episode 

Why is M&A Integration so Hard?

James Payne

Galina Wolinetz

M&A deals are notorious for going belly up, particularly during the integration phase. Why is it that this phase of the process is the most difficult? Kison sits down with Galina Wolinetz from Virtas Partners and James Payne from Merger Integration Consulting to discuss.

Jeff Desroches
VP of Corporate Development at Atlas Copco
Ivan Golubic
Former VP Corporate Development at Goodyear
Erik Levy
Group Head Corp Dev and M&A at DMGT PLC
Kison Patel
CEO at DealRoom

Why is M&A Integration so Hard?

21 May
with 
James Payne
Galina Wolinetz
Or Listen On:

Why is M&A Integration so Hard?

Why is M&A Integration so Hard?

Why is integration so hard?

Because after the deal is signed, most senior leaders lose interest in what happens next. They will pawn the integration off to some management team who is not prepared with no resources and other day job responsibilities.

Ensure success in integration

You have to have dedicated individuals that are focused on program management and a solid structure around how an integration program is gonna run. You can also incentivize the individuals that have a direct impact on synergies and set out a target for them to achieve, whether it’s revenue or cost synergy. 

Integration should start early

The integration team should start early in the transaction, preferably during the target selection phase of the acquisitions. This will allow them to help pick the right target, identify risks and opportunities, create an initial hypothesis of what the integration would look like, and predict what the overall integration cost is going to be to avoid surprises. 

Tools

Stop using Excel Spreadsheets. You need to start using professional program management tools that are web-based, and have the ability to interact with the target company, so they can get involved in the program management school as well. Make sure you can communicate through that tool and that it has an archive of conversation.


special guests

James Payne
Principal Consultant at Merger Integration Consulting LLC
Galina Wolinetz
Managing Director at Virtas Partners

special guests

James Payne
Principal Consultant at Merger Integration Consulting LLC
Galina Wolinetz
Managing Director at Virtas Partners

Hosted by

Kison Patel
episode 

Episode Transcript

Intro

We've all heard stories about integrations gone bad. We're quickly realizing integration is where value gets created or destroyed. We don't want to see value get destroyed. So today we're discussing why M&A integration is so hard. 

Let's kick off with a little background on yourselves. 

Galina Wolinetz: I am currently a managing director at Virtas Partners, accounting and finance consultancy firm based out in Chicago.

Majority of my experience actually goes back to a corporate environment. Prior to joining Virtas I had about 25 years in corporate development, merger integration type roles at two companies, largely 20 years with United Technologies, many of you know them today as Raytheon Technologies and with Stanley Black and Decker, which I headed up the integration management office for that company. 

So I have experience with these large corporate integrations on one hand. On the other hand Stanley Black and Decker had spent several years integrating companies of various sizes and complexity from about 20 million to over a billion where I headed up the integration team that was deployed at the time integrations were contemplated and put together.

That's my background and now at Virtas Partners, we service various partners and various clients in various sizes and different types of affiliations, whether it's a private equity, corporates, and others. 

James Payne: 've been 25 years in the information services and technology sector, including legal information technology, software, and services.

For the last six years, I've been focused on the HR, payroll services, and technology sector. I've been involved as Kison centered over 50 M&A deals that have gone at least through due diligence.  You look at a lot of stuff that doesn't even get to due diligence. I have completed over 25 acquisitions in their corresponding integrations.

Like Galina, these are mostly smaller deals, less than 100 million, and generally less than 50 million. A lot of small family-owned, owner-operated companies. Generally, I would run the operations of the acquired company post-closing during and through the integrations. I've also handled 13 divestitures, many of these with associated transition services that I ran.

For most of these deals, we use strictly internal corporate resources, but we have used consulting support for some of the larger ones. And in particular for the divestitures to help devise the break apart of the assets. 

Let's start off with what needs to be done to make sure integration is successful?

Galina Wolinetz: First and foremost, you have to acknowledge the fact that integration is a multifaceted, multifunctional, multi-dimensional project and a very complex one and that. 

What I'm finding more and more than talking to potential clients, or even from my experience in my prior life as a corporate development individual. 

Anytime there's a transaction that doesn't meet a certain threshold, it seems like it doesn't get the necessary attention or kind of level of structure or rigor that would be required for any other large transaction.

