Why is M&A Integration so Hard?

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.

Why is M&A Integration so Hard?

21 May
James Payne
Galina Wolinetz
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Why is M&A Integration so Hard?

Why is M&A Integration so Hard?

"The biggest problem is the lack of continuity between the corporate development team and the integration team." - Galina Wolinetz

In this episode, James Timothy Payne, JD, MBA Principal Consultant at Merger Integration Consulting, LLC, and Galina Wolinetz, Managing Director at Virtas Partners M&A Integration | Separations, talk about why integration is so hard. 

Galina and James discuss what makes integration difficult, ensuring success during integration, and the necessary tools to make your deals more efficient.

special guests

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

Hosted by

Kison Patel

Episode Transcript

Text Version of the Interview

How to make integration successful?

GW: First and foremost, you have to acknowledge that integration is a multifaceted, multifunctional, multi-dimensional project that is very complex. 

And from my experience, anytime there's a transaction that doesn't meet a certain threshold of size, it seems like it doesn't get the necessary attention or the level of structure that would be required for any other large transaction.

After the transaction gets signed, senior leadership often loses interest and focus on running that integration program. So the transaction gets thrown over the board to some management team or whoever can catch it.

Inevitably, that group is either not prepared, doesn't have resources, and it's on top of their day job, and they don't have the tools and resources they need to put the integration management forward. 

And that's where I see a lot of the integration programs falter and don't reach the potential, strategic rationale, and value creation that the management team has been hoping to achieve.

There's a lot of rigor that has to go into an integration program. I'm always shocked when talking to a private equity firm, and they're talking about doing a roll-up. And they let the management team handle post-transaction who has no experience whatsoever. 

You need to have a certain number of dedicated individuals that will be focused on program management. I'm a firm believer in having a real structure around how an integration program will run and what types of activities need to happen throughout the integration program so that you have a focused senior leadership, have the resources available, and have the level of accountability for the team. 

  • How are we tracking our work plan?
  • How are we monitoring synergies?
  • Are we creating value through this transaction?
  • Is there a steering committee that can make decisions fast?

JP: For me, there has to be a management focus on the integration. And an integration plan that needs to start, at the latest, during due diligence. You learn a lot in due diligence about the company and what the impacts might be to the integration. And you've got to build in those integration costs as part of the deal. 

I have been with many 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. So you need to have that integration budget, which also helps you manage the plan.

Having and tracking milestones and quantifiable goals and deliverables are also needed.

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

People that may not be at the top are often the ones that stay. So we've utilized retention bonuses to make them stick around for six months to give them time to learn about the new organization and not just leave because they've been acquired.

Incentivizing the Integration Team

GW: One thing that has worked well for me is developing an incentive program for participants in the integration program on both sides of the transaction. 

This is to demonstrate to everyone how important the program is to leadership. Also, to provide them real incentive to perform and be creative about achieving some of the objectives you have set for the acquisition program.

In almost every acquisition that I have been involved in, we set aside a certain incentive level to design a program around hitting certain levels of synergies.  

We would define a group of individuals that directly impact whether or not those objectives have been achieved. It's straightforward. You set goals, and then individuals get paid out as those goals are achieved. 

You have to work with your HR team to understand how a program like this should be structured directly. And also to make sure that the people included can affect the outcome and have the ability to make changes to achieve some of these results.

Usually, it would be the program management office team or the integration management office, depending on what you have. And also each of the heads of the functional area of both sides of the deal. They have the most ability to influence the synergies.

Does Leadership Make and Break Success? 

JP: Bad management can certainly break a deal, but good management in and of itself may not be enough. You need to have that structure in place and have a steering committee 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 will never be enough to do everything.

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

GW: I agree. Integration is a complex program, and management needs to demonstrate their seriousness, like participating on the committee, making fast decisions, and giving an incentive program.

Unless they are serious, it will be very difficult to get the team to focus on it and align the proper resources to ensure the program succeeds. 

