Mergers and acquisitions (M&A) hold the promise of fast growth, economies of scale, and competitive advantage, yet fully realising these benefits remains a great challenge for business leaders. According to studies by McKinsey and the Harvard Business Review, 70% to 90% of all M&A deals fail to deliver their anticipated benefits. More importantly, poorly executed deals waste precious time, resources and erode long-term shareholder value. Why do so many M&A deals fail? The most cited causes are attributed to issues such as the misalignment of business strategies, an over estimation of planned synergies, poor integration and cultural clashes.
To begin to understand the problem, it’s important for business leaders to recognise that an M&A deal may have good reasons on paper and even seem necessary based on competitive forces. There also is pressure from shareholders to deliver better and better results. This is why so many deals are pursued. Yet, real and sustained business value requires far more than leadership aspirations, board level strategic plans, and the legal and financial frameworks with that merge companies together.
The Nepali insurance sector provides a timely example of the forces driving mergers. In response to new regulatory requirements set by the Nepal Insurance Authority – specifically, the mandate to increase risk-based capital and double minimum paid-up capital reserves to Rs. 5 billion – many insurance companies have opted to merge rather than raise capital by issuing debt or by seeking additional investment. Beyond the immediate change to the capital structure, these mergers require a complex integration of product portfolios, customer relationships, management systems, and human resource (HR) practices.
There are many factors to consider when planning and executing a successful merger. A good place to start is to define the complexity level. The complexity of a merger depends on the size and nature of the companies involved. For example, when a smaller firm is absorbed by a larger one in the same general business, the dominant company often dictates culture and processes. However, when two companies are of similar size, or are in different kinds of businesses, the integration process presents unique leadership and operational challenges.
In my experience managing mergers and acquisitions of varying complexity, I’ve identified some key concepts which can help business leaders successfully navigate. In this article, I will outline four critical phases that, when executed well, significantly increase the likelihood of achieving the intended benefits. During each phase, skillful change management helps people collaborate, share information, and execute a new Operating Model. These phases focus on upfront planning, managing the transition, company integration and creating value for the long term.
Of note, often management consultants thrive on supporting companies through the M&A process. While consultants with industry expertise can help with certain types of work such as due diligence, business planning, valuation, workforce planning, governance, and the operating model, they are not the answer for all parts of the phases. The executive team with the strong support of HR must guide a company through the entire process and relying too much on consultants can limit the success.
Phase One: Planning
The Planning phase is the time when companies explore the potential for a merger and begin to prepare for one to take place. The key is to deeply consider not just how the products and customers might fit together but to look at the cultures, vision, strategies, and markets served by the two companies. Moreover, even if a case can be made for the two companies joining together, then will it pass the regulatory authorities and be viewed positively by the Board and shareholders.
Here are some of the main considerations in the Planning phase:
- Vision & Strategic Fit: Do the two companies share a vision for the future and how they can influence and succeed in the future? It is hard for companies to progress together if they want to go in different directions. Are the companies built to deliver on similar strategies? For instance, if one company approaches the market as a low-cost producer while the other is after the premium end of the market, then their strategies and thereby organisation competence would differ greatly.
- Due Diligence: If the visions and strategies seem to fit, then thorough due diligence is needed to ensure that both companies understand each other’s companies and can better gauge the current strengths and weaknesses.
- Potential Value: As due diligence is completed, potential opportunities to create value should become evident. The value may be in economies of scale, product line expansion, expanding the customer base, entering new markets, increasing financial assets for investments, etc. A conservative estimate of potential value is critical as this will set into motion financial payback timelines and Board expectations.
- Financial Structuring: There are many ways to merge companies such as buyouts, stock swaps, acquiring assets, or a leveraged buyout through debt. Financial advisors and the Board will carefully consider the due diligence reports and the estimated potential value to price a company accurately and choose the best option.
- Business Plan: What is the plan for delivering value together? What’s the value proposition? What is the new go-to-market plan? What are the revenue and market share projections for the merged company?
- Shareholder and Board: For private companies, the Board and owners make the decision to merge, but in a public company there is an additional step of shareholders voting.
- Regulatory Clearance: Even if Boards and shareholders want the merger, regulatory authorities must approve as well. In some cases, regulators do not allow full mergers based on anti-competitive concerns.
Phase Two: Transition
After Board, Shareholder, Regulatory approvals have been achieved, then companies move into the Transition phase where the goal becomes ‘readiness’ for the merger to take place. To achieve readiness, the companies must work together and make many decisions that will enable the companies to operate together.
Here are some of the main considerations in the Transition phase:
- Collaboration: Transition teams form in both companies and the teams will collaborate on business issues, share documents, represent interests, and liaison with executives to ensure the companies become ready to merge. Finance, HR, IT, Sales, Operations, Supply Chain, and Legal representatives are essential on these teams.
