Post-Merger Management

Value Creation in M&A Integration Projects

Kirsten Meynerts-Stiller, Christoph Rohloff

• Publisher: Emerald Publishing Limited
• Year: 2019
• ISBN:
  9781838674533
• Topic: Business
• Subtopic: Mergers & Acquisitions
• Index: Business

Companies acquire and merge to generate accelerated value growth. But merger integrations pose an enormous challenge to organisations: they are fraught with over-inflated expectations of making rapid synergy gains, laden with pitfalls inherent to complex organisational change, charged with emotion and are often influenced by socio-psychological dynamics. This complicated situation poses risks, and it is no surprise that many merger integrations turn out to be botched jobs.
This book pools the current know-how, and closes important knowledge gaps, to offer hands-on advice and practical answers to the many 'how to' questions relating to merger implementation. It also explains the broader M&A context in which integration projects are rooted, providing a crucially important understanding of how to assess the chances of realising synergy potential and evaluate integration risks. The book demonstrates how integration can succeed and provides a candid overview of everything that needs to be done to navigate one of the most challenging areas of entrepreneurial activity.
Business integration managers should view this as a vital instruction manual containing the essentials for the successful organisation of merger integration projects. The book guides PMI-managers through all the relevant fields of action to ensure a successful merger which forms a functioning and profitable business.

PART I

INTRODUCTION

1

Mergers Are Back in Business

The buying and selling of companies or parts of companies as a strategic option has become mainstream business practice. But do companies have the necessary skills for the job?

Globalization and the associated speed with which companies nowadays expand their business activities, adapting them to new markets and competitors and strategically reorganizing their business fields at an ever-increasing pace, makes the prospect of achieving these adjustment processes solely via organic growth appear very ambitious, if not impossible.

In many cases, the adjustment processes necessitated by increasingly volatile market conditions can only be realized by purchasing or relinquishing business shares or certain business divisions – be it for the purpose of tapping into new regional markets, achieving an appropriate size for the business field, developing an important skill base within a reasonable time frame, or for one of numerous other reasons precluding a lengthy organic growth process.

This applies, in particular, to companies in industrial countries, where organizational growth is inadequate to generate the sales dynamic and investment confidence required in the face of competition from the up-and-coming business giants in the emerging countries (Lucks, 2013, p. 3ff).

In recent years, there has also been a significant increase in cross-border transactions on the part of Chinese investors, who are keeping a particularly keen eye on Germany's medium-sized business landscape while cultivating their traditional links with Great Britain via Hong Kong (M&A China/Deutschland, 2014).

In the North American markets, there is a long tradition of mergers. Major merger and acquisition waves started to be seen as long ago as the nineteenth century, and back in the 1970s M&A volumes reached significant levels (Müller-Stewens, Kunisch, & Binder, 2010). Consequently, the topic acquired disproportionate importance for the general public. In the early 1990s, over 45% of the working population in the United States was personally affected by mergers and had gained first-hand experience of them in the course of their working lives (Jansen, 2000c).

In Europe, a number of large-scale acquisitions spring to mind, such as Thyssen/Krupp or Mannesmann/Vodafone, but up until the turn of the millennium, acquiring businesses was not part of standard corporate culture. The very term ‘takeover’ met with hostility in public discourse, and negative intentions were ascribed to acquiring companies.

Around the turn of the millennium, this perspective changed both in Europe and elsewhere. The number of mergers and acquisitions (M&A) increased significantly; this trend was backed by the level of liquidity available at the time, and despite a number of crises in the period between 2000 and 2007, the total volumes continued to increase. In many cases, however, mega mergers were responsible for driving up the figures. In Central Europe, names that spring to mind are Daimler/Chrysler, Dresdner Bank/Allianz, VW/Porsche, Commerzbank/Dresdner Bank or Deutsche Bank/Postbank. Admittedly, some of these merged entities have already been and gone, while others are talking of splitting up again, as in the case of Deutsche Bank and Postbank in the spring of 2015. ¹

1.1 The Need to Improve Integration Competence

Since that time, it is not just the mega mergers that have been dominating the market and the headlines, but numerous relatively average ‘purchases’ involving companies of all sizes. The purchase of companies, business divisions or start-ups has come to be regarded as a natural strategic option, not just for corporations, but for medium-sized businesses as well, and is hence a frequently used instrument (Lucks, 2013, p. 14). This trend is being backed by the availability of liquidity coupled with new forms of financing in mature capital markets.

