3 Aspects of M&A Integration That Are All-Too-Often Overlooked

Kerie Kerstetter
More often than not, mergers and acquisitions fail to deliver on their intended value'a testament to the complexity of M&A activity. However, despite the risks, mergers and acquisitions can also present a host of opportunities for pivoting strategies, growing customer bases, or developing new synergies. How can boards ensure they've thought through all aspects of an M&A opportunity?

The road of M&A integrations is one of many temptations'at least, that's how Sean Lyons, partner and M&A expert with Liberty Advisor Group, characterizes the most common mistakes made during the M&A process.

His white paper titled Seven Deadly Sins of M&A provides a valuable reminder of the dangers of Presumption or Negligence when it comes to designing and executing an integration plan. In this blog, we'll discuss three of the seven 'deadly sins' and focus specifically on the board's role in preventing these all-too-common M&A mistakes.

1. Spending Too Little Time on Cultural Integration

Merging two organizational cultures is a complex and delicate process, which is rarely allotted the sufficient time and attention during the M&A process; it also remains one of the key reasons that mergers and acquisitions fail in the months and years following a transaction. We've spent a lot of time recently discussing reputation risk and how value-slashing corporate crises like BP or Wells Fargo can almost always be traced back to poor cultural practices. By ignoring or minimizing this step during an M&A transaction, what kind of culture are you fostering down the road?

In his white paper, Lyons also points out that cultural differences can be a great source of employee frustration and distraction. Too often, companies make the mistake of allowing 'dual leadership' to persist rather than streamlining the leadership team and the organization's reporting structure. This lack of decisiveness can have serious implications.

Steps the Board Must Take:
Boards must ensure that management uses the diligence process to meticulously assess cultural components. 'There are many more possible stumbling blocks than you might imagine,' said Lyons. Management must review everything from HR policies, work-from-home policies, and travel expectations to decision-making processes and organizational hierarchy.

Make sure that you have analysis of cultural differences within the charter of the HR and Communications work streams. Similar to comparison of employee benefits, this side-by-side analysis needs the same level of rigor and prominence.
Sean Lyons, Partner, Liberty Advisor Group

Boards and compensation committees should also play a role in assessing incentive and compensation plans for the new organization, as that becomes a key tactic for retaining top talent. It's also the board's responsibility to objectively assess behavior norms evinced by the two leadership teams. Where do values and expectations align or differ? In order to answer these questions, the board may have to conduct its own interviews with management or examine process flow charts to understand where inconsistencies may arise.

Once all the analysis is complete, the board and management teams must be decisive in solidifying the new cultural structure to ensure no gray areas loom as the two companies begin integration.

2. Making Unrealistic Assumptions About Productivity

Contingencies are dangerously difficult to plan for during M&A integrations. As a golden rule, however, boards and management must not rely too heavily on the revenue projections of the target company, lest they overlook the all-too-common byproducts of M&A transactions: employee turnover, customer churn, inflated synergy targets, etc. In fact, these elements must be weighed heavily by the board when assessing the viability of an M&A deal'and projections should be adjusted accordingly.

'Failing to account for churn happens when you have inexperienced people involved in the process, whether at the board level or at the management level,' said Lyons. 'It's important to have people with merger integration experience to drive these key activities.'

Steps the Board Must Take:

The board's best defense against contingencies is to identify key resources (e.g., top talent, key customers) and develop a retention plan for each. In the anticipation of employee turnover, boards and management must also consider the top talent of the target company and incentivize accordingly'and they mustn't stop there. A succession plan should also be drafted to allow for a smooth progression of talent in the case of inevitable churn.

Communication becomes a critical aspect to minimizing the turnover of key customers, as we'll discuss below. The acquiring company must anticipate some level of anxiety or uncertainty among the customer base'particularly for customers of the target company'and combat with proactive and transparent messaging. In anticipation of inevitable turnover, however, Lyons recommends that boards and management adjust any publicly-announced synergy targets by setting them lower than the company's internal targets to account for the potential shortfall of top-line synergy projects.

Again, the board must ensure that these factors related to churn are assessed pre- and post-close.

3. Shortchanging the Communications Plan

News about an acquisition can cause significant levels of anxiety for employees of the target company, as rumors and speculation can disrupt daily operations. Lyons points out that communications during an M&A deal too often contain conflicting messages, which only serves to distract and diminish confidence among stakeholder groups.

Steps the Board Must Take:

Every M&A roadmap should include a detailed communications plan that identifies key stakeholders (both internal and external) and outlines specific messages and delivery mechanisms. Unfortunately, this critical step is too often glossed over.

The key stakeholder groups include investors, customers, employees, suppliers, and regulatory bodies. Each of them will have a material impact on the success of the deal'therefore, the integration team needs to make sure it has consistent and comprehensive communications to these groups.
Sean Lyons, Partner, Liberty Advisor Group

Boards must ensure that the company establishes a centralized system for developing and delivering communications throughout the M&A process, ideally through a designated committee. The committee, which may include members of the senior leadership team, the legal team, and/or the board of directors, will review and approve all communications before they are distributed.

For more information about the board's role in mergers and acquisitions, view the full M&A roadmap (Seven Deadly Sins of M&A) on the Liberty Advisor Group website. Also be sure not to miss our recent article in C-Suite Magazine titled, Building a Firm Foundation: The Ever-Important Role of the Board in M&A.
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Kerie Kerstetter
Kerie Kerstetter is a former Senior Director at Diligent and the Next Gen Board Leaders. She has done extensive work into how governance and ESG technologies empower leadership to make informed, data-driven decisions while mitigating cyber risk. Kerie was one of the founding members of Boardroom Resources, the premier educational resource for board members, acquired by Diligent in 2018.