Maximising value from integration

Mergers & Acquisitions

M&A transactions redefine organisations and their prospects for growth. How successfully, and quickly, acquisitions are integrated will determine the winners from the losers. Richard Goold Partner, Moorhouse

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Acquiring businesses tends to happen for three main reasons: to grow, build capability or achieve cost synergies. However, it is one thing to acquire a business, it is another altogether to integrate it successfully in order to deliver the real benefits. Numerous studies have emphasised that between 70 – 90% of integration programmes fail to deliver the benefits 2 – why is this?

With this topic in mind, Moorhouse brought together integration leaders from across different industry sectors to discuss the key success factors to achieve maximum value from acquisitions. The group discussed eight key insights which are described on the following pages.

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PURPOSE OF THIS PAPER

of integration programmes fail to deliver the stated benefits. 1

1 Source: Barometer on Change 2015-16, Moorhouse2 Source: Harvard Business Review

1 Purpose of this paper

2 Key insights on maximising value from integration

10 Benefitsofa‘secondwave’ofintegration

13 Summary

16 Further information

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Simon Finnie, Group Performance Director at Kier Group and Eduardo Cesar, Director, Strategy & Process Improvement at American Express, provided their insights on maximising value from integrations.

It is inevitable that there will be resistance to change, particularly when it comes to undertaking an integration. Having a strong mandate from the Board will help the Integration Lead to overcome such obstacles. It is important that the mandate is explicit in its nature to ensure it is clearly understood and respected throughout the organisation. The senior management team must recognise that the Integration Lead has the authority of the Board and is accountable to them for the integration.

The importance of the role of the Integration Lead was recognised by the group. Selecting an individual who has significant experience of the organisation and has the endorsement of the Board will help provide the required leadership for the integration. The Integration Lead will need to know how to drive large and complex programmes to achieve the required outcomes. The group also recognised that the Integration Lead role is a dedicated, full time role – it cannot be done whilst juggling business as usual activities. He or she should have a detailed understanding of the business case for the acquisition and be able to articulate it to the broader integration team.

The group discussed that resistance to change is often driven by continuing with two management teams post completion. Power struggles between management teams need to be resolved as quickly as possible. Moving to a single management structure for the combined organisation is an important factor in moving the integration programme forward at speed.

ENSURE THE INTEGRATION LEAD HAS ASTRONGBOARD-LEVELMANDATE

Strong senior sponsorship and effective decision making are critical to integration success due to external pressures driving timelines. Eduardo Cesar American Express

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INSIGHT 1

Having an Integration Director who is empowered by the Board is critical to driving the integration process and achieving the synergies. Simon Finnie Kier Group

It is critical that the synergies, integration costs and overarching business case are mapped to the profit and loss account. The failure to link the two is the primary reason why integrations lose focus and fail to achieve their stated objectives. There is an absolute need to focus the integration teams’ minds on what has been included in the business case and how it can be delivered. Including the synergy targets on a separate line in functional P&Ls is the best way to ensure the management team are accountable for delivery of the synergy targets.

Including synergy targets in the functional P&Ls of the accountable executives was fundamental to delivering a successful integration of Mouchel into Kier. Synergy benefits of £17m significantly exceeded the original target of £10m as a direct result of maintaining focus on the numbers throughout the process.

It was recognised by the group that there was a need to quantify synergies for each workstream and develop a tracking system which would be mapped to the relevant lines in the P&L. Having a benefits tracking mechanism in place ensures that key stakeholders, such as the Integration Steering Group, are provided with regular updates on progress against the plan and realisation of the benefits.

Involving the integration team as early as possible in the deal is a key enabler to developing momentum for the integration programme. It is also important that this team consists of subject matter experts from across the business covering areas such as IT, finance, HR and operations. They are critical in developing an understanding of the key challenges for the integration, as well as driving the development of detailed and well-informed integration plans. Continuity of involvement of the integration team from pre-deal through to post completion will significantly accelerate implementation. It also supports the identification and understanding of the benefits for the acquisition. Having a separate team undertake the due diligence and then handing the baton to the integration team to take forward can lead to a number of challenges, for example the sourcing of synergy estimate data and agreeing integration requirements.

Even if specialist advisors are brought in to support the due diligence process it is important to involve internal resources. They need to act as a bridge for the integration, taking learnings from the due diligence into the integration planning phase.

The group was unanimous in recognising that investing upfront in integration planning will pay dividends in the longer term. Commitment at a senior level to moving quickly on integration is an important factor and enables momentum to be generated. Getting as much done as possible during the first 100 days post completion will help ensure long term success and delivery of the benefits.