Don't Steering Committee Add More Work?

JP: It's how you leverage the steering committee. The steering committees that 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.

The last thing I want to do is to surprise the business unit leader with some problems at a steering committee. The leaders of those departments need to be prepared for the issue.

If you structure the steering committee right and leverage it right, it can do a lot to keep the project moving forward. 

GW: It can look like it's just a level of bureaucracy to whom you are just presenting 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. 

My objective is always not to walk away from a steering committee meeting without a decision being made. It's all about how an IMO or integration leader manages these steering committees to your advantage.

Passing the Buck  

GW: As an M&A practitioner, having been on the deal side, I can safely say that we all enjoy what we're doing. And once the deal is done, there's an inevitable letdown. Everybody wants to move on to the next thing.  

The biggest problem is the lack of continuity between corporate development or business development teams 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 cannot influence and participate in transactions post-close. That is where you feel a lot of tendencies for things to fall apart. 

You've got to make sure that the business development team and the integration teams are connected in a meaningful way. They are partners and facilitate each other's activities throughout the entire life cycle, from strategy until post-merger integration. 

In that way, 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 somehow so that they have the skin in the game from how the integration will perform. 

JP: The Integration is hard because it has a lot of detail and requires some tough actions, especially when trying to achieve cost synergies. So the integration side may feel like they've been passed the buck. 

Especially if you're not engaging some of that integration team during the due diligence, and many people get brought in to do the integration that isn't part of the deal for many reasons. They can start to feel that they didn't pick these goals and are now responsible for achieving them. This is where incentives can certainly help.

It also helps when you have a good IMO and a good steering committee structure where you can bring the business leaders back involved and remind them that their team was involved in the due diligence and committed to this part of the deal. So now they have to step up and deliver.

What leads to Burnout?

JP: Integration and the entire M&A process can be challenging. Sometimes deals can drag on, and it can be tough to close. Sometimes you need to make a lot of concessions to get to the close, which can lead to some deal fatigue and just wanting to move on.

Sometimes concerns about the buyer overpaying or the seller not getting as much as they wanted can create deal disappointment. And that disappointment can impact the enthusiasm for the integration tasks that have to follow.

Identifying Risks

GW: As an integration professional, I should be involved in the transaction early. Ideally, I should be involved before due diligence and before the model is created. I want to see the available information and why they think this is the right target to buy. 

This way, I will know what our integration hypothesis will look like and start thinking about the risks of buying that company. 

During your typical diligence, I'd like to be there and represent the integration function and start talking about integration costs for them to include that in their model so that no one is surprised at the costs post-close. 

JP: We make it a habit of including what the integration will look like in our deal proposal to the senior management team. We make sure that we put that front and center before they decide whether to approve or not approve the deal. 

But the way we identify risks in integration is by looking at what they don't have.

  • If they don't have a good integration structure 
  • If they don't have an infrastructure set up.
  • If they don't have a detailed integration plan with quantifiable milestones and goals
  • Do they have a change management plan in place?
  • Are there sudden changes in the base business?

But the immediate risk that you should be looking at is whether the acquired leadership team is planning to join the company or not.

GW: I agree. A lot of it revolves around people and culture.  I think culture matters, but it's just something that you need to address. It's not a deal-breaker. My approach would be to address the differences and ensure that both cultures can live side by side or incorporate these cultures together to merge.

Tools for Integration

GW: You need 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 teams look at professional program management tools that are web-based or cloud-based. Such tools can interact with the target company employees to get involved in the program management tool as well. 

I want to caution people from going overly complex. I want participants to be able to log into something. It needs to be super self-explanatory and very easy to learn. 

I also use workshops before and after close, where we would get both companies together and start thinking about what day one would look like. I always make sure that I'm incorporating the opinion and input of the acquired company because they are the ones that know their people, tools, processes better than any one of us. 

