Ernst & Young
Mitch Berlin
Deal announcements and closures dominate M&A headlines but rarely do we read about what happens in between and after.That is where the heavy lifting is, and it can dictate the deal's success.
Companies face significant challenges as they try to align on management, culture, and strategy. This can sometimes become exacerbated when there is a perceived "merger of equals" - two companies that are alike in terms of size, scale and market relevance.
But do not be fooled by the term "merger of equals," which is often misleading when you peel back the layers of each organization.
Marked differences often quickly emerge and make it clear there is no such thing as true equality between distinct organizations. And as two work feverishly to become one, divergent perceptions, strengths, and weaknesses manifest at every turn. With the stakes high, there are some critical factors to consider during sensitive points in the integration process.
Does it make sense?
Wall Street and industry observers do not automatically look favorably upon the combination of two like-size organizations. Companies must clearly and convincingly articulate why this deal makes sense because they need Wall Street and key stakeholders to get behind the deal. Companies need to communicate quickly to preempt unwanted market noise. And both companies must agree on the story about how one plus one equals more than two - including quantitative benefits, such as improved earnings, liquidity or distribution channels. It also includes the qualitative drivers, such as market share, greater R&D or vertical integration. A better story likely means greater support from all stakeholders.
Investor support can quickly gain momentum - we have seen stock prices increase in after-hours trading following a deal announcement, but we have also seen them plummet.
Defining leadership
There are countless moving parts in a transaction that can impede a smooth transition. Prioritizing the announcement of the new leadership team is key. Communication on this should happen quickly, defining executive roles and setting the tone for the new organization. This can sometimes be difficult, with inevitable internal politics and pre-existing loyalties vying to shape the new pecking order. For example, a few years ago, when the merger of two media companies was announced, the board could not come to an agreement on several key leadership positions. The deal ultimately collapsed nine months after the announcement.
To avoid a possible slowdown in productivity and synergy realization (if not an all-out deal collapse), boards and management should prioritize fact over emotion. Compare parallel roles and departments, understand relative strengths and weaknesses of executives and teams, and ultimately decide which company brings the most efficient and successful versions of each to maximize synergies. Even two market-leading companies will have clear winners when it comes to best-in-class departments and offerings. Prioritizing the goal of becoming an upper-quartile company above all else will help the new organization justify its leadership decisions and reach its full potential.After the close
Once the market noise has subsided and operation as one organization begins, there is an inevitable struggle to rationalize the deal at all levels and become comfortable with a "new normal." Maintaining employee morale and engagement is critical. Leaders must convey that the new organization serves a higher purpose than that of its predecessors. This is especially critical in a workforce dominated by millennials, a population to whom purpose is a key driver. A purpose-led transformation combined with a strong financial business case is the combination that is most likely to win the hearts and minds of a diverse group of stakeholders.
An emerging challenge post close is that of integrating two disparate cultures. Cross-sector plays are more and more frequent as companies are turning to M&A to maintain market share amid persistent disruption. It is not uncommon to see a technology company merging with an original equipment manufacturer (OEM) auto company, or a financial services company integrate a small start-up into a larger established platform. In these instances we might see, for example, a complex technology company with offshore operations merge with a traditional, institutional player who shies away from decentralized structures. Leadership must assess the landscape to determine which direction will deliver the highest returns.
As M&A becomes increasingly central to the search for sustainable growth, companies will continue to face integration challenges. Integration, especially in this age of digital technology and innovation, is equally important in all stages of a deal. A clear story of purpose, timely definition of leadership and a fact-based blueprint for the future will set an organization up for success.
Mitch Berlin leads the Operational Transaction Services group of Ernst & Young LLP, which advises companies on all aspects of merger integration including people, processes, and technology.