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Avoiding common M&A mistakes: Tips to plan and execute a successful integration

RFP
Manufacturers are eager to deal, but many make critical mistakes in the M&A process that doom post-merger performance. The numbers are daunting: 90% of all mergers fail to hit their investment targets, and four out of five M&A deals don’t create any value.1

According to Grant Thornton LLP’s Value-Added Strategies survey, manufacturing executives report that half or more of M&A activity over the past five years has been unsuccessful (Figure 1).2 However, CFOs take heed — it doesn’t have to be this way. Effective due diligence and careful integration planning and execution go a long way toward making sure deals achieve their intended synergies.

Get real
M&A failures usually result from a lack of pre-deal financial realism. Why? First, most transactions are predicated on revenue and cost projections that err on the side of optimism. When companies fall short of those pie-in-the-sky projections after the deal, it makes even satisfactory performance look disastrous. Second, and perhaps more important, a completely accurate predeal projection isn’t possible.

“Remember that deals are done with incomplete information,” says Ed Kleinguetl, Grant Thornton’s managing director in the Transaction Advisory Services practice. “No matter how much due diligence you do, until you own it, you don’t have access to 100% of the information on the target company or potential buyer. Also, the numbers on a piece of paper are just that: numbers, promises.”

Question everything
Predeal synergies are often based on best-case scenarios. CFOs must be wary of numbers that predict inflated outcomes for the following:

  • Workforce totals: Headcount reductions are frequently overstated. Even when staff cuts are possible, other factors can prevent implementation (e.g., union contracts, clawback provisions of economic development incentives).
  • Purchasing power: Until engineers and procurement staff from each company map out joint sourcing strategies, supply chain savings are just guesstimates. Even a small difference in a part or material specification can eliminate projected volume discounts.
  • Customers: An acquisition should expand the customer roster, but how many customers are contractually committed to each party? At the same time, customer overlap and pricing histories can sometimes result in lower pricing and reduced profits.
  • Tax consequences: M&A can create tax advantages, but it can also create numerous tax complexities — including new and expanded direct and indirect tax compliance challenges — which can place additional strain on existing resources and create incremental costs.

Kleinguetl says that it’s good practice to consider only half of estimated deal synergies to be realistic. He also warns that many deals have estimated synergies that are completely unattainable.

Synergies related to corporate culture are particularly difficult to quantify, yet incompatible cultures (e.g., entrepreneurial vs. bureaucratic) can increase costs, lead to the loss of key personnel, and hinder performance (i.e., quality, delivery). That’s why 92% of executives involved in M&A said their deals would “have substantially benefitted from a greater cultural understanding prior to the merger.3

Perhaps most dangerous of all is deal inertia, which may leave executives reluctant to cancel a transaction even when problems arise or projections seem unreasonable. Leaders often don’t want to waste the effort invested in a deal, even if the merger is likely to fail.


Devise a strategy to get from plan to performance
Most M&A mistakes are avoidable with due diligence and effective integration planning, says Kleinguetl. “Every one of these things can be addressed and mitigated with good due diligence on the front end and with integration planning on the back end,” he says.

Integration planning requires CFOs to have a strategy “to move from that piece of paper, that promise, that investment thesis, to actual performance,” says Kleinguetl.

“To do this, you have to develop a well-crafted plan,” adds Chris Schenkenberg, partner with Grant Thornton’s M&A Tax Services practice.

And you have to manage it. Managing integration is best done by delegating responsibility to leaders in appropriate departments — sales and marketing, HR, operations, tax, supply chain, etc.

“CFOs delegate that plan, allowing others to own parts of it, and then hold those people accountable for the integration’s success,” says Schenkenberg.

In addition, savvy CFOs recognize that three best practices drive effective integration:

  • Communicate: Begin communicating as soon as possible — ideally, before the deal closes — in a consistent manner, regardless of the audience. Without information, rumors fly, usually reflecting worst-case scenarios. For example, employees will want to hear about potential job losses, relocations or reassignments. Tell them as much possible, as quickly as possible.

  • Manage expectations: Anticipate the expectations of all parties affected by the deal — employees, stakeholders, customers, suppliers, etc. This is especially important for companies entering new countries or regions. Regulations, behaviors and cultures vary dramatically around the globe.

  • Move quickly: Commit to a 100-day plan with clear milestones, and make it happen. After the first 100 days, momentum inevitably stalls and day-to-day problems tend to take precedence over realizing deal synergies. The 100-day plan should also establish timelines for employment changes and bonus or severance packages, in an effort to keep staff engaged throughout the integration.

Developing and executing a detailed integration plan can seem overwhelming, which is likely why so many CFOs fail to do so before a deal is consummated. However, a solid integration plan — developed before any documents are signed — is critical to making M&A profitable.

It doesn’t have to be rocket science. “With many transactions,” says Schenkenberg, “most activities are common to all, from diligence through implementation. From there, you need the ability to identify the value drivers, assess risks and then modify your plan to address the nuances of your deal.”

How realistic is your pre-deal integration planning?




1  McCann, Erin. “Mergers and acquisitions may be hazardous to health IT,” Healthcare IT News, Nov. 21, 2012.
2  Grant Thornton LLP. Value-Added Strategies, Autumn 2014. Visit grantthornton.com for more details.
3  Deutsch, Clay and West, Andy. “A new generation of M&A: A McKinsey perspective on the opportunities and challenges,” McKinsey & Co., June 2010. Visit mckinsey.com for more information.