Merger and acquisition – M&A - is the ‘ultimate change programme’. It is often high profile, always disruptive, and carries a large degree of risk. You need to manage the risk, and to do that, you have to approach the whole process in a practical and people-centred way explains David Axon, head of private equity and M&A at Celerant Consulting.
Merger and acquisition – understanding the workstream
With a focus on understanding the ways people and organisations really work, M&A can be a step to major increases in shareholder value and customer satisfaction. It has been said that the hard work begins after the deal has been signed. In reality, the M&A process should be looked at in terms of (equally important) ‘upstream’ and ‘downstream’ components. Upstream activity includes all pre-negotiations and due diligence. Downstream activity is the action required to make the deal work in practice.
Why are you doing it?
Upstream, it is vital to have a robust understanding of why the M&A is being considered. Are you acquiring a new or extended customer base? Are you reducing costs over time? Are you gaining access to innovation, or to fresh or previously closed markets? The answers should directly influence the way you carry out all your upstream M&A activity, from clarifying your strategy to selecting entities for acquisition.
Understand what’s behind the numbers
Analysis of the key components of the M&A – typically two currently separate businesses – needs to include more than historical financial performance. Of course the
numbers matter. But, on their own, they will not give real insight into how they are achieved on the shopfloor.
Some of the answers will be provided by thorough groundwork. It is important to know the degree of alignment – or otherwise – between the key physical elements of the businesses. These include IT systems, supply chain and environmental practice.
But our experience is that, ultimately, the process of integrating two businesses will either be enabled or (severely) impeded by ‘cultural fit’. What is it and what does it mean?
‘Culture’ means what?
The culture of an organisation is a combination of working environment, working practices, levels of manager commitment and staff buy-in to common goals. There are
techniques available to assess all these key attributes. This should be done before the acquisition. That way, cultural strengths and weaknesses are known, and understood,
along with all the other key areas of the operation. And there are fewer ‘surprises’.
The upstream, pre-deal analysis should be as comprehensive as possible. It must fully test the operational (including cultural) assumption that the businesses are capable of
working together, to create increased value.
Clearly identify the risks and vulnerabilities in the business plan. This includes the issue of whether two geographically, and perhaps culturally, separate groups of people will interact successfully post-M&A.
Start to determine a robust integration plan. Factor in the potential for increased value (including cost avoidance,cost reduction, and business performance improvement).
Acquisitions: try before you buy
Knowing precisely how you intend to make things better before you buy is crucial to maximising the value to you of any intended acquisition. In short, understand clearly what needs to go, what needs to stay, what is missing and what needs to change – including culture.
Roles and responsibilities, and the decision making framework, have to be clearly articulated and strongly communicated. Dispel confusion with total clarity. The M&A process is a unique chance to ‘get it right’ with the work culture, so don’t create or substitute a regime of complication and confusion.
Successful integration starts with good information
Good levels of management information, leading to visibility and control of business performance, are vital. At the time the M&A goes live, critical business controls must be in place to ensure that you understand, and then effectively manage, all key business risks.
To avoid unnecessary disruption, use existing business performance metrics where possible. But, whether existing or newly developed, you must have accurate and appropriate key performance indicators (KPIs). These should relate specifically to revenue, cost, productivity, process, employees, customers and markets.
Don’t assume success: measure it
Have the KPIs in place, yielding accurate and timely information. Act on this quickly. Assume nothing. Ensure you know whether the M&A integration is succeeding immediately. Or, if not, be ready with practical steps to help it succeed. In summary, you need to: know what you need to measure; know how to measure it; know how to
interpret the measurements; and know how to turn your understanding and insight into fast corrective actions.
Three routes to making the most of people
Throughout, keep people front of mind. If you want new, and better, levels of performance from people in the post-M&A environment, you have to do a minimum of three things.
First, you have to ask for better performance. Do this explicitly, and in ways that people understand. Don’t work in a climate of vague expectations; make both the demands and the opportunities very clear. Second, you have to make it possible for people to deliver: obstacles such as defective process have to be identified, understood and removed. Third, you have to understand and acknowledge individuals’ points of view and their
An M&A, as ‘the ultimate change programme’, often poses the ultimate threat to job security, peace of mind, morale and commitment. The unease can usually be dispelled simply by communicating with people regularly and honestly. And
if there is bad news, such as headcount reduction, think about its likely impact early. Be ready to handle it before you make any announcements.
By taking the approaches described here in the upstream phase, you should arrive downstream of the deal being signed in good shape.
You should be ready to make the most of the human capital, and the collective experience, that the newlyintegrated businesses represent. The challenge now is to make the pieces fit together and yield higher value than was possible pre-M&A.
Making integration work: an operational challenge
The challenge is, above all, operational. Especially in manufacturing, where there are typically more people and more processes to be integrated than you would find say in
the worlds of software development or advertising.
The key is to set the tone of the integration from the very start. When, for example, one chemical company created a billion dollar plus single product manufacturing capability
through acquisition, it worked well in advance of operational go-live to ensure it hit the ground running.
Preparation delivers results
More than a dozen integration teams were established, composed of carefully chosen employees from both the previously separate companies. They began looking at
how to achieve cultural fit and practical integration a full month before the deal was finally signed. This intensive groundwork transformed the upstream paper benefits of
the M&A into a series of measurable gains. These occurred in key areas, from combined sales force effectiveness to rental on premises.
Integration through best practice
Make sure that excellence has a specific focus and that everyone has access to practical examples of how you want the integration to work. Another international
manufacturer created ‘centres of best practice’ across multiple sites. These sites had previously been operated by no fewer than five separate acquisitions. The centres
provided a catalyst for rapid spreading of best practice by example, and by word of mouth. A 50 per cent decrease in materials consumption and a 20 per cent increase
in productivity were the benefits from this particular M&A. These are the very same operational impacts that strategists dream of!
Retain focus on customers
The risk with any M&A is that management focus – from C-level to the supervisors on the shopfloor – becomes progressively more inward-looking. Successful integration
never loses sight of the fact that the real goal is not internal, it is external: greater productivity and profit through more effective focus on the needs of the customer.
Intensive work within a diverse European operation delivered a re-focus on the customer’s voice.
By identifying common ‘critical to customer’ processes across five previously separate operating companies, and then standardising them, not only was operational efficiency
increased (by some 20 per cent), but also customers reported an improved experience throughout the client’s operations.
In the examples cited above, the M&A context was acquisition of one existing operation by another. But all the gains are equally applicable to situations where private equity is looking to maximise the value of an acquisition.
Private equity: renewed focus on value creation
There is now a real focus within the private equity community on how manufacturers create value (as well as how much). Their previous, and perhaps somewhat abstract, approach ended abruptly with the credit crunch. The realisation now is that even the most complex multi-billion dollar deals must have strong roots in enhanced revenue, margin and growth.
It may seem blindingly obvious, but the real pre-requisite for any successful M&A is detailed understanding of how the daily work gets done. What’s good right now? What
could be improved? Where exactly will the acquisition help to make a positive difference, and how?
Operational reality holds the keys to M&A success
Ultimately, the real goal is practical answers to the question ‘how do we make these operations fit together’?
The answers, as manufacturers and the private equity community alike are discovering, come not from the architecture of the deal on paper. Rather, they are to be
found in operational reality.