- Communication: As the collaboration begins with the transition teams, it is critical to communicate with the broader organisation too. A merger transition phase will be full of uncertainty and stress and employees will be eager for some understanding of why the merger is happening and what value is expected from it. Leaders should resist to make bold predictions about performance or blanket statements about workforce numbers because employees will latch onto what is said and this could lead to disappointment and resentment later if the lofty expectations are not met.
- Design Principles: One step that is often overlooked is to agree on organisation design principles that guide the decisions during the organisation structuring process. Such principles could include strategic alignment to enable business growth, minimal disruption to existing reporting relationships, optimal reporting authorities of no more than seven direct reports per leader, minimal organisation layers, team collaborations by proximity, agile customer-facing groups, and clear accountabilities.
- Organisation Structure: Begin this process early because there will be many iterations before it is done. The structure is critical to guide the workforce planning and selection of employees who will be in the newly formed company.
- Functional Readiness: At the same time the organisation structure is being designed, the functional groups such as Marketing, Operations, HR, Legal, Finance, Supply Chain, Auditing, R&D, Strategic Planning, etc. all need to prepare themselves for the merger. Building functional readiness must be led by the Executive Teams of both companies and involve direction from the Board. A key part of functional readiness is updating policies. The policies that deal with HR (i.e. compensation, benefits, leave, etc.) are some of the most critical to have in place before the Integration phase.
- Operating Model: The linchpin of the Transition phase is the operating model that specifies how to operate when the two companies join. This essential model considers how the organisation structure, approval authorities, workflows, IT infrastructure, workforce capabilities, and business locations and offices all work together to produce the product, process sales, and manage customers. Using a reputable consulting company with deep industry expertise to help create the operating model is critical.
- Workforce Planning: Once the operating model is agreed upon, then the workforce planning can be completed. The organisation design and operating model will reference industry benchmarks and the business plan to help determine the right amount of headcount, critical roles, skills, and responsibilities for various functions.
- Executive Team: Before Day-One of the newly merged companies, the combined Executive Team for the newly merged company needs to be in place and have clear reporting relationships and authorities. The executive team will communicate expectations of the merger and provide a unified voice to all employees.
Phase Three: Integration
The integration work begins in the Transition phase as groups work toward functional readiness, but the Integration phase truly begins Day One when the companies are officially merged as one company. The challenging goal of this phase is performance. Can the two companies merge their workforce, operations, decision-making, and processes to fully realise their Operating Model plan? Potential value can be destroyed if the Integration phase is a failure, and this phase is the most significant one for Human Resources.
Here are some of the main considerations in the Integration phase:
- Asset & People Transfer: As soon as the new company is launched, then assets transfer ownership to the new entity and then employment is transferred. The assets give ownership equity to secure against loans and to possibly sale if redundant. Transferring people is challenging because of new reporting relationships, work locations, benefit schemes, responsibilities, payroll, etc. which will require significant HR support.
- Governance: This work begins in the Planning phase as exists throughout the four phases as the companies adapt to one another and form the standards, policies, values, and processes that are practiced throughout the newly merged company. Good governance practices reduce the risks of the company while helping achieve consistency and reinforce accountability.
- Clear Decision Authority: One of the biggest challenges in newly merged companies is operating with clear decision authorisations. Often merged companies adopt a matrix organisation that has many stakeholders with dotted-line relationships but limited decision-makers. HR must give particular attention to charting approval authorities for all leadership levels and note who must be informed and provide consent.
- First 90 Day Plans: The first 90 days is a key period for new leaders to exert their influence and establish themselves with their teams. It is also a time when a new culture begins to be formed and the organisation established shared values and work processes. HR needs to support leaders in developing a First-90-Days plans that guide leaders on which new stakeholders to meet, how to set direction and expectations with the team, and how their team fits into the organisation mission and Operating Model.
- Business Integration: Function readiness in the Transition phase prepares the plans and policies, but there is still the integration that get all the work group processes integrated and operating as one company. IT systems need to provide the full company data for decisions and financial accounting needs to be integrated.
- Corporate Scorecard: It’s critical to track the corporate performance during the Integration phase. By creating a corporate scorecard that requires groups to work together and share responsibility to achieve a metric, executives will help drive integration, teamwork, shared decision-making, and accountability.
Phase Four: Value Creation
Creating value in a merged company can be realised immediately with operational efficiencies and financial advantages, but creating value through strategic synergies, market expansions, competitive positioning, etc. may take years to fully realise. The biggest challenge is to create value in the eyes of the customer. The ultimate test is to create value in the eyes of the customer and increase the value over time to ensure the retention of the customers. Value creation, therefore, is not a one-time solution or ‘fix’ but an ongoing continual value creation challenge that keeps a company competitive.