Even if we're talking about a couple of hundred million dollars, half a billion dollars, it's still a pretty sizeable capital deployment that management is putting forward. However, after the transaction gets signed, it seems like we completely lose any interest from a senior leadership standpoint, at least in any kind of level of focus from running that integration program, the transaction gets thrown over the board to some management team or whoever is able to catch it.

Inevitably, that group is either not prepared, don’t have resources. It's on top of their day job and they don't have kind of these learned out tools and resources that they should be using in order to put the integration management forward. And that's frankly, where I see a lot of the integration programs falter and just don't reach the potential and the strategic rationale and the value creation that the management team has been hoping to achieve through deploying that capital for M&A rather than other ways that they could have deployed that capital. 

That's interesting. So you're really gravitating towards this just overall size fit in the way they approach the integration in general. This sounds like there'd be multiple components within it. How you staffed it? the budget you put behind it? Maybe, if you can share a little more details on that? 

Galina Wolinetz: There's a lot of rigor that has to go into an integration program. I'm always shocked when I'm talking to a private equity firm and talking about doing a roll-up and say, well, how were you approaching? Post-transaction. And they just say, well, just let management handle will have they done this before? 

No, they really have not.  You certainly need to have a certain number of dedicated individuals that will be focused on program management. I know that the word playbook has gotten a bad rap lately. Some people think it's a little bit too rigid. Certainly doesn't cover all potential situations, but I'm a firm believer in having a real structure around how an integration program is going to run and put a lot of rigor around what types of activities need to happen throughout the integration program. 

So that you have a senior leadership focus, be you have the resources available to support the integration activities, the level of resources from a capital standpoint of budgets on that needs to be given to the integration program so they can put forward their activities in a meaningful way.

And then the level of accountability for the team. On one hand, it could be an accountability through various tracking mechanisms. How are we tracking against our work plan? How are we tracking our synergies? Are we creating value through this transaction that could be achieved through really pretty rigorous governance that you would want to set up for an integration program?

Is there a steering committee that has the ability to make decisions in a rapid manner? Those are required in this kind of very fast developing and fast-flowing program. So on the other hand, I'd say some things that have worked well for me in the past is developing an incentive program for participants in the integration program on both sides of the transaction on the acquiring side, and then inquiring side too, 

  1. Demonstrate to everyone how important the program is to leadership
  2. Provide them real incentive to perform and to draw and look under the covers and get creative, and get innovative around how we want to achieve some of the objectives that you have set pre-acquisition program.

How do you actually incentivize it from both sides of the table.

Galina Wolinetz: Almost every acquisition that I have been involved with in the last several years, we had set aside a certain level of incentive pool of cash or funding so that we can design a program around. Whether it's revenue, synergies, you know, hitting a certain threshold of synergies, whether it's revenue or cost side.

We'd define a group of individuals that have a direct impact on whether or not those objectives have been achieved.It's a very simple, ultimate goal and objective, you send those outs that the target and then individuals get paid out as those goals are achieved. 

They have some graduated way of increasing if we go above and beyond the targets and so on and so forth, you have to be really crisp and you gotta work with your HR team. 

They're directly for understanding how a program like this should be structured, but also make sure that the people that you are including have actual ability to affect the outcome and have the ability to make changes so that they are able to achieve some of these results.

Who would be the key people that you would target to incentivize? I can imagine every single person involved in the integration.

Galina Wolinetz: It will be the program management office team, the leadership team at that level. So whatever you would have, we have a PMO or IMO. And then I would say each individual functional area. 

Then the head of a functional area and again, I would say on both sides of the equation, the acquired an acquiring company and those individuals that would have the most ability to influence whether or not those synergies are achieved.

Tim, what drives success in integration? 

James Payne: There has to be management focus on the integration. And there has to be a plan that integration planning needs to start at the latest during due diligence.

You learn a lot and due diligence about the company and what the impacts might be to the integration you've got to build in those integration costs as part of the deal.

I have been with a lot of companies that seem to think that integration costs would just be absorbed by the departments that are going to be working on it. That's pretty unfair to them. And then it's hard for them to find the resources because they don't have any extra money to get the right resources working on it. 

I think you have to have that integration budget, which also helps you manage the plan. And then obviously having milestones and quantifiable goals and deliverables, and then actually tracking them.

