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To some, this may appear as a rather precarious discussion to have, as what we see thru the media does not always depict a full story. And there’s almost always several sides to the Iran chronicle.

Nevertheless, one can gather from the gist of the current news and media that Iran is bracing itself for significant change. No doubt, the country is seeing the brunt of it right now. But inevitably, Forex rates may in fact start to stabilize soon-which is always an encouraging sign for economic development.

Promises & bravado aside, foreign stake and ownership have truly become more transparent and realizable. FIPPA (Foreign Investment Promotion & Protection Act) provides clear and easy to follow guidelines for company setup, delivers protection against expropriation and nationalization, and simplifies & accelerates repatriation of profits and capital abroad. Hence, despite the momentary cold feet that many multinationals are experiencing, there is no doubt in anyone’s mind that M&A opportunities in the country are immense. Whether your business is focused on agriculture, mining, hospitality, healthcare, energy, technology, or MTS/MTO manufacturing, there are certainly opportunities for the taking. And more often than not, these opportunities appear to be worthwhile to pursue.

Moreover, Imports have practically become redundant; in fact, it is quite surprising why imports ever worked in the first place. The fallout from imports has always been damaging and risky ie: limited forex options & international credit terms, LC and wire transfer restrictions, logistics, Days in Inventory (DII), Out of Stocks (OOS) etc. The list goes on. In addition to bureaucracy and red tape associated with customs and clearance, high duties, and most importantly logistics and Cash Flow Cycle Time have all been undeniable hindrances to imports, let alone a deterrent. Which is all the more reason why local manufacturing is the logical approach for any multinational or multilocal.

Consequently, as previously mentioned there appear to be a plethora of M&A prospects in the country, and this in part due to the fact that the country has been shunned for many years, particularly by major multinationals who could under normal circumstances provide a boost to the local economy and businesses within.

On the hindsight, the past several years have proved to be a windfall for many local businesses who have faced minimal challenge from competitors; and in essence, have had an open road to success.

Examples are FMCG dynamos, some of which operate more than 3000 distribution vehicles, but who are yet to recognize methodical and financial implications of applying elementary KPIs such as Time to sell, Drop Size, DII, Truck utilization and the likes. As a result, a dearth in challenging competition has only wired local firms-some gradually being morphed into formidable powerhouses-nonetheless, often running wild, handling the customer and consumer with little or no reverence, and basically doing what they please.

So, what could motivate a local business to consider a M&A? Afterall, with all this autonomy and unconventionality, there seems to be quite a lot of money-spinning going around. Why would anyone in their right mind even consider joining hands, or even contemplate selling a well-oiled cash machine?

In fact, the rational could be remarkably simple and ingenuous. Sharper business minds, of course have little doubt that a turnaround is imminent; there are a multitude of reasons for this conviction—socio-economic issues topping the list. But even traditional minded business owners fully recognize that the country has been deprived and shirked for many years. And not just referring to roads and infrastructure; rather, all the knowledge and principally Industry Best Practices that have been left unexpressed and contained by multinationals.

Hence, smart entrepreneurs have little doubt that upending the competition and maintaining an edge will require immediate and sustainable change. This superiority, however, can only be possible upon the adaptation and successful implementation of relevant industry best practices—something local companies have not been adequately exposed to for quite some time.

With this prelude, let’s take a closer look at some of the risks and challenges associated with the M&A process in Iran.

Identification and Analysis:

Assuming we have engaged in some preliminary exploration to identify M&A candidates—whether having been approached directly or surveyed the market for potentials, and before taking the decision to look at Top-Line or Bottom-Line numbers, it is critical to note several key characteristics of Iranian businesses:

First, due to the prolonged dispossession and inability by companies to invest, this new Capex spending binge is by no means short term, as many companies have only recently begun to invest in new machinery and equipment. Existing equipment are either outdated, capacity capped, or in derelict shape due to extended usage and inappropriate maintenance; the latter being a direct consequence of heightened sanctions.

As a result, many FMCG companies have to a great extent become capital intensive. Even in the event that companies manage to successfully acquire machinery necessary to fuel growth, many are still chapters behind their successful overseas foes, and will have to continue investing in more advanced manufacturing and particularly packaging technology, just to reach parity with multinationals or other regional competitors.

Hence, analysis of EBIT or EBITDA will not get us very far at all. In fact, even a FCFBT analysis may only cover small grounds, as we have yet to uncover the true effects of ROIC and the trends over the years which affect our cash flow. Naturally, once we have a closer and more cognizant view of the above, we should be able to confidently propose a more realistic EV for the business, and even possibly include a transaction premium where necessary. To summarize, it is crucial to get our finance specialists to work in collaboration with the seller’s team. This will undoubtedly deliver a closer and more diagnostic look at the trends, which will in turn enable us to rather contentedly distinguish simulated prospects from golden goose money makers—and fortunately, the latter are a plenty. We’ll touch on Valuation, and Valuation Adjustment risks and options later on. But first, let’s take a quick look at Due Diligence routes.