THE SYNERGIES, COSTS ANDOVERALLBUSINESSCASEMUST BE TIED TO THE P&L

ENSURE THE INTEGRATION TEAM HAVEEARLYINVOLVEMENT

Planning is often an afterthought as the deal team are fully focussed on getting the transaction across the line. James Barraclough Clearwater International

It’s essential to focus people’s minds on the business case and how it can be delivered. The best way to get people to listen is to ‘bake’ the synergy targets into their functional budgets. Simon Finnie Kier Group

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INSIGHT 3INSIGHT 2

Having an integration playbook helps structure the integration plan and accelerate execution. It provides a checklist of activities for each business function to run through during an integration so you don’t start from scratch on every acquisition. Our aim is to get 70% of the integration completed in the first 100 days (depending on the size of the deal).

GeoffCollett AstraZeneca

Identifying the key talent who are central to a business and incentivising them to stay is essential and supports the culture of the combined organisation. Eduardo Cesar American Express

The integration of cultures from different organisations can take time and should not be rushed. It’s important to be flexible and patient.

MatthewCouch London Stock Exchange Group

All deals have a degree of momentum that should be leveraged. Employees will be expecting change from Day 1 so it’s critical to integration success to make the necessary changes as quickly and efficiently as possible. Delaying the inevitable such as streamlining of management layers will lead to more issues and cause greater disruption to the combined business. Employees will be distracted from their day to day responsibilities and implementing the changes will become harder.

The first 100 days following completion should be used to drive the integration process. The group agreed that moving at pace is key to the overall success of the integration. Typical areas of focus in those first 100 days include: implementation of the new organisation structure, consolidation of property portfolios and rationalisation of supplier contracts.

During the discussion it was noted that a number of companies have developed Integration Playbooks in order to leverage learnings from previous integration projects. These are then used as the starting point for the next integration project and updated / tailored as required. Developing detailed integration plans for each functional area and looking to execute as much as possible in the first 100 days were both regarded by the group as driving successful integration.

The importance of bringing two workforces together and merging them into one streamlined organisation structure cannot be underestimated. Employees need to be involved in the integration process, information shared and key talent retained. All of this is paramount in minimising disruption. It’s important that the workforce of the company being acquired are made to feel welcomed by their new employer.

An example of how this can work well is the approach taken by Kier Group following the acquisition of Mouchel in late 2015. On Day 1 (completion), Kier put cupcakes and welcome packs on the desks of each Mouchel employee. Also, a Kier senior manager was present at every major Mouchel site on Day 1 to welcome everyone and provide an overview of the company. This was quickly reinforced by new email addresses and office signage.

Readily available information and support for all employees, such as a welcome microsite including responses to ‘Frequently Asked Questions’, goes a long way to making employees feel positive about the organisation that they are joining. Communicating effectively and openly to employees during an integration process is vital.

Engagement of the acquired firm’s senior management team can be a challenge. People will be influenced by the attitude of their long term leaders, be it positive or negative. It may be necessary to cut ties early with some senior management from the acquired company if they are a negative influence. The discussion group agreed that the associated restructuring costs would be insignificant compared to the risk to the integration’s success.

Undertaking an organisation design as quickly as possible post completion is key to ease uncertainty amongst employees of both organisations. A detailed review of organisation structures will help to unlock headcount savings identified in the business case. Applying a standard grading structure across the combined organisation helps to identify duplicate or overlapping roles in the combined organisation.

EXPLOITANDLEVERAGEMOMENTUM

NEVERUNDERESTIMATETHECULTURAL ISSUES AND CHALLENGES

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INSIGHT 5INSIGHT 4

Internal knowledge and capability should be supplemented, where necessary, with external specialists who can bring experience and insights from other relevant programmes. They can also provide independent challenge which is not always possible internally. However they need to be brought in at the right time to contribute the most value, working closely with the internal integration team to be most effective.

The discussion around the table focussed on the importance of the Integration Programme Management Office (PMO) and having the right mix of internal and external resources. The Integration PMO is a full time commitment, both centrally and for functions such as finance, who have a key role to play in tracking costs and benefits. A core team of internal resources should be used on multiple transactions to ensure that experience and knowledge is transferred from one integration to another. Setting up the Integration PMO in the right way also drives focus. The PMO can take work from the delivery teams and key strategic resources to free them up to focus on delivery and accelerate the realisation of benefits.

GET THE RESOURCING PROFILE RIGHT

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Data management and analytics for acquisitions are becoming increasingly important. The group were in agreement that these areas require proactive management. Pre-deal, information requests tend to focus on finance, legal and compliance data requirements as well as financial requirements. Issues can arise when multiple requests for the same or similar data occur. This can lead to a loss of goodwill within the ‘target’ organisation and become a source of frustration.

Building on the integrity of the data room and maintaining one version of the truth is critical to avoid duplication and ensure that integration planning is based on robust data. Using baseline data that both management teams recognise is essential to setting off on the right foot so that the quality of the data doesn’t become a distraction to the main task.