Since back in the 1990s, the transaction side of the market, i.e. the side concerned purely with the purchasing process, has undergone considerable professionalization. The big consulting firms have established their own M&A departments, banks have started to play a key role in this ‘multimillion-dollar game’, large law firms have become important players in business acquisitions and even national and international legislation and case law has attempted to master the huge complexity of the valuation procedures along with the contractual arrangements and the risks associated with business acquisitions.

This know-how is now readily available on the market for purchase, although many large- and medium-sized companies have long since compiled their own resources on the subject.

This is the positive news. However, the value of an acquisition is not generated on conclusion of the purchasing process. With the exception of a few rare cases where the focus is on accounting issues such as losses carried forward, the targeted value of a business acquisition is not generated until the subsequent integration and implementation phase has been completed. Irrespective of how deep or broad the integration needs to be in order to achieve the aims of the acquisition, the mere capacity to carry out integration in a professional manner is the decisive factor.

And now for the less positive news. Mergers can turn companies into extremely fragile entities and lead them into very volatile times. They pose the biggest entrepreneurial and organizational challenge for businesses and have a major impact on corporate reality. Nowhere else is the destruction of value so great than in the case of failed mergers, and numerous studies have shown that more than 50% of all mergers fail to achieve their original objectives (see Section 3.1).

This failure is not just due to weak strategic decision-making, but mainly to a poorly organized integration phase on conclusion of the purchase agreement. The capacity to make a success of the post-merger phase differs considerably from one business to the next.

The integration capability spectrum is reflected in how companies view themselves and in their structural prerequisites for post-merger integration. It ranges from businesses that see ‘the careful integration of new staff in the company’ as being their core skill to companies that have established clear structures and processes. The latter would say of themselves: ‘For handling integration processes, we have our own methodology and highly qualified managers and staff, who are experienced in merger activities’. Further along the spectrum, there are companies that consider the merger to be over and done with on conclusion of the purchasing negotiations and live by the motto: ‘Get on with it, but don't spend too much time or money’.

The ability to make a realistic assessment of the costs involved in integration is a core M&A skill and a clear competitive advantage: companies capable of purchasing other companies and integrating them in a professional manner grow faster than companies with purely organic growth.

It is fair to say, however, that merger integration competence is not something that can be acquired within a short space of time. Firms that are already well on the way to acquiring a certain degree of integration competence are all too well aware of this. In most cases, the decision to improve capability in this field and go to the trouble of learning new skills stems from the painful failure of previous acquisitions. Organizational learning curves of this kind resemble exponential functions; they make the distinction from the competition increase disproportionately over time and are hard to replicate.

Coping with all this simultaneously is undoubtedly the biggest challenge facing managers in their day-to-day work and is described in more detail in Chapter 4 as ‘merger management competence’.

Organizational integration competence is only available to a limited extent on the external consulting market. External service offerers extend the ‘workbench’ so to speak by assuming responsibility for a wide range of sub-tasks, notably in the field of IT or on behalf of the Project Management Office. However, a shortage of internal competence can only be substituted by external competence within limits.

Integration processes are massive interventions in corporate reality. They call for project management skills that can be deployed quickly and for socio-psychological realities to be handled properly; they often put a strain on the capacity of the entire organization while also leading to a high level of insecurity and distrust among staff employed with both the target company and the acquiring company.

External consulting support can help in providing experience-based knowledge and implementation tools. However, external support can only be genuinely effective if the expertise provided is accompanied by a readiness on the part of the company itself to implement the integration process with due diligence. Ideally, therefore, external consulting should only play a supportive rather than a steering role in integrations.

1.2 Terminology Shapes Reality

Interestingly, the perspective from which the merger process is viewed is reflected in the terminology. All the public interest and attention, including that of the management, is focussed on the transaction phase, the conclusion of which is termed the ‘closing’. In many companies, perception of what is really important follows the same approach. Where this is the case, the closing elicits a big ‘sigh of relief’ that the feat has been accomplished and the merger closed. The company promptly turns its attention to other operative issues, freeing up the resources that have been tied up in the transaction team and allowing the employees involved to resume their day-to-day duties. Nothing could be more fraught with risk than this kind of approach.

The major challenge for the organization is not encountered until after the closing, during the implementation phase. It generally ties up more manpower and resources than planned for in the pre-merger phase. This massive feat is often given too little thought despite jeopardizing the company's very survival. And the clock is ticking. Unlike other internal reorganization processes, which can usually be scheduled for a favourable point in time by the management, the closing represents the ‘starting shot’. The integration phase has to get underway now, with no chance of postponement. Therefore, the ‘closing’ is actually an ‘opening’ into the decisive phase for achieving the ambitious merger goals (Fig. 1.1).