Due Diligence:

Contrary to the common belief, DD should not prove to be a heinous task after all. At least one of the big four audit firms (EY) has an active presence in Iran, and another operates in affiliation. Naturally, this will create a more consoling environment for finance individuals who may sometimes undesirably get immersed in hair splitting attention to detail.

Nevertheless, here are several grey areas which should be attended to with care:

Authentication and Valuation of Assets has always proven to be a delicate and sometimes scheming task. However, since the nationwide centralization of real estate deeds into an integrated national network in 2021, authentication of assets and their status has become routine and free of fraud.

Accordingly, Valuation has grown into a more simplified task and price comparison is easily achievable. Crucial to note that companies regularly adjust book value of assets to account for inflation and real estate price increase; hence, utilizing the services of a reputable audit firm is nonpareil in order to ensure that price adjustments are per market norms, and verifiable.

Financial Statements: Many companies have made the decision to switch to single book accounting—although for those who opt to keep a second set of books, it does not necessarily refer to any illegal practice, and they may be simply retaining two books in order to ease preparation of management accounts vs. official. However, almost all companies are using one or possibly two well established ERPs or integrated software to maintain and generate data. And regardless of whether the software is operating under web or directly via decentralized servers, access to data is generally single source and easily verifiable. Goes without saying that a warning sign is what we could refer to as LDI (Low Data Integrity); that is when a company claims to have two sets of accounting books and no record of their official numbers which they claim on the M&A financial statements.

Whilst performing DD, some audit companies determine to temporarily place auditors on the ground over a specified period of time. In essence, when related to FMCG companies these auditors make a daily count of trucks exiting company warehouses. If required, these numbers are then extrapolated to compare with projected assessment of sales volume; naturally, seasonality is almost always factored in.

Though this may appear to be a cumbersome task, in principle it provides significant information and validity. Similarly, access to accounting records such as daily cash, checks and DSO, procurement contracts and DPO, and inventory levels are sometimes performed in a similar manner to the above—by temporarily stationing auditors on the ground and comparing actual transactions with ERP records.

Legal and Taxation DD is relatively less problematic, as any possible damages may be shielded thru well thought out Warranties and Indemnities clause. Noteworthy to add that warranties and indemnities are not widely employed in Iran, and sellers may be wary of and frown upon the idea.

Most M&A in Iran will probably be comprised of share sale

Nevertheless, most M&As in Iran will probably be comprised of share sale rather than the sale of assets; hence, warranties should be as extensive as possible to cover all aspects of the business. As common practice, we must make all attempts to avoid reducing seller warranties and compel the seller to flush out material and intelligence which has not yet been revealed. Additionally, we should push for Indemnities, particularly for those contained in disclosure letters received from the seller.

Whether the seller is entirely opting out of the business or choosing to remain a shareholder, typically, they will want to take some of the recently acquired cash and invest in other areas of focus. Accordingly, employing escrow accounts, which are largely unheard of in Iran will be extremely difficult to enact.

However, other viable options are available which could be presented by the auditors—commonly, the use of inland bank guarantees or real estate deeds are an acceptable norm. With regards to real estate deeds, it is important to have the entire deed or a relevant portion signed over to the buyer and notarized at a public notary. Considering the accuracy of real estate valuations and the predominance of similar transactions, this is an adequately safe option we should accept with open arms.

On the surface, Operational DD may pose as one of the most grueling tasks; but far from impossible when performed thoroughly. Specifically for FMCG M&As, it is critical to get a scrupulous involvement from Ops teams on both sides.

Naturally, once the new organization is up and running, all efforts will be put in place to improve productivity throughout. Implementation of best practices should be at the center of all priorities, restructuring will be an imminent aftermath, and cost savings will be anticipated thru all modules.

Nevertheless, it will be extremely helpful if we have a thorough understanding of frontline operations activities. Bear in mind that sanctions have had a direct and negative impact on supply and logistics; hence, incongruence is expected throughout. But it is important that we predict a timeline, and understand how soon we are able to fill in the gaps in order to ensure there is a smooth operation, post signing.

For starters, we need to identify whether or not there is an ERP in place, or if we are using an MRP at the plant level which is harmonized with other sales and finance software. Do we have written SOPs? Do we have hourly production recordings or an end of shift compilation report? The former being crucial, particularly if at some point in time we are aiming to impose Pareto Analyses, separately analyze operations and technical downtimes, and capture unaccounted production time. Do we have SMS communication/advisory for logistics notifications, such as gate traffic, dock time & dispatch, and arrival of raw mats? Though a vast portion of Operations issues will be addressed in detail during the transition phase, ignorance is certainly not the right approach. Fortunately, local companies are always excited to boast about their achievements, and will have minimal objections when it comes to glamorizing their feats.

Furthermore, it is critical to recognize that one of the biggest challenges is maintaining desired inventory levels. When market is cash driven, supply and demand are to some extent reversed—and this retrogresses back through the entire supply chain.

