Acquiring for geographic expansion, customers or product, or merging with an equal competitor are common strategies to increase growth. Yet, many mergers and acquisitions (“M&A”) transactions fail. Investors, both private and public, instinctively point to flawed strategy or poor due diligence as the culprits. Both of these may be true, but a crucial third element is overlooked: a lack of standardized integration processes. Solid Post-Merger Integration (“PMI”) planning is essential to successful M&A, particularly for growth-stage technology businesses that are making their first acquisitions.
Across Insight’s portfolio, companies engage in more than 20 M&A transactions a year, with millions of dollars at risk if the acquisitions fare badly. To mitigate this, Insight Onsite wanted to document and understand PMI challenges and successes in order to develop best practices that can help with future M&A. So over the past several months, we interviewed 25 seasoned portfolio executives to explore their experiences and learnings from the best—and worst—integrations of their careers.
In the next few newsletters, we will reveal our learnings and the resultant best practices. First, we lay out the top eight most common PMI mistakes.
Mistake #1: Setting unattainable targets during due diligence
"We know we overpaid [for the business]…what we should have done [after close] is adjust our model. We should have “hit the pause button” early and been honest with ourselves, and the Board, that the spreadsheet was not attainable."
Every M&A transaction is based on a set of expectations and assumptions that lead the acquirer to complete the deal. Those expectations are often reasonable but sometimes need to be reassessed post-close. In either case, the management teams of both companies, who are now accountable for the results, need to align on achievable targets for the next 6, 12, and 24 months, and begin to manage their teams accordingly.
Targets set upfront must be realistic. Many times, executives recounted how their team hit the ground running during the integration phase, only to be deflated by missing the first quarterly target. The result? Employees are demotivated, the Board is disappointed, and trust disappears. Rather than adjust the expectations, executives may push harder, micromanage, or replace key executives. This is not the right approach—the spreadsheet is not the business. The assumptions are not the reality. Re-examine post-deal, understand the implications, and adjust as necessary. Setting the right expectations and goals is critical to maintaining momentum throughout an integration.
Mistake #2: Not dedicating resources to manage integration
"We would have benefited from a dedicated team to create and manage the integration and [whose] compensation was tied to successful outcomes. Instead we were distracted by the day- to-day business operations, and we short-changed the integration goals … if you’re not willing to dedicate the resources, don’t do the deal.”
Once the ink on the term-sheet has dried, and before the deal closes and funds are wired, planning for integration is imperative. This begins 30 days out, if possible, and requires a dedicated project manager, and leadership team to guide both companies through the process.
The integration challenges are myriad: perhaps IT, with one company far behind the other in terms of systems and processes; financial, with accounting integration and revenue recognition; sales, with multiple products and new messaging; overhead, involving relocations and office closures. Nonetheless, most executives note that the biggest challenge, by far, is cultural. If the two companies aren't able to quickly mesh and accept new roles and responsibilities, while aligning behind a joint vision and common goals, the merger will fail.
Regardless of the challenges, a dedicated team that is responsible for managing this complexity is an efficient and effective way to tackle them. Executives recommend that this team should comprise about half of a senior leader from each company, along with a mid-level project manager. This team is required prior to deal closing and for at least the first quarter afterwards, decreasing over time as feasible.
Mistake #3: Failing to clearly and explicitly tie success metrics back to deal logic
"When we integrated into the business, we lost visibility."
PMI involves the blending of two corporate stories, and clearly articulating why the deal occurred and why the “whole is greater than the sum of the parts.” Successful companies tell their customers, partners, and themselves a corporate story of why they exist and create metrics to measure their success. These may include gaining market share, selling more to existing customers, cross-selling the customer base, increasing retention, cost savings, and market expansion.
The metrics should articulate the acquisition rationale and be stage-specific. For example, market share gain may be an ultimate goal, while joint selling of may be a stage-specific goal for phase one of the PMI. The PMI team, CEO, and CFO need to put processes in place to collect metrics regularly in order to track progress. Upfront executive alignment and tracking of these metrics will enable your company to stay focused on what matters most, while understanding if critical items are on track.
Mistake #4: Spending too little time on retaining top talent
"Identify the top 20 percent of the company, their names and what they do. If the list is small enough, set an objective to retain every single one of them. Then, design a plan to make sure that each individual is taken into account."