Fig. 1.1: Terminology Shapes Reality.

The same applies to the term ‘integration’. This choice of language signalizes an approach that can prove a hindrance in the ‘growing together phase’. Integration is often associated with incorporating something new in something that already exists. One part integrates while the other stays the same. This perspective can prove explosive and generate a dynamic of its own that is difficult to control. Moreover, it does not usually reflect reality. In order to grow together in changed organization processes and structures, both sides need to adapt. Consequently, this book often uses the words ‘implementation’ or ‘implementation phase’, while not completely discarding the commonly used term ‘integration’.

1.3 Every Merger Is Unique

Mergers differ in terms of their objectives, the scale of the target company, the integration strategies, the maturity of the merging businesses, their existing procedures and many other aspects. This makes every integration phase all the more unique. In time, however, typical patterns emerge for individual companies owing to the fact that, within any one entity, similar goals, integration strategies, project approaches and many other standard procedures are pursued in the course of acquisition and integration activities.

A ‘playbook’ setting out a de facto standard for future merger integration projects based on previous experience of integration processes can provide answers to around 80% of all questions relevant to the integration approach. As a result, such companies will be left with far more time to attend to the remaining 20% of decisions, which need to be taken with a great deal of care and thought.

It is hence a matter of striking the right balance between establishing a standard integration procedure in order to take pressure off the system and avoiding the pitfall of over-standardization that ignores the system's ability to adapt to the specifics of any given situation and prevents clarification of important issues.

1.4 A Focussed Perspective of Strategic Merger Integrations

This book aims to assist integration managers in recognizing the full spectrum of the challenges they face, thus enabling them to prepare themselves properly in the run-up to a merger and gain a thorough insight into the factors relevant for success by dedicating sufficient time and attention to the topic over the course of the integration process. It also provides a basis for developing or further developing the merger methodology to be applied throughout the company, otherwise known as the playbook.

In this book, we will be focussing solely on strategic M&A. Strategic mergers always pose the challenge that, in order to succeed, i.e. achieve the objectives pursued via the acquisition, parts of both companies have to create something new by means of successful collaboration. It is hence a matter of creating a new entity – able to operate on the market in a well-coordinated and successful manner – from two very different organizations.

Purely financial mergers, such as company takeovers on the part of financial investors, private equity firms or similar entities, are not the subject of our focus. Generally speaking, companies such as these also face major challenges, as reorganization and efficiency enhancement programs often call for major internal changes. However, the nature of the changes differs from those involved in a strategic merger, where people coming from different business realities have to plan a joint corporate future in a targeted manner and with as little conflict as possible. This does not automatically mean that the companies have to amalgamate with each other 100%, but the differences should not have a negative impact on cooperation within the business.

Strategic mergers are only successful if they result in frictionless, stress-free cooperation with a view to achieving targets.

1.5 Hard Facts versus Soft Facts?

In the case of all strategic mergers, the integration processes involve a technical and a cultural component, which cannot always be clearly differentiated. To draw a clear-cut line between a technical merger and what is frequently referred to as a ‘cultural’ merger would be to make an artificial differentiation in the dynamic integration reality. Both aspects of integration run concurrently and have to be dealt with at the same time. Both require an in-depth basic knowledge, a sound understanding of the subject matter and proper handling of the needs of the parties involved.

In this book, we aim to present an integral approach to merger management – one that does not distinguish between so-called ‘soft facts’ and ‘hard facts’ but provides an overall view of all aspects of merger management that have to be dealt with by integration managers if the merger is to succeed. To continue the metaphor, ‘soft facts’, if ignored in everyday business, can rapidly turn into ‘hard facts’ and pose huge stumbling blocks that not only put the brakes on integration processes. Similarly, ‘hard facts’ can become ‘soft’ and less resilient faster than most companies would like. By way of example, ‘hard’ sales targets included in the M&A business case soon dwindle to nothing if the sales forces from the target company lack motivation.

This book on the subject of post-merger management focusses predominantly on the implementation phase. It is nevertheless sometimes necessary to look back at the transaction phase and the decisions taken during that time. Integration managers require a broad knowledge in order to make an accurate appraisal of the tasks carried out and the decisions taken during the transaction phase and their impact on the success of the integration process.

In practice, it is just as difficult to make a clear distinction between transaction and...