How to Recognize Value and Avoid Disruptions in PE Transactions

Sometimes a merger integration doesn’t go as planned. But those hiccups can largely be sidestepped with the right preparation, writes Paul Calamita, a partner at RSM US LLP.

Merger acquisitions and carve-out events require focus and rigor in order to deliver enhanced value to the emerging organization. Unfortunately, historical data shows that while many of these past transactions failed, even more failed to capitalize on their expected value, with the resulting transformation causing disruptions to key daily operations. To avoid these harmful missteps, your organization must implement a comprehensive strategy to not only avoid disrupting the day-to-day operations of the business, but to capture the deal value anticipated by the strategic investment.

A lack of integration success can be attributed to a host of factors. In some cases, companies focus too much on the deal itself, rather than the actual integration. Some organizations even attempt the post-close integration without detailed plans or testing of the critical integrating processes or systems. Others underestimate the level of effort necessary to complete the integration or the impact the effort has on its leadership and management team. Frequently, integrations simply fail because they are managed by people with a lack of merger or optimization experience or lack of bandwidth.

An effective approach when managing an integration is to maintain focus on four key cornerstones to ensure your organization quickly recognizes value and, at a minimum, avoids business disruptions. These cornerstones are: accelerating growth, capturing value, executing the integration, and managing the change.

Accelerating Growth

A successful integration is measured first by its ability to accelerate growth around the investment, whether it is an acquisition or a carve-out. This requires the identification, validation, and prioritization of the revenue or business growth opportunities identified as part of the initial investment thesis. In an effort to help achieve these targets, organizations must establish a structure to help manage and govern the integration process, supporting the growth strategy and empowering individuals to achieve the expected results. Aligning measurements and incentives with the growth strategy is critical to maintaining this focus.

In order to jump-start the integration, it’s important at early stages to formulate the initial integration vision, as well as to identify key leaders and resources to spearhead the critical integration activities. When identifying these leaders, it’s important to consider and leverage those executive and operational leaders within the acquired organization or target to gain key insights into the business and understand how the integration could affect the day-to-day operations of the business.

This integrated approach will help provide operational insights that impact and drive deal value, as well as highlight any operational risks that might need to be addressed prior to the integration.

Capturing Value

In today’s dynamic business environment, organizations must work quickly to identify and quantify costs, synergies, risks, and value drivers in order to maximize the value of the deal. It’s important that organizations understand that the value of the deal is not just found in revenue or market growth initiatives, but also in cost and process optimization efforts. For this reason, it is important that organizations keep a keen eye on systems, underlying processes, and operations.

Early on, target operations, systems, and supporting processes must be assessed, along with the skills and capabilities of the management team, to evaluate their impact on the integration and identify opportunities to improve deal value and mitigate integration risk. It’s important that throughout the integration effort, ownership and accountability of each synergy opportunity and risk is assigned and carefully tracked to ensure the anticipated benefits are realized.

Executing the Integration

Executing a successful integration with limited disruptions to daily operations begins with establishing an effective project management office (PMO). A critical step in every PMO is aligning the appropriate integration leadership across all levels of the effort. Leveraging the identified and prioritized deal synergies, the PMO should coordinate effectively with each project work stream to track and manage tasks, risks, interdependencies, and milestone deliverables, while also assessing the impact or disruption that this effort is having on the daily operations of the business.

An effective PMO and integration starts with planning, setting the course and articulating the strategy for the integrated company. It is important for the organization to determine the degree of integration and nonnegotiables up front, as well as identify and protect core operations that are out of the integration’s scope. Any “day one” necessities should be quickly identified and resolved, and a communication plan should be developed to execute early communications to keep the company informed on goals and progress of the overall effort. Integration planning requires careful identification and execution of requirements across all functions. Key integration risks and dependencies must be understood, and 100-day plans and potential quick wins should be developed and posted.

A desired future state must also be designed, with functional and operational “to be” perspectives that identify, value, and prioritize key integration initiatives and synergies. Leadership and organizational structures will require development, while also assessing cultural differences and developing necessary people-change programs.

After thorough planning, your organization should initiate integration plans by completing activities to achieve deal closure and day one requirements. The 100-day plan’s quick wins should be delivered, as well as tactical integration plans.

As part of the implementation effort, be sure to align resources effectively, and be realistic with timelines and expectations. Effective planning will help ensure you do not lose sight of day-to-day operations and adversely impact the business. Thorough plans and resources must be in place, with realistic goals and targets that are managed aggressively during the execution phase.

Managing the Change

An integration is not only about processes and technology; it’s also about people and culture. Strive to align cultures and build employee engagement, while developing plans to identify and retain key talent as well as optimize compensation and rewards. Core talent should be nurtured so that these individuals know their value and can assist with managing not only the day-to-day operations but the execution of the integration plan as well.

A key to managing change during the integration is developing a strategic and comprehensive communication campaign. All team members should feel involved or at least be aware of integration plans and how those plans would affect them.

Final Thoughts

An optimized transaction can deliver significant financial and operational value to an organization. For example, RSM US LLP advisors recently assisted with the merger integration for two $350M technology companies with duplicative functions and services. The RSM team worked closely with management and functional teams to identify savings opportunities, set goals, and define targets and organizational structures. After defining an integration approach, an annual $20M in savings was identified, as well as a consolidated staffing and organizational structure and defined future state service offerings and processes.

If your company chooses to acquire another business or initiate a carve-out, there is always room to gain additional value and, sometimes, a significant amount of room to optimize the transaction effectively. However, proper planning and execution are critical. With an experienced team, you can deliver on the investment thesis and help ensure that not only is the deal value realized, but day-to-day operations are managed without any adverse effects from the integration.