It is almost a cliché to say that most mergers and acquisitions (M&A) transactions fail but indeed research shows that ‘some 50% to 83% of M&A result in failure’ (Lewis, 2019). Arzac (2008:153) also points out that merger synergies are difficult to attain and their size can be disappointing.
However, M&A transactions are an important part of implementing the strategic goals of the buyer, whether growth or bringing in new capabilities. The sale of a company is a major event also for its owners (the sellers), management, employees and other stakeholders alike (Rosenbaum and Pearl, 2009:8). It is therefore important to understand that ‘a disciplined approach to integration will improve success and keep value drivers behind the deal in focus’ (PwC, 2017:1).
In this essay I argue that any company engaging in M&A and wishing to do it successfully, should treat M&A Integration as a separate discipline with dedicated resources, a systematic approach and proper management attention to it.
Let us start by definitions. The term ‘M&A’ refers to a merger or acquisition transaction that leads to the combination of two or more companies that in the future are meant to operate as one (Reed, Lajoux and Nesvold, 2007:646). Furthermore, the term ‘M&A Integration’ refers to the ‘art of combining two or more companies‒not just on paper, but in reality‒after they have come under common ownership’ (Reed, Lajoux and Nesvold, 2007:646).
It is worth noting that M&A Integration is also often referred to as ‘Post-Merger Integration’ (BCG, 2015) or simply ‘Merger Integration’ (Bain & Company, 2016). I however prefer the term ‘M&A Integration’, because talking about Post-Merger Integration implies a process that starts only after the closing of the transaction, whereas, I argue, a successful integration of an M&A transaction requires starting the integration planning as early in the M&A process as possible.
In my experience, M&A should be viewed as a means to an end, ie. a tool for implementing a company’s strategy. According to research (Reed, Lajoux and Nesvold, 2007:647), the ten most common reasons why companies make acquisitions are:
- Achieving economies of scale (operating synergy)
- Accomplishing strategic goals more quickly (strategic planning)
- Making less efficient managers in the target more efficient (differential efficiency)
- Replacing inefficient managers in the target (inefficient management)
- Increasing market share (market power)
- Lowering cost of capital (financial strategy)
- Taking advantage of a relatively low share price (undervaluation)
- Asserting control in an underperforming company (agency problems)
- Obtaining a more favourable tax status (tax efficiency) and
- Increasing the size of a company (managerialism)
Given the well-known wisdom about most M&A deals failing, it is surprising that according to BCG (2015), less than 40 percent of companies have a standardised approach to M&A Integration, while they do have standardised processes for other part of the M&A process, such as target screening, due diligence, and valuation. I argue that M&A Integration should be viewed as a separate discipline with due resources and attention, should the acquirer want to be serious about implementing its strategy through M&A.
PwC advises that successful M&A Integration must happen quickly and systematically (PwC, 2017:5), and that ‘there is no value in delay’ (PwC, 2017:2). According to Reed, Lajoux and Nesvold (2007:649), M&A Integration can take up to a year, but the more successful initiatives are completed in six months, with the most critical phases completed in three months (100 days).
Implementation of a quick and systematic M&A Integration process, however, does not happen by itself. In my experience, there is a real risk that without a dedicated team and proper management attention, M&A Integration falls between the cracks due to at least two reasons. First, deal teams are seldom neither interested nor incentivised to see through the entire integration, and secondly, the business division that owns the acquisition is too busy focusing on the implementation of its organic growth strategy, and often lacks the skills and discipline required for M&A Integration. Thus, M&A Integration should be done by a dedicated M&A Integration team lead by a dedicated M&A Integration manager, who has full support of the senior management.
Putting focus and effort into M&A Integration pays off. According to McKinsey (2016), those companies that do integration well deliver as much as 6 to 12 percentage points higher total returns to shareholders than those that do not.
The discipline required in M&A Integration is well demonstrated by studying the M&A Integration processes recommended by leading consulting firms. For example, PwC (2017) talks about seven fundamental tenets of successful integration, that are
- Accelerate the transition
- Define the integration strategy
- Focus on priority initiatives
- Prepare for Day One
- Communicate with all
- Establish leadership at all levels, and
- Manage the integration as a business process.
