Tying up M&A Strategy and Integration

A strong deal strategy doesn't guarantee success. Integration is where value is created and must be prioritized from the very beginning of a deal. In this episode of the M&A Science podcast, Darrell Heaps, CEO at Q4 Inc, discusses how to tie M&A strategy and integration together.

Tying up M&A Strategy and Integration

15 Dec
Darrell Heaps
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Tying up M&A Strategy and Integration

Tying up M&A Strategy and Integration

Deals can be a strategic fit and make a lot of financial sense, but it will only deliver value if integrated properly." - Darrell Heaps

A strong deal strategy doesn't guarantee success. Integration is where value is created and must be prioritized from the very beginning of a deal. In this episode of the M&A Science podcast, Darrell Heaps, CEO at Q4 Inc, discusses how to tie M&A strategy and integration together.

special guests

Darrell Heaps
CEO at Q4 Inc.

Hosted by

Kison Patel

Episode Transcript

Why tie integration to strategy

Many deals look good on paper. Deals can be a strategic fit and make a lot of financial sense, but it will only deliver value if integrated properly. It's all about how it gets executed after the deal.

Getting the deal done and the negotiations are the easier part. Getting the integration right to deliver on the intended value is harder. That's where the rubber hits the road and that's where you're going to deliver the revenue synergies and the cost synergies. 

If those are well planned out, executed, and managed against, you will never realize the deal's value. And deals cost a lot. They take up a huge amount of time and capital. So if you screw that up, all the value evaporates, and then you're out of time and money.

Learning the hard way

The first deal that we did went perfectly. It was just luck. It fits so well strategically and culturally. It was an adjacency in our product portfolio that made a ton of sense. So we did the deal, and it just worked. Doing M&A seemed pretty easy, and that gave us a false sense of capability. 

Our lessons came on our second deal. We didn't plan too much, we didn't know better, and things took a lot longer than expected. It costs twice as much to implement things to realize the intended value.

That left a scar, and now we've learned our lesson. We've paid the price for not planning the integration and the back end of the deal. So now we are much more purposeful when we went to our third deal, and we've gotten stronger as we've done successive deals. 

Problems encountered during M&A

It started with diligence from a broad market perspective. First of all, any deal should be driven by strategy, and the more focused the strategy is, the easier it is to measure if we should do this deal or not. 

And what usually happens is, as the company grows, there's this shiny object that the management team convinces themselves as to why it makes sense to acquire it. And that should never be the case. It should be the other way around. 

You should have an intent as to what you're trying to create, and M&A is a tool to achieve and accelerate that. We did that well on the second deal, but we didn't look if it was the best one we could go after at that time. 

And then also from a diligence perspective, we focused little on culture. 

  • Who's going to be the operating team?
  • What is the culture that they operate in?
  • How is that going to be integrated into how the business operates?

It's a soft component that doesn't show up on a spreadsheet. But that's something that we should focus on because everyone is usually on their best behavior during the deal. But once the deal's done and you're operating, you really start to see how different the cultures are. Then the execution timeline will take longer as you change people. 

The other thing was technical diligence and integration. How are we going to integrate this technology into our platform? And that was not done at the level that we needed to. We were still discovering many things post-deal.

The initial integration plan is easy to throw out the window because it's based on a false understanding of how the technology works and what we needed to do. So then everything gets reactivated, and that's where everything takes longer and costs more money. 

Kicking off integration planning

We do it using a cross-functional approach. We look at M&A as part of our operation. Larger companies have deal teams and integration teams. But we just use our management team and operating team. 

We run our M&A function with me, the CFO, and a couple of folks in the strategic finance group. Now, we do have partnerships as part of our product management groups. 

So our strategy and partnerships in corp dev sit in our product strategy group. So when we're looking to do things, we make sure that it is driven by the strategy first. We want to be able to deliver value to our customers. 

We're going to allocate capital to do this much organically, and we also earmark this much capital to accelerate plants through M&A. Then we find targets that fit within that. 

As that happens, outreach happens through someone in the product group or through myself to facilitate those conversations. Then, as that starts to harden, even before we sign an LOI, we start asking questions:

  • What does the integration look like here? 
  • What's the risk? 
  • How much risk are we taking on in doing this deal?
  • And what do we need to be prepared for?

And that's something that helps us understand how we want to structure the deal.

  • Do we even want to acquire? 
  • Are we just acquiring client contracts? 
  • Are we acquiring new technology that then we're going to integrate?

As we understand that, then we start to broaden out the team that's involved. We look at financials parallel with what it will take to deliver value. The deal team needs to understand the costs associated with realizing the intended value of the transaction, even at a high level. 

We think about the ROI of the deal and then the timing. We would do that on the front end, but it's on a surface level. Then, after signing an LOI and then digging into diligence, we have a cross-functional team built for that deal in our business.

So we would pull people from functions, depending on the deal. They will be focused on finalizing the economics of the deal but also building the integration plan before we get to close. 