JP: I agree. There are a lot of tools out there. But the tool will only go so far if you don't have the right people and the right integration structure set up. So you need the right steering committee and an integration leader that has the right authority to lead that effort. 

You need a strong leader in that role and someone who respects the organization and is going to listen to them. 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.

Day One

GW: I believe that day one is the most crucial thing to get right on the integration program. There's so much uncertainty around integration programs for all the stakeholders involved, and it needs to go well. 

What I have seen in the past that worked very well is a robust focus on all-around stakeholder communication. The most impactful way to handle things is to call your customers and explain what will change and what doesn't. 

For employees, a lot of times, we try to make it into a big celebration. We would deploy our senior leaders worldwide to hold town halls or all-hands meetings to communicate the same message consistently throughout the whole organization. 

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

When all else fails, ensure that the train runs on time on Day One and that nothing falls apart.

JP: Day One is one of these things where you can get it wrong, but it's never going to be great. It will never ensure the success of the acquisition, but it can certainly make the future days a lot harder.

First impressions can last a long time, for good or bad. It's important to set the tone for the acquired organization and the acquirer's organization.

One mistake I've seen companies make is they come in and promise the acquired company that nothing is going to change. It's never a good idea to say nothing will change because something is always going to change. 

People aren't going to remember a lot of what you say at those initial meetings. You don't want to overload them with too much important information, and you want to keep it high level and expect to have to repeat the news a lot.

One of the other things we would always do is a master comprehensive Q&A. We would break it up for each group to say the same thing to be consistent. It can hurt your credibility if one group says something else and another group says another. 

Earnouts on Integration

JP: It almost guarantees a lawsuit because there are going to be changes in the organization. So unless you've planned to let the company run on a standalone basis, 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 earnouts are just lawyers waiting to start a lawsuit.

Setting Up Integration Budget 

GW: We have a list of compilations of actual costs that have happened on various integration programs of various sizes and complexity. And we have developed a tool that basically rates a particular transaction based on size, complexity, geography, and things like that. 

And based on that, we can draw actual cost data on similar types of previous transactions and go from there. 

You're never going to get it perfectly right, but it gives you an order of magnitude that includes this type of number in the model. Then that will be your integration budget after the transaction closes. 

JP: I've relied a lot on the due diligence team. As I'm working on the integration plan during diligence, I ask the integration leads from the various functional groups to build a financial model from the ground up based on the things that they need to deliver the integration plan. And the challenge is always around coming up with realistic numbers.

Dealing with Egos

JP: This is a real challenge, especially when the acquired company is much 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 be really hard.

Especially if the acquired company is giving everyone a C-level title or senior VPs and suddenly, they became managers. This also poses a problem. 

The HR diligence has to address some of the issues when interviewing the senior leadership about the role they will be interested in post-closing. But my experience, particularly with the owners, has not been good. 

I always like to put the owner under a consulting agreement for three months because you can always hire them back as an employee if they work out. 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. 

How does TSA hurt integration?

GW: We would typically have a separate workstream related to managing the transition service agreement activities and how we will get off the TSA.

JP: As the seller, you have to keep in mind what will happen to your own staff. There's going to be staff associated with divested assets, but there's going to be a group of people who really aren't part of the divested assets.

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

Those people will immediately start looking for other positions within the company to know they have a role. So you have to think through that and potentially offer some retention bonuses to those in that gray area.

It can become tricky, but if all those required to execute the TSA start leaving? Then you can come in breach of your transition services agreement if the resources that we're supposed to do the transition services are gone. 

Improving the Integration Process

JP: You have to start integration planning early and make sure that there's a good integration program structure and that you have detailed integration plans. 

Remember that people are the most important thing, and they're also the most unpredictable, so you need to have a good change management plan and be honest with people. 

GW: Also, you have to acknowledge 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 also need to put in structure and have to dedicate a certain amount of resources. Not every person needs to be dedicated to this project, but a certain amount of resources must be fully dedicated. 

And get that leadership team support and guidance. 

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