How to Execute an Effective M&A Integration Handoff
Importance of an Effective Handoff
Whether you are an investment banker or strategic buyer, it's always the future performance of the business that you are excited about. So, yes, we negotiate prices and terms, but the future performance of the business is not reliant on that.
You don't want to overpay for an asset, but it's all about the business's future performance, and you get that from integration. That's where the handoff part comes in. And that handoff part is done by individuals in our organization that understand
- How to bring things together
- How to scale a business
- How to leverage the components
- How to look at two organizations, and maintain the integrity and the attractiveness of that underlying organization and make sure that you're not going to destroy its ability to realize that future performance that you were so attracted to in the beginning.
Integration is more of a preservation, and make sure you don't bury or smother the business you're bringing in. But if it's a pure consolidation play, you need to ensure that you're executing it without destroying the revenue value or trajectory.
Setting up the deal for success
At the end of the day, it all boils down to shareholder value. Over the years, we've looked back on transactions. If there's a scale consolidation play, what happens in that instance is you try to set meaningful targets, particularly EPS. This transaction in a certain period would be accretive to our shareholders and our earnings.
And after that, we try to let it go because we've integrated it into the organization. And if we need to continue publicly reporting the performance of that underlying asset, it's hard to do when we've already integrated it into our existing organization.
Sooner or later, when it's part of our overall organization, we will move on. We see the inertia, and we see the revenue growth. You can point to a particular set of clients, a particular product, which would be helpful as well.
But that's more short-term. The long-term transactions you need to think of should be driven by where you want to go, adding capabilities if you're moving into an adjacency area.
We've got to be open with our shareholders on that, and we've got to hold ourselves internally to those targets we want to hit. And we've got to pivot.
And again, projecting future performance isn't the easiest thing. And if it were easy, everybody would be doing quite well in this world in acquiring businesses, investing in certain types of technologies, or even underlying equities and fixed income.
But I would say it is something that you need to have discipline on. The question is, depending on the underlying entity you're acquiring, the discipline will vary based on the scrutiny and the rigidness of the performance that you're going to hold the teams to.
Integration can be highly complex. For example, suppose you negotiate a transaction where you're not acquiring a hundred percent of the business, or you're maintaining the management team, and you want the management team to perform to the projections that you acquired them under. In that case, it is problematic if you have earnouts.
You need to ensure that everybody's working together and they're rowing in the same direction in the boat because they will be concerned with hitting their targets.
Pillars of an effective handoff
It starts with the business sponsor. I can run valuations in my sleep. I can look at projections, and we can boil them down, can calculate them down to what we think the impact for the shareholder will be on an earning-for-share basis. However, if we don't have a strong sponsor backing up this plan and building it, it's all for nothing.
And when I say sponsor from the business side, someone who's going to manage and run it and bring it into the organization. That's very critical. Without a business sponsor, things don't normally get done. But, there are also times when an opportunity arises and it starts to wane down because no one is supporting the deal.
And the other pillar is the strategic vision. The strategic vision takes conviction, a little expertise, and an understanding of the target business and where the industry's going. So the business sponsor has to have that vision and conviction but it also needs to fit within the strategy. And that's what we work on every day.
- We work on the strategic vision.
- We work on where the industry's going.
- We work on where competitors are.
- We do competitor analysis.
- We also talk every day to our clients.
- Understanding the industry trends that are happening.
Incorporating all of those in our strategic vision, I think is very critical and understanding in terms of assessing a transaction that comes in front of us. Whether that's going to help us get where we think the market's going or the clients' needs in the future. So strategic vision is critical.
People Alignment is also another. CEOs often don't want to be the ultimate decision-makers because they are there to guide people and ensure that we're all working in concert with each other.
But capital is not infinite; senior management teams often fight for that capital, even though everyone wants shareholder value. Most of the management team should be behind the underlying acquisitions for it to succeed.
If they are not, it might be difficult to get things done in the future. There may be some angst or impediments that may rise, and you will need their help. They need to feel like they are part of the company's future vision and need to be bought in to drive and enhance shareholder value to really make it work.
Getting people on board
When evaluating an opportunity, we're in control of the actual team that manages the valuation, the negotiation, the due diligence, and, obviously the execution after that. So when we are working hand in hand with the business unit sponsor, When there is uncertainty or questions about the investment, we have an open meeting with the management team. Or we can go to the individual stakeholders and address their concerns.
We have a very extensive M&A process in which we evaluate opportunities and there are different stages. There is a senior management team that opines on whether we want to move forward with a non-binding bid to get into the round to at least have a look at it. And at that point, you get feedback.
So now we get a few things we need to address in the next round when they open up the virtual data room and discuss their concerns. Then we decide whether we want to move forward.
If it's a significant enough transaction just by our corporate governance, we must go up to the board. We're a bank. We have great controls; we're very transparent. We need to make sure that we're following the right governance standards. We've got an audit team. We've got regulators and external auditors that have to ensure that we're effectively abiding by our standards obviously because we're a publicly traded company.
How to ensure dedication from the Business Leader?
It's a process. If the business unit leader is effectively communicating with their team and conveying their vision and process, it's a good sign. It's a combination of their interaction with their team and ensuring they are not missing anything.
And when we start getting involved, their team becomes the core team from an operational perspective, and we work with them very closely daily. You have to make sure that the projections are realistic and attainable.
Building Relationships with BU Leaders
It's all about building and gaining their respect where they realize that you will point out the areas they should be concerned about and guide them properly during the deal. It takes time.
What's key is understanding that you are not an expert on everything and when there are issues that are out of your expertise, you should advise them to get experts right away to assess the situation.
