Key areas to address in jump starting your merger
- By Ryan Elliott
- Apr 09, 2019
Anyone who has been through a merger or acquisition understands the need to begin integration planning as soon as the merger is announced. But pre-merger planning in a “black box" environment, with a one-way, incoming flow of information, can lead to chaos after the official,change of control.
When the shroud of secrecy is lifted, managers who had nothing to do with defining the execution plans are tasked with both implementing them and realizing their benefits.
The effects can be devastating. Wall Street can punish companies that fail to post immediate, tangible, and substantial post-merger gains. Negative analyst assessments lead to a self-fulfilling prophecy in which the appearance of an unsuccessful merger leads to the reality of a weak postmerger company.
The market typically expects government-serving businesses to post immediate post-merger gains the same as it does commercial-serving businesses. Government-serving business may struggle to reduce the size of support functions, and M&A can provide a unique opportunity to improve legacy structures.
What’s more, government-serving businesses can secure reimbursement for pre-merger activity costs by preauthorizing proposed integration plans provided the proposed savings exceeding reimbursed costs by a two-to-one ratio. All of which makes the business case to JumpStart integration planning — and averting an integration nightmare — even clearer.
Averting the Nightmare
Preventing a merger nightmare requires making smarter use of the pre-merger period when details and regulatory approvals are being finalized. Companies can exchange information with a “clean room” and prepare integration opportunities, while remaining compliant with legal and regulatory constraints.
The JumpStart approach uses three principles:
Promote greater organizational engagement. Beyond ivory-tower number-crunching, integration teams should host synergy summits to build relationships and plot integration strategies.
Realize the best of all possible worlds. Rather than basic cost comparisons of existing structures, teams should seek new ideas from the best practices of leading companies.
Transform the abstract into action. Despite required protocols and confidentiality constraints, integration teams or a third party can manage the flow of aggregate information to help divisions prepare for immediate post-merger actions.
The following describes how to achieve merger goals in four areas: IT, growth, supply chain, and procurement.
Following post-merger integration efforts in line with Transition Services Agreement exit agreements, help desk and IT customer service centers typically experience a high volume of calls and contacts just to keep operations functioning. Companies should thus have IT integration plans in place well before the merger is finalized.
A pre-merger IT diagnostic can help identify platforms, data sources, infrastructure, support models and vendors to best enable post-merger activities and reduce integration risks. This effort should culminate in a plan that identifies system and technology roadmap dependencies to ensure continuity of IT functionality amid organizational change, enable integration and transformation of business processes that are dependent on rationalized systems, and highlight potential risks associated with systems and data integration.
Before a recent nationwide acquisition was closed, we accelerated the IT integration involving hundreds of decentralized locations. We ensured day one ERP system integrity by standardizing data security policies, accounting for all internal and external system interfaces and integration points, and designing a gradually evolving IT organization for pre- and post-integration support.
Crucial to the client’s success was a rigorous assessment of IT architecture for integration risk planning. Vendor alignment through transparency earlier on in the process also led to cost reduction through consolidated subscription and implementation discounts.
A merger integration effort directed at bottom-line quick wins through cost-cutting can stymie the main reason for the merger: growth. To keep focus, we recommend a series of separate but similar growth workshops at each company.
In tech, it’s particularly important to consider platform synergies: how do the two companies’ products fit together, if at all? What new cross-selling opportunities will arise? What will be the competitive response? In this way, the companies gain a coordinated view of how to remove barriers or stimulate new relationships. Then the newly merged company can launch growth-based initiatives starting on day one after the change of control.
To solidify its position as a leader in business intelligence technologies, IBM purchased Cognos and the new company touted the most complete, open standards-based platform in the business intelligence space. Cognos achieved double-digit growth within two years, contributing to IBM’s information management year-over-year revenue growth of 24.5 percent in just one year after acquisition close.
The deal was made to accelerate IBM’s “Information on Demand” strategy, a cross-company initiative to leverage capabilities in unlocking the business value of information.
Mergers are opportunities to find new supply chain strategies that cut costs, improve service, and benefit from economies of scale. The pre-merger integration team can assess all ongoing capital and productivity improvement initiatives, the degree of vertical integration in the supply chain, and any manufacturing assets or contract-manufacturing terms. Such analyses may reveal value creating opportunities, such as upstream or downstream integration.
We found 25 percent in network optimization synergies in a large global merger, driving a reduction in warehousing operating expense and optimizing shipments into more economical weight brackets. Additionally, following US trade policies changes, A.T. Kearney rationalized the combined companies’ import and export volumes to reduce tariff costs by 20 percent.
Although procurement yields significant merger cost synergies, these don’t always arise simply from higher volumes. Rather than blindly trusting in economies of scale, companies should undertake rigorous analysis and examine both entities’ procurement terms and negotiation strategies, and even contemplate overhauling processes to adopt industry leaders’ best practices.
Identifying these synergies in the pre-merger phase will result in a quicker route to savings. In one merger, we helped arrange synergy summits for hundreds of global buyers to build consensus on procurement priorities.
In the case of price differentials, the integration teams could draft letters to suppliers to send immediately following the merger’s completion. Where procurement volumes would be bundled, requests for proposals from both companies were ready to go on day one. As a result, the company exceeded its procurement savings targets by 30 percent.
The most successful mergers go beyond capturing synergies to channel new energy into redefining growth strategies, IT capabilities, supply chain frameworks, and procurement relationships.
By increasing the quality and speed of integration planning, companies have an opportunity to reap the financial rewards of their maximum post-merger potential months earlier than if they had used a conventional merger planning process.
The author wishes to thank Michael Hong, Nancy Sidrak, Gillis Jonk, and Sumit Chandra for their valuable contributions to this article.
Ryan Elliott is a partner at A.T. Kearney based in the Washington, D.C. office