“The biggest problem is the lack of continuity between the corporate development team and the integration team.”
How to effectively approach integration
On this episode of M&A Science, Kison interviews James Timothy Payne, JD, MBA Principal Consultant at Merger Integration Consulting, LLC and Galina Wolinetz Managing Director at Virtas Partners M&A Integration | Separations, about the difficulties of integration.
They discuss how leaders can lose interest in the deal after the contracts are signed, pawning off the integration phase to a management team that is not well equipped to deal with the intricacies of integration.
They offer the alternative solution of having dedicated individuals who are focused on program management to run the show instead.
Additionally, James, Galina, and Kison discuss the timeline of integration. They suggest to start the integration process early, preferably during the target selection phase of the acquisitions.
Doing so allows the integration team to pick the right target, identify risks and opportunities, create an initial hypothesis of what the integration would look like, and predict what the overall integration cost is going to be to avoid surprises.
The group closes the interview with a discussion of how to handle egos during the integration process and the craziest thing they’ve seen in M&A.
Text version of the interview
How to make post merger integration successful?
Galina Wolinetz: First and foremost, you have to acknowledge the fact 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 is able to 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 that they need in order to put the integration management forward.
And that’s where I see a lot of the integration programs falter and just don’t reach the potential and the strategic rationale and the 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 I’m 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 is going to 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 tracking synergies?
- Are we creating value through this transaction?
- Is there a steering committee that has the ability to make decisions fast?
James Payne: For me, there has to be 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 a lot of 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 really 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.
How to Incentivize the integration team?
Galina Wolinetz: One thing that has worked well for me in the past 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 around how to achieve some of the objectives that you have set for the acquisition program.
In almost every acquisition that I have been involved with in the last several years, we have set aside, which is included in our business model, a certain level of incentive so that we can design a program around hitting certain levels of synergies.
We would define a group of individuals that have a direct impact on whether or not those objectives have been achieved. It’s very simple. You set goals and then individuals get paid out as those goals are achieved.
You have to work with your HR team so they directly understand how a program like this should be structured.
And also to make sure that the people included have the ability to affect the outcome and have the ability to make changes so that they are able 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?
James Payne: 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 that’s 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 is never going to 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.
Integration is such a complex program unless management truly demonstrates by their actions, not just words.
Actions such as participating on the steering committee, making decisions really fast and having an incentive program that clearly demonstrate that they’re putting their money where their mouth are related to the success of the potential integration program
It’s going to be very difficult to get the team to focus on it and get the proper resources aligned in order to ensure the program actually succeeds.
I’m completely in agreement that leadership is super important and they have to demonstrate their focus and their support of the program with actions rather than words.
Another thing is how you leverage the steering committee. The steering committees 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, whether it was not enough resources or problems I ran into.
The last thing I wanted to do is to surprise the business unit leader with some problems at a steering committee.
What you want to do is that the leader whose department is having a problem be prepared on the issue that this department isn’t getting on, or isn’t where they need to be.
But you want a leader to know that that’s coming and so you can say yes, and here’s what we’re doing to get it back on track as opposed to getting really defensive.
If you structure the steering committee right and leverage it in the right way, it can do a lot to keep the project moving forward.
It can look like it’s just a level of bureaucracy to whom you are just presenting just 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. While we have 38 action items that we had to complete, we only completed 24 and therefore the first one needs to get flagged.
We had a separate section in each of the functional representative’s presentations that would talk about what decisions we need them to make today, specifically. My objective is always not to walk away from a steering committee meeting without a decision being made.
It’s really all about how an IMO or integration leader manages these steering committees to your advantage.
What is the biggest problem during post merger integration?
As an acquisition interacting with the other side, with multiple advisers, that’s fun and exciting and people get hung up on that. Once that gets done, there’s an inevitable let down almost afterward.
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 have no ability to influence and have participation 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 integration teams are connected in a meaningful way.
They are partners and they facilitate each other’s activities throughout the entire length of the life cycle of a transaction 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 in some way so that they have the skin in the game from how the integration is going to perform.
The integration is hard because it has a lot of detail and it requires some tough actions, tough decisions, especially when you’re trying to achieve cost synergies.
So, there can be probably more on the integration side where they feel like they’ve been passed the buck.
Especially if you’re not engaging some of that integration team during the due diligence, lots of people get brought in to do the integration that isn’t part of the deal for lots of reasons.
There can be some of that feeling that I didn’t get to pick these goals and these things to achieve, and it’s getting dumped on me but going back to the incentives can certainly help.
Also, it helps when you have a good IMO and a good steering committee structure where you can bring the business leaders back involved by reminding them that their team was involved in the due diligence and they committed to this part of the deal.
Does M&A process drain people’s time and energy? Is it hard for people?
I think some of both integration can be difficult and challenging, but 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. That can lead to some deal fatigue and just kind of wanting to move on.