For most M&A, the true value of the deal resides in the people. Retaining institutional knowledge of the technology, operations, customers, or market is fundamental to integration success.
Executives must identify who they need to retain in the PMI process, and what it will take to keep those people engaged. Earn-outs and retention bonuses should be considered a necessary expense, and it's important to incorporate those costs before the deal gets signed. But even more so, regular one-on-one meetings and having a “people tracker” where executives discuss how each key employee is doing can help retain key team members.
Mistake #5: Lack of honest communication about intentions and culture
"We told the new employees, 'we want you to teach us.' People got excited about that. But when actual decisions came up, it was clear that there was already a prescribed endpoint to everything based on our point of view and what we wanted to do."
PMI is a time of extreme change for both companies as well as their people. The reality is that acquisitions aren't always beneficial for everyone. In an effort to try and calm the stress, executives can easily sugarcoat reality or over-promise, and subsequently, under-deliver. This is a sure way to lose talent. As one executive put it, “Once you lose the trust of employees, all aspects of integration become more difficult because people are distracted by second-guessing whether what you say is actually what you mean to do”.
Being honest and transparent upfront is essential – assure people that while there will be tough decisions to be made, you will always be open and straight-forward with them. You owe them that at least.
Mistake #6: Delaying difficult cost reduction decisions
"You could lose a year if you don't quickly make the hard decisions to exit people out, and then do so with grace.”
Everyone knows that “synergies” are a key driver of M&A rationale, and this is usually code for cuts. Projects and teams get re-examined and shifted, satellite offices are consolidated, and specific employees (including executives) are no longer needed. All executives agree that delaying these decisions, and their implementation, increases costs and distracts people. This is particularly true if the projects, teams, offices and executives earmarked for reduction are included in the integration process. Cuts should be decided and communicated (if not implemented) at the outset of PMI when there is already lots of activity and change. Once things settle down, it becomes even more difficult to make them. No organization should weather two rounds of disruption, especially when the decisions were apparent at time of close.
For those decisions that are clear (e.g., the combined company doesn’t need two controllers or two heads of sales), most people who won’t continue with the single entity are willing to help ensure a smooth transition, provided they are compensated for their effort. Although a truism, both sides want to part on good terms.
Mistake #7: Shallow understanding of a joint product roadmap
"Don't assume you know the product and the end-user benefits. How the management team describes the product’s capabilities and the reality can often differ vastly, as can the gap between the customer’s needs and the product’s capabilities."
While most of the eight mistakes on this list are internal, this mistake—not understanding what you're buying—is the easiest to spot by outsiders, usually customers. Insight has several data points on product acquisitions where the acquiring company wasn't sure what to do with what it ultimately bought. As a case-in-point, a company with an analytics product acquired a CRM product that sold to the same market, but the user was different and the products didn’t share data or workflow. Therefore, the deal rationale of “greater share of wallet” and increased retention and stickiness didn’t unfold as predicted. The poor product integration was at odds with the market story of end-to-end capability, and the forced product integration led to a poor customer experience. The tech teams were unclear on what to build, and the increase in sales never materialized.
A clear and defined product roadmap that sales can go-to-market with is essential. Don’t under-estimate how much time this can take.
Mistake #8: Earn-outs that have no clear and measurable metrics to assess success
"The earn-outs hampered our ability to integrate faster because the founders wanted to operate how they've always operated and were motivated by the money on the table, rather than the joint success of the combined company. If we were to do earn-outs in the future, we'd make them more straightforward and understand the misaligned incentives”.
A select group of M&A deals include earn-outs—cash or stock bonuses for achieving performance goals. Well-structured earn-outs are tied to measurable performance metrics and activities to ensure alignment, and continue to motivate the executives whose compensation is at risk.
Problems typically occur when the metrics are loosely defined and ambiguity ensues about whether the goals are achieved. In general, executives agree that transactions should only set earn-outs if they are SMART metrics (specific, measurable, accurate, reliable and timely). “You will spend more time arguing than achieving your goals and it leaves a bitter taste in your mouth”.
Post-merger integration is science as well as art. There are ways to finesse an acquisition, integrate cultures, and motivate people that can’t be fully documented. This has to do with the skill of the executives and the culture they’ve created.
Insight’s handbook documents the science of PMI. There are fundamental activities that everyone should do. There are at least eight mistakes that everyone should avoid. Our next post will discuss “Key Priorities at Every Stage” of the integration process.