Developing a summary Integration Dashboard can help the management team have visibility over the programme, focussing on the key metrics that will determine success. Working on the British Airways integration of bmi, Moorhouse designed a dashboard of programme performance metrics across all aspects of the programme. This provided senior BA stakeholders with visibility of key performance metrics and progress against the targeted benefits.

DATA AND INFORMATION MANAGEMENT NEED TO BE MANAGED PROPERLY

INSIGHT 7INSIGHT 6

Where possible it is important to reuse the same individuals who have been involved in previous integration programmes, as the problems and pit-falls are common across different acquisitions. Eduardo Cesar American Express

It’s vital that ‘one version of the truth’ is maintained throughout the integration process. Support and goodwill from the acquired firm should not be wasted on repeated requests for duplicate information. Simon Finnie Kier Group

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Companies are under increasing pressure to ensure their acquisitions deliver the maximum benefits. There is an initial focus of effort during the first 100 days after the deal has completed, after which integration programmes can lose momentum. A ‘second wave’ of integration effort can help to ensure delivery of the full benefits identified in the business case, as well as identifying an additional 20% of cost savings. The return on investment for undertaking a ‘second wave’ is significant. This is backed up by the senior leaders that Moorhouse has engaged with, who often cite second wave integration as the most important thing they would do differently in hindsight.

The group discussed three main factors that supporttheneedfora‘secondwave’ofactivity:

Loss of momentum A significant number of integrations start to lose focus after the first 100 days of activity. Companies focus on implementing the quick wins and the new organisation design, then focus shifts to other business priorities. This often results in the longer term integration projects not being completed such as: consolidation of systems, rationalisation of property portfolios and suppliers.

Resistance to change It is well understood that an acquisition creates uncertainty amongst employees of both organisations. This causes delays in moving forward with integration execution as employees are distracted by what the integration means for them personally and their future role. Once the roles have been confirmed individuals will be more focussed on sharing knowledge and working collaboratively to achieve a common goal.

Performance optimisation Companies often fail to consider how to optimise the performance of the combined organisation. There are areas of the business that take longer to assess and understand how they can be integrated to drive enhanced customer service. Looking at an organisation through a different lens can generate additional opportunities for savings, including: streamlining of processes and reassessment of back office activities.

It’s important for finance to maintain discipline in years two and three to ensure the full benefits of an integration are achieved. When the external focus has shifted to the next deal, operational success will need to be supported by an internal governance framework to track delivery of the benefits. MatthewCouch London Stock Exchange Group

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Opportunity of up to 20% additional

cost savings

Longer term integration projects

‘MustDo’and Quick WIns

Additional savings opportunities

‘SecondWave’Integration opportunities

Year 1 Years 2-3

Additional savings opportunities

Business Case benefits

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BENEFITSOFA‘SECONDWAVE’OF INTEGRATION

INSIGHT 8

It was clear from the discussion around the table that having a structured approach to managing integrations was key to driving them forward at pace. A number of themes were identified during the discussion which can be summarised into three areas that, if addressed properly, will determine success.

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SUMMARY

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Clarity of purposeNo two integrations are the same so being able to clearly articulate the strategic rationale for the acquisition (growth or capability enhancing) will help to define how the acquired business will be integrated. It is important to document the ‘guiding principles’ for the integration and ensure that the executive management team are aligned with the integration strategy.

Effective governance and reportingEnsure that a proper governance structure is put in place to drive the integration forward at pace, make the difficult decisions and resolve issues as quickly as possible. Putting in place an effective Integration PMO will be critical to tracking progress against integration plans and delivery of the benefits. Planning and reporting on the status of integration should be made as practical as possible.

Managing changeExperience has shown that it is critical to implement the new organisation design as quickly as possible after the acquisition has completed. It is important to recognise that ambiguity and uncertainty will exist in both organisations and develop change management plans to deal with this. Best in class employee communications will also be key. It is also essential to ensure that cultural differences between organisations are not underestimated.

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It is widely recognised that integrating two businesses is complex. Every integration programme is different and has its own unique challenges which need to be addressed. Organisations that focus on these key elements will have a much better chance of delivering a successful integration and achieving the desired outcomes.

SUMMARY CONTINUED

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Moorhouse is a management consultancy that works with major corporate and public sector organisations. We support our clients in turning their strategy into action, by providing ‘out of the ordinary’ delivery capability and by establishing a culture of change.

Moorhouse regularly runs discussion dinners and breakfast seminars that seek to draw out perspectives and to identify lessons for broader benefit.

Visit our website at moorhouseconsulting.com for more details or call 020 3004 4482

Forfurtherinformationabouthowweworkwithclientstosupporttheirintegrationandseparationprogrammes,pleasecontact:

Mike Creasey Client Director, Mergers & Acquisitions

mikecreasey@moorhouseconsulting.com

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Maximising value from integrationMHMC07-2017-01-MA-SecondWaveWhitepaper