One of the things that I've used a lot with smaller acquisitions are retention bonuses. So they're not exactly tied to the integration, but what happens a lot with smaller companies is the people you really need to retain are the ones that can find new jobs the easiest. So they're the ones that take off.

And people that may not be at the top are often the ones that stay. So we've utilized retention bonuses that simply stick around for six months and at the end of these six months, you'll get this bonus to give them time to learn about the new organization and not just leave because they've been acquired.

Does leadership really make and break success? 

James Payne: Bad management can certainly break a deal, but good management in and of itself may not be enough. So you need to have that structure in place. Having a steering committee that's made up of the leaders of the organization that have control over resources. 

A lot of times the challenge within integration is finding the resources to get the work done. Companies might have integration teams of varying sizes, but the integration team is never going to be enough to do everything.

And so you're going to need to rely on departments to find resources, to get things done and so having a steering committee that includes people that control those resources can play a big part in that. 

Galina Wolinetz: Integration is such a complex program. Unless management truly demonstrates by their actions and those actions are

  • Participating on the steering committee
  • Making decisions really fast,
  • Incentive program that clearly demonstrate that they're putting their money where their mouth are related to the success of the potential integration program 

Unless they demonstrate that through actions, not just words, that this is an important program for the company, for the shareholders or for the private equity owners, whatever is kind of the customer or some of the key stakeholders.

It's going to be very difficult to get the team to focus on it. It's going to be very difficult to get the proper resources aligned in order to ensure the program actually succeeds. I'm completely in agreement that leadership is super important and they have to demonstrate their focus and their support of the program with actions rather than words.

Kison Patel: I'm still curious about the steering committee model if that really actually helps and makes decisions get done faster?

James Payne: It's all on how you leverage the steering committee. The steering committees I would create would have the leaders of various functional groups. I would bring information to the individual members about challenges that we were having with their organization, whether it was not enough resources or problems I ran into.

The last thing I wanted to do was surprise the business unit leader with some problems at a steering committee. What you wanted to be able to do is that leader whose department is having a problem be prepared that you're going to have to bring up the issue that this department isn't getting on, or isn't where they need to be.

But you want a leader to know that that's coming and so you can say yes, and here's what we're doing to get it back on track as opposed to getting really defensive. If you structure the steering committee right and leverage it in the right way, it can do a lot to keep the project moving forward. 

Galina Wolinetz: It can look like it's just a level of bureaucracy to whom you are just presenting just to keep them happy.

But that's not how I usually utilize the steering committee. My objective is to bring topics to the steering committee rather than conversation, right? While we have 38 action items that we had to complete, we only completed 24 and therefore the first one needs to get flagged, you know, or whatever. 

We had a separate section in each of the functional representative’s presentations that would talk about what decisions do we need them to make today, specifically? And we say, here's an issue. Let's say a senior leader at a factory left the company and needs to be replaced. 

Can we deploy, a, search firm or whatever else, different types of problems that get brought up? My objective is always not to walk away from a steering committee meeting without a decision being made.

So I would circle back as we inevitably will get off on tangents and we'll talk about other things and I would always make sure that I'm the one bringing it back to, ‘okay. I need you guys to make these three, four decisions today before we walk off this meeting so that we can proceed with the program’.

It's really all about how you manage these steering committees to your advantage. And when I say you, I mean the IMO or the integration leader. 

James Payne: I agree. That's a really good point that the steering committee meetings become simply there's a status report we did A, B and C next week we're going to do D and E. You're going to lose their interest and they're going to stop showing up.

They're not going to be effective. So you need to bring to them the issues that you need them to act upon. 

Why do you think there's a tendency to pass the buck when it comes to integration? 

Galina Wolinetz: As an acquisition interacting with the other side, with multiple advisers, you know, all of that stuff, that's fun and exciting and people get hung up on that. And once that gets done, there's kind of this inevitable let down almost afterward. 

Like, okay, well, we're done now. Now what? We're kind of moving on to the next thing. And I think the biggest problem in my view is that the lack of continuity between corporate development or business development team and the integration teams.

In companies where the business development team has no touch to the integration and they're not measured on how the acquisition performs afterward. They have no ability to influence and have participation in transactions post-close. 

I think that's where you feel a lot of tendencies for things to kind of fall apart. You've got to make sure that the business development team integration team are connected in a meaningful way.

They are partners and they are facilitating each other's activities throughout the entire length of the life cycle of a transaction from strategy until post-merger integration. So that,the data gets transferred appropriately. There's a very formalized handoff between the business development team and the integration team.