They’ve done the deal and they just want to be done with it and either go onto the next deal or just get back to their day-to-day responsibilities.
Also, sometimes concerns about the buyer overpaying or the seller not getting as much as they wanted, can create deal disappointment. Such disappointment can impact the enthusiasm for the integration tasks that have to follow.
I don’t think that integration is difficult per se if you have the right tools, the right structure and the right team in place. I find it to be an exciting project in itself having been on both sides and then again, most of my career in doing the deals in acquisitions and divestitures.
I have decided consciously to focus on integration because of the more exciting and interesting parts of actually bringing people together. It is similar to drawing the blueprint of what the combined organization is going to look like.
Developing and capturing those synergies that were very interesting to look at on paper and how it is actually going to get done in practice and kind of getting to the bottom of that are the exciting parts.
How to identify risks in M&A integration programs?
As an integration professional, I should be involved in the transaction early.
My ideal time to get into the integration program is around the time when they’re thinking here’s the company we’re going to buy even before due diligence nor before the model is created.
Let’s assume that we’ve already decided that this is the right industry for us to be in and want to expand there.
I want to be there taking a look at the information that is available, whether the company is public or private and be able to draw initial thoughts around ‘what is our integration hypothesis going to look like.
Each person dives into their specific functional area and comes up with risks and opportunities. They advise the deal team about how much you should subtract for this risk or add for this opportunity when they’re developing the model.’
I’d like to be there early on throughout this process and represent an integration function and start talking about integration costs for them to include that in the model as well so that no one is surprised all of a sudden,
We had a practice of including in the deal proposal to senior management to get approval to move forward with the deal.
So they put that front and center to make senior management decide whether to approve or not approve the deal going forward to understand that integration has to be thought about.
In some ways, the way to identify risks and integration are by looking at if they don’t have a good integration structure, good infrastructure set up for integration, detailed integration plans with quantifiable milestones, goals, synergy targets, or a change management plan in place.
Also, if you’re monitoring the base business of the acquired company, and if you start seeing changes in the base business, that’s a big red flag because if you lose the base business, it’s really hard to catch up and get those synergies.
Is there anything else that you would immediately look for in terms of risk and integration program?
I’m dealing with smaller acquisitions where you’re trying to decide whether the leadership of the acquired company is going to join post-acquisition and understanding what that management team or the acquired company is thinking and what their plans are by having good conversations with the leadership team of the acquired company.
A lot of it revolves around people and I’ll say the word culture, one of the things, and I think you Kison had a dialogue on this topic about culture and does culture really matter. I think it matters, but I think it’s something that you just need to address.
In my view, it’s not anything that I would decide to do or not do transactions based on the fact that cultures are different.
My approach would address the differences and ensure that both types of cultures are able to live side by side if that’s the way that we want to go. Incorporate these cultures together so that they can get merged.
What tools do you actually need to run a good integration program?
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 have the ability to interact with the target company employees so they can 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 just log into something. It needs to be super self-explanatory, maybe one quick training session and that should be that.
To the extent allowed by law, without gun-jumping and other things prior to close and start doing collaborative work, thinking through what our Day One is going to look like when we get there.
I want to make sure that I’m always incorporating the opinion and the input from the acquired company because they’re the ones that know their people, their tools, their processes, better than any one of us would.
Consulting companies will bring their tools if you hire them. The tool is only going to go so far if you don’t have the right people in the right integration structure set up. The steering committee and integration leader should have the explicit or at least implicit authority to lead that effort.
You need a strong leader in that role and someone who has the respect of 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.
What other tools to use in post merger integration process?
We largely use the tools, software type tools to manage work plans and track performance of work plans, and then track synergy. So that’s really been kind of the place where I’ve used it.
My objective is actually to evolve beyond that and find something that’s hopefully an all-encompassing tool that would have the capability of chat as well,
About M&A integration day 1
I am a big believer that day one is absolutely the most crucial day and most important thing to get right on the integration program. It is something that truly does set the tone.
There’s so much uncertainty around integration programs for all the stakeholders involved, including employees, customers, suppliers, investors, you know, whatever. Things that I have seen in the past that worked very well as kind of a very robust focus on all-around stakeholder communication.
We spent an inordinate amount of effort on making sure that day one goes well. So the type of things that happen is a letter or email communication to customers or vendors and employees.
However, the most impactful way to handle things and I would recommend having is a very robust day one. We usually have it minute by minute where senior leaders would get on the phone with some of the keys and customers and make the phone call.
For employees, a lot of times, we try to make it into a big celebration all around the world. We would deploy our senior leaders to hold town halls or all-hands meetings.
Again, that consistently communicates the same message 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 actually want them to think so you’ve got to dissuade any of those kinds of conversations as quickly as possible.
You have to make sure that business continuity is probably the most important thing. If you get everything else wrong, get the business continuity right. What that means to me is to make sure that the trains run on time on that Day One nothing falls apart.
