What is M&A Integration
There are a lot of reasons why companies do M&A. But unless a company is buying a business and selling its parts (a.k.a asset stripping), or doing an arbitrage, M&A integration will almost certainly occur. It’s arguably the most important part of your entire acquisition as it will dictate what kind of returns you will be getting from your investment.
M&A integration or Post-merger integration (PMI) is the process of connecting two or more separate companies to perform and operate together. The purpose is to achieve the intended synergies of the deal and to maximize its predicted value. The same process is sometimes referred to as post acquisition integration.
Why is M&A Integration important?
Let’s say you bought a company and left it alone. You will only get the revenue of the previous owner, yet you paid a huge amount of money in getting the business. There would be no point in buying that business unless you intend to sell it for a higher price. Integration needs to happen if you were to achieve deal value, especially for strategic acquirers. In fact, M&A Integration should be a part of your strategy as to why you bought the company in the first place.
If a company wants to achieve economies of scale, there would be some form of integration that needs to happen in the purchasing department. If a company wants to achieve revenue synergies, there would be an integration in the marketing and sales department. Integration is where you can make or break the value of the M&A deal.
However, integration is never easy. M&A integration is where you invoke changes in the newly acquired company, and it makes everything complicated. People inherently do not like change, and this generates risks of losing key employees in the process.
The simplest example of this is the organizational structure of a company. We all know that there can only be one CEO, President, CFO, or any other important roles in an organization. This can easily result in retention problems as some people refuse to get demoted, which is inevitable in an acquisition.
Aside from losing key employees, there are also other integration risks that you need to be aware of. The simplest example would be the classic bureaucracies of large organizations placed upon a small business. A small business can be impulsive and just purchase stocks whenever they want. A large organization, however, will have layers of approval processes before a purchase can be made. This will halt the operation of the small business. This is a common risk that if goes unmitigated, will most likely destroy the small business, and the entire deal value of the acquisition. This is why integration planning needs to start as early as possible.
Types of M&A Integration
The number of integration risks is a product of the level of integration the acquirer wants to implement. This is purely based on the strategy of the acquisition and what they want to do with the company post-close. These are the common acquisition or integration strategies in the market:
This is the least used strategy in the M&A industry. In this type of integration, the buyer has decided that the acquired business will be disrupted, and will lose value, if they integrate anything.
The buyer only gains control of the cash, and will require additional reporting of financial statements to the parent company. The buyer allows the target company to retain its culture and operation that made it successful in the first place.
The synergies on these types of transactions will come from mentorship and shared capabilities. The buyer believes that they can impart wisdom and some capabilities that the target company can fully utilize to achieve exponential growth.
This is oftentimes referred to as “light-touch” integration. This approach allows the acquirer to capture some synergies without disrupting the operation of the target company and risking its revenue.
In this scenario, the acquirer integrates selected functions that they deem necessary to capture synergies, without touching the operational part of the business. The most commonly integrated functions are the back office operations and changes in the management and organizational structure of the target company.
Probably the most popular integration strategy of all. In this scenario, the target company loses all his identity as the buyer absorbs it inside their organization. This is oftentimes referred to as tuck-ins, or absorption.
This kind of integration might be harder to execute, but allows the buyer to enjoy more efficiency, economies of scale, and any other kinds of benefits.
If you are still not clear of what integration is and how to implement it, here are some examples of what integration looks like from each functional perspective. Just as previously stated, M&A integration is optional, and the buyer can opt to integrate certain functions and leave the others alone.
This is probably one of the most common functional integration that involves the payroll system of the target company. The new management will need to combine all the activities related to managing employees. The acquirer should be able to track, pay, and manage the newly acquired employees, especially if there will be new policies, compensation and benefits introduced to the incoming company.
There are also instances where the recruiting and hiring process of the organization is integrated. The target company will no longer have the capability of conducting their own hiring process, and all applicants must go through the parent company to get hired.
Accounting and Finance
As the new owner, it’s only logical that the buyer gain access to the financial reporting of the business. The acquired business will be required to report their financial performance to the company for a certain period of time, depending on the demands of the buyer.
Control of cash is also fairly obvious. Depending on the level of integration and the set up that the acquirer wants to happen, the parent company will have the final say whether or not the business can spend cash. In most cases, the acquired company will have autonomy on a certain threshold, but will have to ask for permission if the expense will exceed that limit.
If the acquirer is looking to enjoy economies of scale, then integrating the purchasing department is a must. In some cases, integrating this department will also increase efficiency. This is very common in acquisitions in the same industry, oftentimes, competitors.
In this type of integration, the target company will lose its authority to purchase raw materials or any other types of equipment. They will have to go through the parent company and wait for approval of the purchase request.
Imagine a small private company, who puts all their transactional records in a book or a ledger, suddenly acquired by a fortune 500 company. The acquirer will certainly have no interest in keeping that record system, especially if the private company will be reporting its performance to the buyer.
Usually, when a bigger company acquires a small company, their technology equipment and systems are not on the same level. Integrating this function would mean spending money and making sure that their systems are able to communicate with each other; which includes hardware and software.
Marketing and Sales department
This type of functional integration is where revenue synergies come in. Both companies will now share products and services, including the marketing and promotion. You will often see this when products that used to be standalone, are now bundled with a different product.
Sales people are also included in this integration. The sales people in the acquired company will now be educated on the products of the parent company, and vice versa, so they can sell the product effectively in the market. This is often referred to as the Go-to-Market Strategy.
There are a lot of ways to integrate an acquired company into the mothership. But no matter what the buyer has decided to do, the most important thing to remember are the risks of M&A integration. With every action, there is an equal reaction. The target company has been operating in a certain way for a reason, and changing that will have consequences. Change is not necessarily bad as long as they are intentional, and calculated. These risks should be uncovered during the diligence process, and should be mitigated early on.