M&A integrations at top speed
Nearly 80 percent of US executives and 57 percent of global executives surveyed in our Global Capital Confidence Barometer in March and April said they planned to pursue M&A deals over the next 12 months.
But while M&A activity attracts the most attention, the next step—post-merger integration—can be what really makes or breaks a deal. Integration has changed radically in recent years, and business leaders are finding a need to take advantage of big data and collaborative integration tools to complete integrations with the speed the market demands. That includes integration of software and technology at the core of business functions, adapting business cultures, and using social media to communicate with customers.
Brian Salsberg, the EY Americas M&A Integration Leader, says the pace of integration has quickened for several reasons. For starters, companies need to move fast to protect talent. In a world where it is much more acceptable for talent to move from company to company, holding on to people during an extended period of uncertainty can be a challenge, Salsberg says.
In addition, aggressive shareholder activism is forcing companies to make faster decisions to do a deal and realize its benefits. With valuations near historic highs, companies are also motivated to realize the synergies as quickly as possible in order to make the transactions pay for themselves.
Here are five ways in which Salsberg says companies can make their deal integrations better and faster:
Companies today can be increasingly forward-looking by leveraging computing power to visualize, with a high degree of accuracy, how combined entities will operate. Companies can process public and proprietary data sets to get a better idea of asset performance, and they can crawl websites to understand where companies have overlapping locations or SKUs.
Salsberg offers the recent example of a healthcare services provider that was considering acquiring a similar player. Rather than just making the assumption that a certain percent of the customers of one company would start to use the services of the other post-merger, the acquiring company was able to analyze large and complex data sets to build realistic scenarios. Adding artificial intelligence can also help accelerate diligence, which is important since corporate acquirers cannot always keep pace with the speed of private equity buyers’ diligence.
"Today’s consumers are extremely savvy and powerful," Salsberg says. Companies must be cognizant of this and do everything possible to create a seamless customer experience during integration, but they also need to be candid with customers when they know there might be some bumps in the road.
Social media gives customers a potent platform to express their displeasure, but these same channels give companies the opportunity to communicate directly with their customers and deepen those relationships. "If this is done properly, it’s an opportunity to strengthen trust with the brand at a critical time," Salsberg says. “Increasingly, for example, we are seeing integration management offices include a customer-experience workstream.”
Cloud-based systems enable separate databases to be more easily combined. These systems can quickly add records for thousands of acquired employees, or make a copy of the records of employees who work for a division that is being spun off, Salsberg says.
Of course, the flip side is that as more and more operations become digitized and self-service in nature, the bar continues to be raised on the pace and plan to fully integrate disparate systems and maintain privacy.
With so much of every company's operations taking place digitally, cybersecurity is now a major concern during integration. "There is often a lag between when a breach happens and when it is discovered, and data breaches can create significant liability," Salsberg says. "So there is a premium on properly assessing the strength and security of the target company’s systems and firewalls.
Moreover, when combining systems, it’s critical to make sure not to weaken the acquirer's systems." Some companies even delay computer system integrations to ensure that a connecting systems won't result in a greater risk of infection.
For acquiring companies to gain full value from their acquired enterprises, they can't just run them as completely separate fiefdoms or subsidiaries. "There has to be integration on some level," Salsberg says, so that the parent company can benefit from the acquired company's talent, insights, technology and operations. And when a low-tech company acquires a high-tech one, "it's the people as much as the technology that really matters," he says.
To prevent that highly prized talent from jumping ship, acquiring companies have to treat culture as more than a vague, touchy-feely concept, Salsberg says. Culture boils down to things like how decisions get made, how meetings are run, to what extent long-term strategic planning is a component of the operating model, and even more mundane but symbolic topics such as expense policies the acquiring company can choose to change or leave alone. Companies should focus on bridging the gaps where cultural differences are most pronounced.
When large, established companies buy small high-tech startups, the acquiring companies must quickly address to what extent they will integrate the different cultures of a traditional enterprise and a startup—or risk that the talent they acquired will decide that the larger enterprise isn't a place where they can thrive and walk out the door.
"Maintaining the talent and the innovation of what you're buying doesn't happen just by using traditional integration procedures," says Salsberg.
The ultimate goal: Grow the business
Buyers almost always pay a premium for the companies they acquire. Then there are the inevitable costs of the transaction, including dis-synergies and integration costs.
There are three ways buyers can do a deal that does not create value: poor due diligence before the transaction; paying more than the company is worth; or destroying the company's value while doing the integration. Buyers create value through cost savings, new product offerings, expanded markets and a stronger balance sheet, and much of this value depends on decisions made after the deal.
"A lot of the things that can go wrong, or go right, happen during the integration," Salsberg says.
How EY can help
EY’s experienced transaction practitioners help companies across industries and sizes to develop and execute integration and value capture plans. Working alongside the Integration Management Office, EY brings leading analytics and web-based integration playbooks, a proprietary approach to target operating model design and talent selection, and a proven approach to synergy identification and capture. We also provide deep functional experience in Finance & Accounting, Tax and Working Capital; Information Technology; Human Resources; Supply Chain and Customer/Channel to each of our engagements.