Day One is one of these things where you can get it really wrong, but it’s never going to be great and set the tone and it’s going to ensure the success of the acquisition, but it can certainly make the future days a lot harder.
First impressions can be very lasting impressions for good or bad. It’s important to set the tone for the acquired organization, as well as the acquirer’s organization.
It’s never a good idea to say nothing is going to change, recognizing that people are important and communicating to them. 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. You want to keep it high level and you want to expect to have to repeat the information a lot.
One of the other things we would always do is a master comprehensive Q&A, and then we would break it up for each group so that everybody was saying the same thing. That’s another area where companies can really hurt their credibility.
If one group of people hear one statement and another group here, something dramatically different creates mistrust and all kinds of problems there.
Impact of revenue or margin-based earnout after integration
It almost guarantees the lawsuit because there’s going to be changes. So unless you’ve planned, they’ll just let the company run. As it was before 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 earn-outs are just lawyers waiting to start a lawsuit.
As a Corp Dev, I try to, as much as possible, not get involved. Our lawyers never like it. It never ends well for various reasons and, hope to never have to get involved in those.
Setting up a budget for the integration project
What we’ve done is we have compilations of actual costs that have happened on various integration programs of various sizes and complexity.
With that we have developed a tool that basically rates a particular transaction based on size and complexity. It kind of gives out this convoluted rating system for each individual transaction.
Based on that, we are able to draw on the similar type of transactions, actual cost data, and do kind of an estimation based on that as based on this type of sets of metrics about this company that we’re about to acquire.
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.
Doing some of the integration planning during due diligence includes laying out what that high-level integration plan looks like using the integration leads from the various functional groups. I’ve relied a lot on the due diligence team.
Build a financial model from the ground up trying to understand that you’re limited to a year or two years where you can capitalize on those expenses as part of the acquisition costs.
The challenge always is that usually, the numbers you get are a little or a lot inflated. And so there’s some browbeating to go back.
Personal egos and integration
A real challenge, especially when the acquired company is a lot 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 vary really hard.
Some of the issues that the HR diligence has to address when they’re interviewing the senior leadership about the fact of what role they might be interested in post-closing.
But my experience, particularly with the owners, has not been good. I lobbied hard to put the owner under a consulting agreement for three months and my argument is you can always hire them back as an employee if they work out.
But 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.
What are the best practices in post merger integration
We would typically have a separate workstream that would be related to managing the transition service agreement activities, and varies specifically, how do we get off of the transition services?
These things are never really intended to either have the seller make money off of, or ideally, you know, not to pay them a lot more for doing that work.
I would put forward a specific workstream that is around how we quickly and efficiently get off the transition services to end each functional area which as part of their work plan, needs to be incorporated in there.
One thing as the seller, you have to keep in mind is what’s going to happen to your own staff. There’s going to be staff that is clearly associated with divested assets, and it’s clear they’re going to go with the divested assets, but there’s going to be a group of people that really aren’t part of the divested assets or aren’t going to go with the divested assets.
The buyer doesn’t want them, or they’re just not critical to it. But it’s not clear what’s going to happen to their roles or maybe it’s clear that their roles are going to 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 really have to think through that and potentially offer some retention bonuses to those people that are in that gray area.
It can become really tricky, but if all those people that are required to execute and transition services start leaving, then you can come in breach of your transition services agreement if your resources that we’re supposed to actually do the transition services are gone.
Improving the post-merger integration process
You have to start integration planning early to 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 you need to be honest with people.
Lastylly, communicate, communicate, communicate.
First and foremost, 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 has to be fully dedicated.
Get that leadership team support and guidance.Make sure that by actions and not just words they are communicating their dedication and their kind of support for this project.
What’s the craziest thing you’ve seen in M&A?
I’ve dealt with a lot of small companies where the owner is the leader. They don’t always appreciate my coming in as the senior representative of the acquiring organization and then start calling some of the shots.
I had to deal with some bad actions like unplugging my microphone when I was giving a speech at a trade show and locking us out of the office. One said he was keeping a dossier on me.
The most outrageous thing was that the former owner came to their corporate offices and went to the receptionist and said, I’m looking for ‘Tim Payne in the ass’.
Another thing was when we were dry running our presentations, we were going to share what our company does, what their company does, and here’s the purpose of this and kind of the strategy behind this acquisition.
As we laid out, here’s what a company’s and here’s our financials and revenue, profitability, you know, all that stuff.
The CFO of the acquired company said that they never share their financials with their employees and the employees have no idea how big the Company is from a revenue standpoint.
Also, they never give employees targets to achieve from a financial performance standpoint.
It was just something that our jaws kind of dropped to the floor. I was surprised about that and that changed my mindset.
We are a company that is so driven by financial metrics and recognition, and otherwise, we’re so focused on accountability and each person and line leadership knows what they’re responsible for to deliver periodically.
This company has none of that. No one cares what numbers are and how they motivate people to perform. So I had to basically devise a completely different way of thinking.