You will gain the respect of the business unit sponsor when you're helping them address all these things in a normal transaction. So you have to be very transparent while working with them.
It's like a partnership; we have healthy debates. They get a little bit loud. We have an organization where people feel like they can speak up and speak out, and that's the environment you need in an M&A type of transaction.
Handing off to Integration
It varies. Some transactions don't require a heavy amount of integration, and the terms were pretty vanilla; then we are only there for advice to ensure that if anything arises in the indemnity period and the liability period that we negotiated, then we get actively involved.
It also depends on the nature of the indemnities that we find in diligence. So if there are very specific indemnities on a transaction, then we probably are involved until that indemnity period runs out.
And then from an integration perspective, they have synergy projections, expenses, and assumptions that come back to us to the original model. So we tend to be more actively involved in those at-scale consolidation places than we are in something that's maybe a little more plain vanilla.
We seek external consultants to help set us up in terms of where to structure the integration and how it should be organized.
We have many individuals who have been through many of these transactions. So the intelligence and the know-how of what we have is pretty deep in the organization. But we do ask for assistance in terms of speed.
So I think we're willing to at least get the office up and the integration office, the integration team up and running, and many instances on a global scale. We take out the playbooks we used before and don't adhere to every playbook. We know we have to customize it based on the underlying organization. And if we need to act quickly, we will seek external third-party help.
But we do believe that the success of the underlying integration is more realizable if it's being done by our actual core team than actually outsourcing it to some third-party provider. So in most instances, we set it up within the business unit.
They're knowledgeable individuals. They come from various different backgrounds. They're out of the business and wear different hats. So they have a deep knowledge of the underlying business. Still, they're also part of the integration and part of that team that's being built up for the base period of bringing that business on hand or consolidating that business into State Street.
Aligning the Strategic Rationale
I work closely with a strategic corporate development team that deals more with projections.
- Where is the business currently?
- Where's the industry going?
- Eyes and ears constantly assessing our organization
- Constantly assessing the markets
- Constantly assessing client behaviors and client needs.
They work with us to ensure that the strategic vision that's put forth for that transaction is in the box or in the circle of where they believe that the business is going. That's a nice check, but then continuing to monitor it in terms of capabilities where we think we're going.
And it's a good check because it helps us assess whether certain organizational capabilities are being utilized to full capacity. So constant evaluation and communication help bring the capabilities of the overall organization together to ensure that we're not going to go acquire something that we already keep in-house capability or something similar.
For in-flight deals, the strategic team goes through the strategy on a very periodic basis. So there's communication throughout the organization regarding reaffirming our strategy as we go through it.
Also, Suppose you have to push the strategic vision down that far and ensure that strategic vision's being carried out. In that case, I don't think that was the right decision or the right investment or acquisition to make then.
I think it should not be autopilot. If the market shifts or client needs shift, then you have to, you have to pivot and decide what you want to do. But if you have to push your strategic vision continually after that, then I question whether that's the right decision in the first place.
Buy-Side and Sell-Side Alignment
We have high standards in terms of our governance and what we need to do. And we need to be very transparent with our clients. Culture matters a lot. Certain businesses out there, they'll be fine. However, they probably don't operate near the standard of where we operate in terms of governance, adhering to compliance, and all the risk management capabilities.
So that's critical for us. And I think it's when we go in and talk to particular opportunities, sometimes we know in the first half hour, and we're having a conversation and we're starting to exchange information on the types of company or what that company's underlying performance or business may be.
It's known pretty quickly whether they're managing at a level that is below our standards. And the question is can we get them up to the standards if we bring them in the organization? But in some instances, it's a bridge too far.
So it's people. We need very quality talent. We're not acquiring things and totally eradicating the labor of the underlying business. We need that intellectual firepower to come along with the transaction. So that's something we are very focused on, particularly at the beginning of the transaction.
It's the nature of the underlying business, and you've got to understand what drives the business's success.
If you're buying a software capability, you got to make sure that you understand why they attract that talent. What is it that the talent really enjoys being part of that organization? And you don't want to crush it if you come in and acquire it. So that's something that you have to think about to preserve.
Otherwise, you lose that advantage. You lose that capability; you lose that intellectual firepower and know-how.
- Look at the underlying organization.
- Understand what it is that they do?
- How important the creative mindset and the intellectual firepower of that organization is?
And you've got to take it from there to ensure you can preserve it. Some of our businesses are processing. We need more operators, and we need creativity.
So you got to adapt for each transaction and look at it and understand how important it was to the underlying organization and whether that aligns with your ultimate culture. Otherwise, it's just never going to reconcile.
A lot of it is interaction. It's not different from just human interaction and how you meet people that you enjoy being with. So you've really got to understand what you're buying. And the more time you spend with them, the better off you are.
It's harder in a competitive process, but I think it's something that you should at least demand the minimum interaction and not push forward if you don't have that.
Complexities of Deals
If you're moving away from the core, maybe you're moving into an adjacent area; number one, expense synergies are probably not anywhere near as what you would get from a core acquisition. So ultimately, right there and alone, you've lost one of your levers that you utilize for a core transaction. So financially, it gets a little bit more difficult.
Revenue synergies come more into play. If they're not, it's not completely separated from our core business, but it's a capability that will generate additional revenue synergies.
We know revenue synergies are harder to realize because they get discounted more. And then, if you're acquiring something that might be in a higher multiple valuation range, then say a multiple bank valuation, how do you convince your shareholders this is the way to go?
Then, a debate comes in where a core deal is easy to do but not always available.