And even better than that, if possible, have the business development team continue to stay involved in integration in some way so that they have the skin in the game from how the integration is going to perform. 

James Payne: The integration is hard and it's a lot of detail and it can require some tough actions, tough decisions, especially when you're trying to achieve cost synergies.

So there can be probably more on the integration side where they feel like they've been passed the buck. Especially if you're not engaging some of that integration team during the due diligence, lots of people get brought in to do the integration that isn’t part of the deal for lots of reasons. 

There can be some of that feeling like, well, I didn't get to pick these goals and these find to achieve, and it's getting dumped on me, going back to the incentives can certainly help.

It's like, ‘we think these are achievable, and here's some incentive to try to get it’. Then I think also again with a good IMO and a good steering committee structure where you can bring the business leaders back involved and say, well, your team was involved in the due diligence and they committed to this part of the deal.

So now you've got to step up and deliver it, but I think it basically gets down to doing deals is fun and exciting and the success of completing a deal, and it's probably a much shorter timeframe integration intend to string out a little bit longer, and it can feel more drudgery than the excitement of the deal 

Is integration actually difficult? Or is it the M&A process that's so taxing that by the time people get to this stage or too drained to even care?

James Payne: I think it's some of both integration can be difficult and challenging, but sometimes deals can drag on and it can be tough to get to close. 

Sometimes you got to make a lot of concessions to get to the close. That can lead to some deal fatigue and just kind of wanting to move on.

They've done the deal and they just want to be done with it and either go onto the next deal. Or just get back to their day-to-day responsibilities. And I think sometimes concerns about the buyer overpaying or the seller not getting as much as they wanted, can create deal disappointment. And I think that disappointment can sometimes impact the enthusiasm for the integration tasks that have to follow.

Galina Wolinetz: I actually don't think that integration is that difficult per se If you have the right tools, the right structure, the right team in place. I personally find it to be an exciting project in itself having been on both sides and then again, most of my career in doing the deals in acquisitions and divestitures. 

I actually have decided consciously to focus on integration because I think this is to me, the more exciting and interesting parts of actually bringing people together. Kind of actually drawing kind of the blueprint of what the combined organization is going to look like. 

Developing and kind of capturing those synergies that were very interesting to look on paper but how is it actually going to get done in practice and kind of getting to the bottom of that? To me, that's the exciting part. 

It's not easy by any means, but it's with the right structure, the right approach, the right level of enthusiasm. I think that you can bring to the project. I think it's actually even more fun than doing deals. 

James Payne: And for someone who has done it for 15 years as well, and adds lots of opportunities to. Move off integration into something else. I too chose to just keep doing integrations. I find it really exciting and enjoy it all the time.

How do you go about identifying risk in integration programs? 

Galina Wolinetz: As an integration professional being involved in the transaction early, my ideal time to get into the integration program is around the time when they're thinking here's the company we're going to buy even before due diligence. 

Before the model is being created, I want to be there very early on, involved in the conversation.Is this the right target for us?

Let's assume that we've already decided that this is the right industry for us to be in and want to expand there. Here are a few targets that we're looking at as part of our organic growth strategy. I want to be there taking a look at the information that is available, whether the company is public or private.

I want to be able to draw initial thoughts around ‘what is our integration hypothesis going to look like? What are some of the potential risks and opportunities, I guess I would say with this particular target and being involved all throughout due diligence. 

What I've usually done in the past is typically how would due diligence is run is very kind of strict functional discussion.

Each person dives into their specific functional area and comes up with risks and opportunities. And they advise the deal team about ‘here's how much you should subtract for this risk or add for this opportunity when they're developing the model.’ 

I'd like to be there early on throughout this process and represent an integration function and start talking about ‘here's what integration costs are gonna look like for you so that they can include that in the model as well.’

And so that no one is surprised that all of a sudden, Oh, by the way, it's going to cost us X, Y, Z, to restructure this factory or to put signage on look, we decided to change names and the branding strategy and all of that stuff. 

I don't want anybody to be shocked that as we close the transaction, then all of a sudden the cost of integration, these things are not cheap. So I want to make sure that we've included that in the model and that the price that we paid for the target reflects that as well. 

