By Jim Plomer

Applying integration best practices to M&A transactions can significantly improve a deal’s chance of success. Ineffective integrations can lead to a deal failing to achieve intended benefits and result in a potential loss of value. According to BDO’s 2022 Middle Market CFO Outlook Survey, 35% of companies said they either “did not capture” or “fell short” of synergy expectations for acquisitions made in the past three years. Previous but frequently quoted surveys have even reported M&A failure rates between 50% and 80%. By taking a proactive approach to planning and
implementation, companies can mitigate common integration risks and help maximize expected deal value.

Common Integration Risks and Leading Practices

  • Not realizing synergy, value creation and financial performance goals – Private equity sponsors and companies invest significant capital and energy to find and negotiate a transaction —assuming a price based on deal theses that hinge upon achieving synergy and value creation opportunities. The window to achieve these opportunities (e.g., cost savings, new market capture) can
    close quickly, putting the transaction’s success at risk. Synergy and value creation opportunities should be identified during due diligence and then further optimized pre- and post-close. Once verified and agreed upon by the key stakeholders, those opportunities should be pursued in a deliberate and organized manner post-close.
  • Loss of key employees — Both buyers and sellers risk losing their key employees during a transaction. When information about the potential transaction becomes known (formally or otherwise) employees can become concerned about their future and may start exploring other career opportunities. Opposing corporate cultures can also lead to organizational disruption and employee flight. Competitors can take advantage of employee anxiety and try to recruit key talent. To help mitigate this, companies should develop a plan for cultural alignment and change management. It is also important to have a coordinated communication plan to answer relevant employee questions, such as:
    • Will I have a job?
    • Will my job change?
    • Will my compensation and benefits change?
    • How will this transaction be good for me?

Planning the answers to these and other questions ahead of time allows buyer and seller leadership to provide consistent answers to employees.

  • Loss of customers and revenue — When they learn of a potential transaction, customers can become concerned about their relationship with the buyer or seller (e.g., Will their main point of contact change? Will they no longer be a priority customer?). Customers could also be poached by competitors or try to renegotiate more favorable terms. A proactive customer relationship management and communication plan can address their concerns and convey the transaction’s value to the customer. Moreover, an improperly handled integration can disrupt operations and product or service delivery, leading to lost revenue. Planning and sequencing integration activities is critical to minimizing disruptions to operations and maintaining customer satisfaction.
  • Inability to generate meaningful financial and operational reports — Post-close, companies can struggle with the immediate need for consolidated financial statements and operational reports, leading to a lack of understanding about combined company performance. The inability to produce consolidated reports may be caused by misaligned reporting processes, disparate financial and operational systems, incompatible data and/or inappropriate metrics. Generating meaningful reports should be a focus in the first 100 days to provide leadership with the needed visibility to make decisions. If reporting processes cannot be aligned, or financial and operational systems cannot be integrated in that time, then workarounds should be identified and implemented.
  • Increased corporate risks due to inconsistent policies — Buyers sometimes allow sellers to continue operating independently post-close. However, allowing the seller to maintain policies that contrast with the buyer’s can create undue risks (e.g., misaligned spend, cyber attacks) for the combined company. Aligning key corporate policies — such as those for finance and accounting (e.g., statutory reporting, approval levels), HR (e.g., employee harassment, whistleblower complaints), risk management (e.g., regulatory compliance) — is an important near-term integration task.

It is imperative to start the integration process early, ideally embedded in due diligence. The integration strategy should align with the deal rationale and an envisioned combined operating model. Integration governance should establish Day 1 preparedness, clear leadership, accountability, and planning priorities. By actively mitigating the above risks through the described leading practices, companies can hope to achieve the intended benefits more fully.

Jim Plomer, Transaction Advisory Services Managing Director, BDO USA, LLP
Jim is a transaction merger integration, carve-out and operations due diligence professional having worked over 25 years in this capacity both within industry and major advisory. He has supported large and middle-market corporate and private equity clients across numerous sectors on transactions from $4M to over $50B.