the point of all of this?

One of the reasons deals fail is the buyer does not properly understand your business. This may well be down to you. The benefits have not been articulated with the emphases, supported by evidence, on the value the buyer will obtain going forward.

Moreover, the buyer will have looked in great detail at your business during their due diligence enquiries. They will have identified the changes they want to make. If you are around for several years, then that will stall the transition. They will wish to move as soon as possible, so if you are around for more than, say, a year then this is going to cause issues over valuation and the structure of the transaction.