James Payne: We had a practice of including in the deal proposal to senior management to get approval to move forward with the deal. We always had a section at the end that was 

  • What does integration look like? 
  • How long is it going to take? 
  • What are some of the things we're going to have to face? 

So they put that front and center to make senior management that's going to approve or not approve the deal going forward to understand that integration has to be thought about. 

In some ways, the way to identify risks and integration are by what they don't have. 

  • If you don't have a good integration structure
  • If you don’t have a good infrastructure set up for integration. 
  • If you don't have detailed integration plans with quantifiable milestones, goals, synergy targets.
  • If you don't have a change management plan in place
  • If you're monitoring the base business of the acquired company, and if you start seeing changes in the base business,  that's a big red flag.  If you lose the base business, it's really hard to catch it up and get those synergies if you you've lost that base.  

Is there anything else that you would sort of immediately look for in terms of risk and integration program? 

James Payne: I'm dealing with smaller acquisitions where you're trying to decide whether the leadership of the acquired company is going to join post-acquisition, really understanding what that management team or the acquired company is thinking and what their plans are.

  • Are they going to cash out and walk away? 
  • And what is that going to do to your clients? 
  • Do you plan for them to lead the division? 
  • Are they the right people there? 
  • And if they are the right people, are they willing to stay.

 Having good conversations with the leadership team of the acquired company sharing to the extent you can, what your strategy is, are they bought into that strategy? 

Galina Wolinetz: I agree. I think a lot of it revolves around people and I'll say the word culture, one of the things, and I think you Kison had a dialogue on this topic about culture and does culture really matter. I think it matters, but I think it's something that you just need to address.

In my view, it's not anything that I would decide to do or not do transactions based on the fact that cultures are different. My approach would be:

  1. How do we address the differences and what do we put in place to ensure that both types of cultures are able to live side by side if that's the way that we want to go, or 
  2. How do we incorporate these cultures together so that they can get merged and if it's possible to do that as well. 

What tools do you actually need to run a good integration program?

Galina Wolinetz: You got to have a good program management tool. Hopefully, days are gone where we are just sharing Excel spreadsheets and just sending them around. 

I would highly recommend that the teams look at professional program management tools that are web-based, that are cloud-based, whatever it is, the ability to interact with the target company employees. So they can get involved in the program management tool as well. 

Ability to communicate through that, having some sort of archive of conversations on a particular topic. So that's one area I certainly think that it'd be worthwhile for companies to invest in and get really good at. 

I want to caution people from going overly complex. I don't want the participants in the program to learn how to fly rockets. I want them to be able to just log into something, things need to be super self-explanatory, maybe one quick training session and that should be that. 

I want to make sure that people kind of think about that and then beyond that, there are obviously other tools and I would call them tools but workshops with a tool that I use a lot before close and after the close where we would get both companies together. 

To the extent allowed by law, without gun-jumping and other things prior to close and start doing collaborative work, thinking through what our Day One is going to look like when we get there.

I want to make sure that I'm always incorporating the opinion and  the input from the acquired company because they're the ones that know their people, their tools, their processes, better than any one of us would. So those are the kinds of tools, I like using them as well. 

James Payne: There's a lot of tools out there, if your company has program management tools, they're already using that everyone's familiar with then I suggest sticking with that as opposed to going to something brand new. 

A lot of times consulting companies will bring you their tool if you hire them. I's kind of like, their lost leader and pretty much all of them have it. 

A lot of serial acquirers have created internally their own tools and then turn around and say, ‘Hey, let's sell this and make some money and pay for our IMO office.‘ So IBM has their M&A accelerator and actually is pretty good. I've used that one, Oracle's another one.

The tool is just that, it's only going to go so far if you don't have the right people in the right integration structure set up. 

So again, the steering committee and integration leader that has the right authority, it's not going to do any good to put someone in charge of the integration who doesn't either have the explicit or at least implicit authority to lead that effort. 

Because most of the people that are going to be working on the integration aren't going to be direct reports to that integration leader, just like they're not direct reports to the project manager. 

You need a strong leader in that role and someone who has the respect of the organization and is going to listen to them when he says, no, we need to do it this way, or you need to speed up your need to slow down. 

If everybody's just going to ignore the integration leader, then you know, all the tools in the world aren't going to help much. 

Have you adopted chat tools or tried using a chat tool in conjunction with the project management tool?