  • What's the value of the deal?
  • What's the output?
  • What's the cost before we can achieve those?
  • Where are the areas of risk?
  • How can we de-risk?

Communication with the target company

We try to be as transparent as possible. We don't want them to be surprised as we get into diligence that this is what we're going to be looking at, and here are the areas that we want to prove. We want to set expectations from a process perspective.

But we're not sharing a ton at LOI regarding what will impact how to structure the deal or the value drivers. When assessing culture, look beyond the management team. Just because the leadership team gets along doesn't mean the rest of the business will get along. It doesn't work that way. 

So we want to make sure they understand that as we go through diligence, we want to understand how they operate. In many cases, culture is not given the appropriate attention it deserves. People often underestimate how important culture is to success

Like that second deal that we did, our main culture is hustle. We like to move quickly, and speed of execution is one of our biggest determinations of success. So we encourage a ready-aim-fire approach to things. 

Whereas the other business would be very analytical and slow. They will analyze and get much closer to perfection before they execute. So then you have those two cultures coming together.

One side is always hurrying up, and the other one feels like you need to be thinking things through and you need to be more analytical. And so, decision-making is at odds with those two cultures.

You can't underestimate how much that will screw things up. And then at some point, we need to clean the house to get everybody into the same culture. And that just extends the timeline, extends the cost to be able to actually get to the value.

It's not like there's one good culture. It's not bad; they're just different. Every company has its own culture. So really understanding that is one of the keys to success.

Integration planning post LOI

Depending upon the deal, we will bring in third parties to help with diligence. So whether that's from a technical perspective and certainly, accounting and legal, we're bringing on third-party firms to help us from that perspective.

But outside of that, when we're looking at our technology and integration from a confirmatory diligence perspective, the diligence team will work on the integration. It depends on the required level of integration

For example, we've done deals where we acquired customer contracts and relationships. In those cases, the team structure is very different from if we are acquiring a technology because, in that case, we are integrating billing and accounting systems. 

But we have a good idea of what that will look like very early in the process. Even before we sign an LOI, we build an investment memo that includes the strategy outline, market thesis, financial aspects of the deal, risk factors, and how risks will be mitigated to present to the board for approval.

The project management team usually does it and all of that needs to be approved and finalized before we close the deal. Depending on the deal, it is usually 10 to 15 pages, and it's pretty detailed about what we're trying to achieve.

As soon as we find something we want to go after, we build that investment memo very early.

For the investment memo that gets created more post LOI, once we get into diligence and start building out the plan, it gets pretty extensive as to how the whole project is being planned. 

And then you get multiple work streams. So you have one main work stream, and then you've got different departments impacted by the deal and their relevant work streams as to what they need to do to execute the deal.

You have to tell integration planning very early and parallel with diligence. To have an integration team that just wakes up one morning and has a deal fall into their lap to figure out is really challenging. 

They have no idea about the company and why the deal was done. And now they are asked to build an integration plan for that company. Inevitably they're going to find things very different because the deal team was not thinking about integration when they were doing diligence. 

And most M&A doesn't deliver value not because they don't have strategy but because they didn't integrate properly. 

M&A as a culture

You have to start small. Look for opportunities to do smaller deals that are easier to do. Larger deals are more complex because there are more moving parts, so start small and get a feel as to how that looks, and build from there. And then it's constant iteration and learning from there.

Getting your team comfortable with doing M&A comes with intent. Most companies that focus on organic growth do it reactively. They see this shiny object, and they want to acquire it without any previous experience and it's going to be very difficult. It is very unlikely to go well.

It's also helpful to find investors experienced in M&A. They know how to structure deals and the right advisors to bring in. They can help you decide what to build in the company and what the board should look like. 

It also goes into your hiring. As you build your team, it helps if they are experienced. It's a way to build that cultural strength around executing M&A effectively. 

When you're in a high-growth company, resources are limited, and you are allocating capital to M&A. So when you deploy it against a strategy, and it doesn't work, you can't get that money back. 

It's a big bet, so you need to ensure that you're not going to burn that money away. De-risking M&A is crucial to ensure you get returns from it. 

Preventing deal fever

We have that investment memo process where we need the board of approval. It helps because everything is tested before going ahead. No one has a blank check that we can just go ahead and acquire something. 

Picking integration lead

It's up to me and the CFO. But it's more of our CFO because she is our COO before being CFO. She's integrated into all the operations and understands the business really well. 

It's between her and me to decide who the leader will be from a project management standpoint. And then you have all the different work streams that come out after that. 

Advice for first-time Acquirers

One would be to evaluate the strategy

  • Why do you need this? 
  • What do you think the output is going to be?

And then build relationships with long-term targets. It's extremely important to build personal relationships with leaders that at some point, could be a target company and be on a first-name basis with them. 

In many cases, they can be competitors, which has been very helpful. They know you as an entity, and they can pick up the phone when you call to get through that first phase much quicker. Relationships are everything. 

Especially if you partner first. It will help you see what it's like working together before you acquire them. All things being equal, if there are a lot of potential buyers, they will choose the ones they have an existing relationship with.

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