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The #1 Post-Close M&A Challenge: Value Realization

February 3, 2024

As intensive and time-sensitive M&A due diligence activities are, the sense of victory and sigh of relief once the law firm invoices and banker commissions have been paid is…well, premature. Not the time to hang a “mission accomplished” banner. (Particularly in light of the exceptionally high M&A failure rates.)

Post-close the real work begins: integrating and aligning systems, tooling, processes, and cultures to fully realize the projected benefits of the newly combined companies. Executing well is complex, and here too, time is of the essence. The longer tooling, processes, and culture remain unaligned, the harder it will be to realize the value that prompted the merger or acquisition.

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Moreover, M&A is now about more than baseline synergies intended to improve cost structures, increase revenue, and broaden market access – difficult goals in their own right. Today, M&A is increasingly about transformational opportunities

Stakeholder perspective matters…a lot

The importance of culture, in particular – the behavioral changes that enable new ways of working – is frequently not given the attention it deserves. This is at least as important as the technology and process integrations. 

Many CEOs underestimate the complexity of shifting the combined organization to new ways of working…60 percent of acquirers expressed regret that they did not dedicate more resources to culture and change management during the integration process.
—Brian Dinneen, et al., McKinsey & Company

To position for, and ultimately obtain, transformational goals (i.e., creation of new value) requires disciplined and sustained execution and oversight beyond the 100-day plan. Successful post-M&A integration across tooling, processes, and culture is the determinant of M&A success or failure post-closing. As DealRoom notes, while all aim for success with “measurable value created…few finish” there (emphasis added)

A people-first stakeholder perspective that accounts for the entirety of the combined entities’ ecosystem (employees, customers, suppliers, et al.) is essential. This will help elucidate needed behavioral changes and illuminate opportunities for process and tooling transformations that succeed in creating ‘a whole’ that is more valuable than its parts. 

Importantly, the stakeholder perspective – especially the customer’s – will also help clarify what to leave well enough alone. Poorly contrived integration strategies can diminish the anticipated value that motivated the transaction, and worse, result in the failure of both companies. 

Achieving value-creating integrations

Writing for HBR, Graham Kenny notes, that “Your customers need to have a reason to like the new combination, which may require change as well as integration.” And while Kenny refers to external customers, acceptance is equally critical for internal customers. That is, those for whom behavioral changes, cultural integrations, and upskilling are required.

If these stakeholders, whether IT, sales, DevOps, operations, or whomever, do not understand, buy-in, and embrace the objectives and the consequent necessary changes, it is highly unlikely – even if technical integrations are successful – that anticipated value creation will occur. 

Acquisitions for portfolio diversification, where the acquired company will continue to act independently aside, mergers or acquisitions will ultimately transform the business for employees and customers alike, via new or enhanced product offerings, services, and the way those services are delivered.

For example, consider a traditional bank acquiring a fintech or its technology to create new value streams and strengthen competitive positioning through mobile banking applications and other e-services. Not only are new services offered, but traditional services and how they are delivered change as well. These changes impact sales, customer service, legal, GRC, the tech stack, cybersecurity, data privacy concerns, and more. It transforms the business model and the consequent service delivery ecosystem across all vectors. 

Success requires clear objectives, sustained focus, and agility.

Losing the focus on the desired objectives [and] failure to devise a concrete plan with suitable control[s]…can lead to the failure of any M&A deal….A careful appraisal can help to identify key employees, crucial projects and products, [and] sensitive processes…Using these critical areas, efficient processes for clear integration should be designed, aided by consulting, automation, or even outsourcing options.
—Shobit Seth, Investopedia

We have identified 4 key factors that are often overlooked and that are indispensable to post-close integrations and positioning for what is ultimately transformational value creation:

  1. A shared understanding of what success looks like

Identify key stakeholders and communicate not only why the deal is taking place at a top level, but also clearly define what success will look like. Establish a common language across the newly combined entity to inculcate a shared vision of success. This is critical to achieving buy-in and sustained engagement. 

  1. Stakeholder perspective and input 

While tone and strategic direction are set at the top, frontline stakeholder inputs are essential. Vision and strategy need to move from the conference room and spreadsheet to tactical considerations of impact on the day-to-day. This is where value is generated. The leaders of the post-close integration need to “walk the line” and observe how the proposed changes are impacting work. The efficacy of strategy and vision needs to be assessed against implementation realities.

  1. Performing initial gap analyses and periodic reassessments
    Taking into account stakeholder perspectives, the current state vs. future desired state should be clearly articulated. A detailed roadmap that takes the combined organization from existing capabilities to envisioned new operating models and values should be created. Metrics – KPIs and OKRs – are vital to demonstrating that each step of the journey is on target.

New capabilities and possibilities, how existing processes and technologies will be integrated or re-engineered to achieve them, and prioritization of initiatives must be continually assessed using TOWS (threats, opportunities, weaknesses, and strengths) and required changes agile and responsive.

  1. Agile execution
    Strategies and tactics will likely evolve as a result of both internal and external factors. Adjustments, reassessment, and shifting priorities will be required, though objectives remain constant. 

Post-merger integrations demand agile execution. As work commences, and feedback from stakeholders is incorporated, what is feasible will become clearer. New threats and new opportunities will emerge. 

With an agile integration team, iterative testing, priorities adjustment, and stakeholder responsiveness continuously validate the approach against metrics. Change management discipline and a continuous improvement model are obligatory.

Much ink has been spilled defining poorly executed post-M&A integration as the root cause of failure or success. While this is true as far as it goes, we propose that ultimately, the challenge is not one of integration (i.e., intermixing) per se, but rather one of transformation (i.e., change in form and nature): both parties to the transaction become something new. This is especially true for smaller like-size organizations. If the intention is to create new value streams and increase market responsiveness, post-merger integration requires transformational strategies to succeed. 

 Top Reasons Why M&A Deals Fail