Galina Wolinetz: I have not yet. We largely use the tools, software type tools to manage work plans and track performance of work plans, and then track synergy. So that's really has been kind of the place where I've used it.

My objective is actually to evolve beyond that and find something that's hopefully an all-encompassing tool that would have the capability of, you know, chat as well, 

When we talk about day one being walked through that whole process and how it sets the tone for the future success or demise of the business. Love to hear your experience on that. 

Galina Wolinetz: I am a big believer that day one is absolutely the most crucial day and most important thing to get right on the integration program. It is something that truly does set the tone. 

There's so much uncertainty around integration programs for all the stakeholders involved, including employees, customers, suppliers, investors, you know, whatever.

 Day one has to be that one day where people kind of take our sigh of relief and like, ‘all right, I'm going to be that bad, you know?’ Or ‘I now understand what they're trying to do. Yes, I do agree with the strategy and I do actually think it's going to be worthwhile. And I think it's the right thing to do for the corporation.’ 

Things that I have seen in the past that worked very well as kind of a very robust focus on all-around stakeholder communication.

We spent an inordinate amount of effort on making sure that day one goes well. So the type of things that happen is a letter or email communication to customers or vendors and employees. 

However, the most impactful way to handle things and I would recommend having is a very robust day one. We usually have it minute by minute from senior leaders would get on the phone with some of the key and customers and make the phone call that says: ‘you just saw a press release. You are our most important client. This is what it means for you, this is what changes for you, this is what doesn't change for you.’

So I think that's very personal handholding through this process. For your most important clients or your most important suppliers, I would say is most important as well.

For employees, a lot of times, we try to make it into a big celebration all around the world. 

We would deploy our senior leaders to hold town halls or all-hands meetings. Again, that consistently communicates the same message throughout the whole organization. The objective there is to kind of do away with the rumor mill, right? 

Because in the absence of communication, the rumor mill will fill that gap for you very quickly. And it's not going to be what you actually want them to think. So you've got to dissuade any of those kinds of conversations as quickly as possible.

You have to make sure that business continuity is probably the most important thing. If you get everything else wrong, get the business continuity right. What that means to me is to make sure that the trains run on time on that Day One nothing falls apart.

  • employees get paid
  • customers get sent invoices
  • vendors get paid
  • employees that are traveling are able to swipe their credit card
  • employees are able to call on conference call lines, whatever's happening for both companies
  • products get shipped
  • supplies get received

All of the things have to happen and say, one of the stories I like to tell around this is when I was doing an acquisition at UTC, we had a war room and during that same timeframe, there was a big merger between two airlines.

That merger did not go well, I guess they just had that day one particular did not go well at all. So there was a Wall Street Journal article that basically described the kind of issue that they were running into and basically their communication software collapsed and there were flyers all over the world that couldn't call in and adjust their reservations.

People were stranded, planes couldn't take off like it was just a nightmare. Literally, we cut out that article from Wall Street Journal and put it on our wall in our war room. That was the guiding light of, we said this, ‘we've got to make sure that this does not happen for us.’ 

So what we did is we actually had developed a very specific kind of use cases around each individual functional area. 

We've challenged them to go out and say, ‘Hey, what could go wrong on day one for your function?’ Tell me top 10 things that can go wrong and what is your course of action to A.) fix it? And B.) make sure that doesn't happen. 

Those that I think were very successful exercises of we actually ran them as like a wargaming type of scenario. Not all transactions are going to need to get this intense. 

I mean, this was obviously a very large, massive acquisition. But some form of preparing what can go wrong on Day One, I would highly recommend thinking that through. 

James Payne: I agree with everything. Day One is one of these things where you can get it really wrong, but it's never going to be great and set the tone and it's going to ensure the success of the acquisition, but it can certainly make the future days a lot harder.

First impressions can be very lasting impressions for good or bad. So, if you make a bad impression on day one, it's going to be tough to get that over. I think it's important to set the tone for the acquired organization, as well as the acquirer’s organization.

I think one mistake I've seen companies make so many times is they come in and they're talking to the acquired staff and they say: 

Oh, we bought you because you're a great company. You're doing everything perfectly, we're not going to change a thing.’

You know, the next day everything changes. So no matter what something is going to change, whether it's who sends their paychecks, whatever it is something's going to change. 

So it's never a good idea to say nothing is going to change, recognizing that people are important and communicate to them. People aren't going to remember a lot of what you say at those initial meetings. 