According to PwC (2017:6), ‘companies who do not follow a disciplined approach to integration usually aren’t as successful with their deals as those who do’ because a disciplined approach to integration helps to achieve early wins, build momentum, and instill confidence among stakeholders.
McKinsey (2016) further advises that it is not enough to follow off-the-shelf integration plans and generic best practices that tend to overemphasise process and ignore the unique aspects of the deal. M&A Integration ‘should be explicitly tailored to support the objectives and sources of value that warranted the deal in the first place’ (McKinsey, 2016). I agree, and in my experience M&A Integration should be driven by the key value drivers of the entire deal, and not driven by schematic integration of functions.
After establishing that a systematic M&A Integration approach with dedicated resources is key to M&A success, it is good to remember that M&A transactions may fail due to other reasons as well. Dealroom (2020) has listed ten common reasons why mergers and acquisitions fail. They are overpaying, overestimating synergies, insufficient due diligence, misunderstanding the target company, lack of a strategic plan, lack of cultural fit, overextending resources, wrong time in industry cycle, external factors, and lack of management involvement. It is worth noting, that even if the M&A Integration team gets involved early in the M&A process, many of the reasons for failure cited by Dealroom are beyond the control of the M&A Integration team.
Companies engaging in M&A strategy want to avoid the commonly known pitfalls of M&A. In my experience, a way to maximise the success of M&A transactions is to pay attention not only to the ‘what’ of M&A transactions (eg., strategic fit, valuation, and synergies) but also the ‘how’ of M&A Integration (eg., employing a disciplined approach, having dedicated M&A Integration resources, and using key value drivers of the deal also as drivers of the M&A Integration).
The best way to ensure due focus on the ‘how’ of M&A Integration is to dedicate earmarked resources and ensure full management attention to it. Despite the risks linked to M&A, it is good to remember that when managed well, ‘overall, M&A activity does produce positive results for participants’ (Reed, Lajoux and Nesvold, 2007:650) ‒ a sure incentive for acquirers to treat M&A Integration as a separate discipline.
The author is M&A Director at Helen, one of Finland’s largest energy companies. She has 15 years of M&A, strategy, communications and management experience at Merrill Lynch, Nokia, Booz & Company, Valmet, Finnish Broadcasting Company and PwC.
Arzac, Enrique R. (2008) Valuation for Mergers, Buyout and Restructuring. 2nd edition. Hoboken: John Wiley & Sons, Inc.
Bain & Company (2016) A Strategic Guide to Merger Integration. [Online] [Accessed 4 October 2020] https://www.bain.com/insights/a-strategic-guide-to-merger-integration-infographic/
BCG (2015) Why Deals Fail. [Online] [Accessed on 4 October 2020] https://www.bcg.com/publications/2015/why-deals-fail
Dealroom (2020) 10 Common Reasons Why Mergers and Acquisitions Fail. [Online] [Accessed on 4 October 2020] https://dealroom.net/blog/reasons-why-mergers-and-acquisitions-fail
Lewis, Marsha (2019) Common M&A Pitfalls and Problems. [Online] [Accessed 4 October 2020] https://medium.com/m-a-science/common-m-a-pitfalls-and-problems-1c0a5eca1b05
McKinsey (2016) How the best acquirers excel at integration. [Online] [Accessed 4 October 2020] https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-the-best-acquirers-excel-at-integration
PwC (2017) Seven fundaments tenets of successful integration. [Online] [Accessed on 4 October 2020] https://www.pwccn.com/en/deals/publications/seven-fundamental-tenents-of-successful-integration.pdf
Reed, Stanley Foster, Lajoux, Alexandra Reed and Nesvold H. Peter (2007) The art of M&A: a merger/acquisition/buyout guide. 4th edition. New York: McGraw Hill.
Rosenbaum, Joshua and Pearl, Joshua (2009) Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions. Hoboken: John Wiley & Sons, Inc.