So you don't want to overload them with too much important information. You want to keep it high level and you want to expect to have to repeat the information a lot. So it's communicate, communicate, and then communicate some more.

One of the other things we would always do is a master comprehensive Q&A, and then we would break it up for each group so that everybody was saying the same thing. That's another area where companies can really hurt their credibility. 

If one group of people hear one statement and another group here, something dramatically different creates mistrust and all kinds of problems there.

Kison Patel: Those are some good tips. I like the perspective of the Q&A, then I'll also like Galina mentioned that sort of inversion or pre-mortem approach when you can sort of map out everything that's going on. 

How is integration impacted when there's revenue or margin-based earnout for 12 to 24 months after closing? 

James Payne: It almost guarantees the lawsuit because there's going to be changes. So unless you've planned, they'll just let the company run. As it was before the sellers are going to claim that whatever you changed is the reason why they didn't achieve their targets. 

So either you plan to pay him out regardless, or you plan to let them run without interference. Otherwise, those earn-outs are just lawyers waiting to start a lawsuit on.

Galina Wolinetz: I agree. I try to as much as possible now putting my Corp dev hat on to not get involved in or now type of scenarios because of what Tim just said. 

Our lawyers never like it. It never ends well for various reasons and, hope to never have to get involved in those. 

How  to set up a budget for the integration project and what are the best tools to accompany these projects? And then also related is which costs need to be covered, included for the integration? 

Galina Wolinetz:  What we've done is we have a list, or I guess I should say compilations of actual costs that have happened on various integration programs on various sizes and complexity.

And we have developed a tool that basically rates a particular transaction based on size and complexity and how many locations, how many people, how many countries are involved. And it kind of gives out this convoluted rating system for each individual transaction. 

Based on that, we are able to draw on the similar type of transactions, actual cost data, and do kind of an estimation based on that as based on this type of sets of metrics about this company that we're about to acquire.

Considering size complexity and other things. Here's the type of costs that we have seen in the past from actual transactions. And we're able to prorate it or intuited on to kind of this upcoming transaction.

You're never going to get it perfectly right? But it gives you a kind of an order of magnitude that includes this type of number in the model. So that's, and again, then that will be your integration budget after the transaction closes. 

James Payne: I've relied a lot on the due diligence team. So being part of the due diligence team and doing some of the integration planning during due diligence, laying out what that high-level integration plan looks like, and then using the integration leads from the various functional groups. 

To say: ‘okay, what's it going to take for your team to deliver on that integration’ and then build a financial model from the ground up.Trying to understand that you're limited to a year or two years where you can capitalize on those expenses as part of the acquisition costs.

The challenge always is that usually, the numbers you get are a little or a lot inflated. And so there's some browbeating to go back and sa:

‘Really, that's what it's going to cost to connect the websites. Are you sure? I think my son could do it for pennies compared to what you're telling me, you need. 

So a lot of brows, they try to get some realistic numbers. 

How do you best deal with personal egos and integration? 

Example: person A was in charge of X. And now is reporting to a new person in charge of X, etc. 

James Payne: A real challenge, especially when the acquired company is a lot smaller than the company acquiring them. You get this issue of ‘we were a big fish in a little pond, and now we're looking to be a little fish in a very big pond’ and it can vary really hard.

Especially when the acquired company is giving everybody C-level titles or senior VPs or VP titles, they get moved in, and then they're told, ‘well, you're really now like a manager or director’ that can be really challenging. 

And I think that's some of the issues that the HR diligence has to address when they're interviewing the senior leadership about the fact of what role they might be interested in post-closing.

But my experience, particularly with the owners has not been good. I lobbied hard to put the owner under consulting agreement for three months or something. And my argument is you can always hire them back as an employee if they work out. 

But putting them on a consulting agreement from the beginning makes it much easier to push the person out if they become problematic. It's really hard for owners to let go and accept a new role within a larger organization. 

Can you comment on either best practices or risks involved in the integration and the context of TSA or other divestiture scenarios? What elements of these either help or hurt integration teams of programs? 

Galina Wolinetz: We would typically have a separate workstream that would be related to managing the transition service agreement activities, and varies specifically, how do we get off of the transition services? 

These things are never really intended to either have the seller make money off of, or ideally, you know, not to pay them a lot more for doing that work. 

I would put forward a specific workstream that is around how do we quickly and kind of efficiently get off the transition services end each functional area as part of their work plan needs to incorporate in there. Here are the steps I'm taking to make sure that I'm as quickly as possible. I can now start performing the services ourselves.

James Payne: One thing as the seller, you have to keep in mind is what's going to happen to your own staff. 

There's going to be staff that is clearly associated with divested assets, and it's clear they're going to go with the divested assets, but there's going to be a group of people that really aren't part of the divested assets or aren't going to go with the divested assets. 

The buyer doesn't want them, or they're just not critical to it. But it's not clear what's going to happen to their roles or maybe it's clear that their roles are going to go away after the transition services. 

Those folks immediately start looking for other positions within the company so that they know they have a role. So you really have to think through that and potentially offer some retention bonuses to those people that are in that gray area, or have those conversations with them that; 

‘You know, you can apply for a role, but you can't take it until the transition services are done’

It can become really tricky, but if all those people that are required to execute and transition services start leaving, then you can come in breach of your transition services agreement if your resources that we're supposed to actually do the transition services, start leaving. 

What are some of the steps we can take to improve the integration process as well as the mindset around integration? 

James Payne: 

  • Start integration planning early to make sure that there's a good integration program structure.
  • Make sure you have detailed integration plans 
  • Remember that people are the most important thing and they're also the most unpredictable. 
  • Have a good change management plan. 
  • Be honest with people 
  • Communicate, communicate, communicate. 

Galina Wolinetz: I completely agree with everything he just said, those are kind of important things. First and foremost, acknowledged that it's not just going to be something that you can do in addition to everything else you're doing. 

  • You've got to have to dedicate time and effort.
  • You're going to have to put in structure. 
  • You're going to have to dedicate a certain amount of resources. Not every person needs to be dedicated to this project, but a certain amount of resources has to be fully dedicated.
  • Get that leadership team support and guidance.
  • Make sure that by actions and not just words they are communicating their dedication and their kind of support for this project.

What's the craziest thing you've seen in M&A? 

James Payne: I've dealt with a lot of small companies where the owner is the leader. They don't always appreciate my coming in as the senior representative of the acquiring organization and then start calling some of the shots. 

So I had to deal with some bad actors and some of the things I've done with is unplugging my microphone when I was giving a speech at a trade show, locking us out of the offices. 

One said he was keeping a dossier on me. And then, uh, the most outrageous, I think was the former owner came to their corporate offices and went to the receptionist and said, I'm looking for ‘Tim Payne in the ass’. 

Galina Wolinetz: We were in the process of acquiring a company and we were getting ready for the first joint workshop that we were going to meet with individuals from the acquired company.

And we were, kind of dry running our presentations of we were going to share here's what our company does. Here's what their company does, and here's the purpose of this and kind of the strategy behind this acquisition. 

And so as we kind of laid out, here's what a company's and here's our financials and revenue, profitability, you know, all that stuff. The CFO of the acquired company said:

Yeah, we never ever share our financials with our employees. We just don't do that. We are a private equity-owned firm. Our employees have no idea how big the company is from a revenue standpoint. They have no idea of profitability. They've never been given targets to achieve from a financial performance standpoint.’

I was surprised that we didn't know that until then and also it surprised me and kind of changed my mindset. 

My thoughts immediately when my guys like we are a company that is so driven by financial metrics and recognition, and otherwise, we're so focused on accountability and each person and line leadership knows what they're responsible for to deliver by quarter, by month, by year.

This company has none of that. No one cares what numbers are and how do they motivate people to perform. So I had to basically devise a completely different way of thinking. 

How are we going to incorporate this part of their culture into how we manage ultimately, the combined organization? It was just something that our jaws kind of dropped to the floor.

Like interesting, not bad, but interesting. So it's something that we had to deal with. 

Ending Credits

Thank you for taking the time to explore the world of M&A with our podcast, please subscribe for more content and conversations with industry leaders. If you like our podcast, please support us by leaving a five-star review and sharing it. I enjoy hearing feedback and connecting with our listeners.

You can reach me by my email. It's kison@dealroom.net. M&A Science is sponsored by Dealroom, a project management solution for mergers and acquisitions. 

Additional educational content is available on Dealroom's blog at dealroom.net/blog. Thank you again for listening to M&A science, see you next time.

Views and opinions expressed on M&A science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.


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