So, we have to get key stakeholders involved in the process; over communication in its most expressive & consequential form, alongside slightly expanded and augmented delegation matrix. And with the aid of MRP developer devise Live SMS advisory at manufacturing plants in case non is in place.

Thus, it is all the more important to sink our teeth deep into the operations and request as much information as possible. Bear in mind that operations initiatives which some of us take for granted, may only be touched at the very surface, as managers tend to prefer reviewing macro vs micro details.

The same level of prudence could be applied to other modules, including sales and HR. For example, to locals HR is mostly Admin and GR; employee contracts, and so forth. Granted, HR has made tremendous progress over the past 10 years, and this is evident in large and small organizations alike. Centralization of HR function, devising designations & grades and using HRIS local software are all accomplishments which have been well undertaken. Even tasks such as Recruitment, Budgeting & Planning, Employee Induction & Orientation, Training & Development and Employee Retention have experienced improvements.

Nevertheless, when it comes to more intricate HR involvements such as performance development reviews, balance scorecards, career development plans, and even multiskilling at the factory floor, though not implying that they’re non-existent, they are rather stroked at the very surface.

Even multinationals who have had a sturdy presence in the country have generally managed high level HR from regional offices outside the country. Thus, top notch caliber and competence essential to running such magnitude and potential of a market has not always been exploited to the fullest.

Moreover, due to sanctions and a fear of OFAC, reviews and supervision of the market in some cases, may have been trivial and shallow—where senior managers prefer to look at macros only, and stay away from anything they fear ‘Legal’ could frown upon. Naturally, in Iran’s sanctioned environment, opportunities and options have become rapidly restricted and regulated, and Legal departments have moved into the spotlight as every decision seems to have started to revolve around them. Ultimately, some businesses whose dealings encompass multinational or oversees partners, have had to abruptly undertake new rules and regulations, some falling under an entirely different set of codes. During this evolution, adhering to structure has sometimes become unwelcome.

As a result, accountability is often harder to come by, and this is a caveat which can be sensed within different modules of many local organizations.

Having said that, for those of us who almost always see the glass half full, we can only envision opportunities. And we’re talking about vast unchartered territories where a progressive multinational executive will only eat for breakfast. Specifically referring to HR, and in preparing the organization for the transition it is a good idea to obtain an in depth understanding of existing practices.

We’re not only referring to introducing appraisals—9 Block Grid, Balanced Scorecards, Succession Planning and Accountability—but most importantly, enhancing team caliber by recruiting, training and retaining key functional talent for positions which were previously concealed with no accountability.

On a positive note, literacy and education in the country are quite impressive, with 55% of the work force comprised of women, and an almost comparable number of university graduates being women … talent is a plenty; and if one has the slightest affinity with the culture, they’re soon to notice that learning capability and even competence is effortlessly at par with the immediate region—MENA.

Therefore, tasks such as designing work flows to develop dependency with other departments, creating respect for each other’s work and ultimately achieving mutual trust should be at the top of HR’s to do list.

But dependency is only good if we can safely maintain regular spot audits, as too much reliance may sometimes lead to team fraud and racketeering. And though local understanding of Internal Controls, is Internal Audit (the former generally being unavailable), setting up a solid Compliance Team who possess an unyielding attitude towards auditing and SOP integrity, can’t be stressed enough.

Innately, Valuation and Valuation Adjustment techniques will be attended to by our finance experts. But regardless of whether they propose Market Capitalization, DCF (Discounted Cash Flows) or simply an analysis of Book Value, it is still essential that we take several fundamental steps to mitigate our investment risk. And in any event, our final Valuation is subject to satisfactory results of the Due Diligence.

Given that the functional currency of most transactions will be the Iranian Riyal, The Purchaser is ultimately agreeing that it is investing in a local Iran business which strictly operates on the local currency. Consequently, and irrespective of the US Dollar/Euro estimate of FCFBT (Free Cash Flow Before Tax) or other valuations, Seller is committing to deliver results denominated in IRR (Iranian Riyal) as per financial documents submitted to Purchaser; and this is sometimes prone to deterioration, given inflationary nature of the economy.

But again, there is no reason to fret on the subject. First, most reputable businesses in Iran tend to somehow correlate IRR budgets to projected and conceivable USD/Euro bottom line numbers. This, of course is conventional practice. The point for contention, however, is whether profitability projections are reliable and in harmony with inflationary trends. Naturally, our finance experts should utilize their sharp-edged proficiency and knowledge to wrangle with the seller, dispute and mitigate risks.

Additionally, our legal team can draft a Valuation Adjustment clause within the Heads of Terms accord, which can later be instated into the share purchase agreement. For example, on FCFBT valuation we can include a clause for a pre-agreed percentage deviance from Max and Min FCFBT over a certain number of years after closing of transaction, whereby downward adjustment is calculated and paid by seller to buyer, and vice versa for upward adjustment. Again, we shall leave the calculation technique to the experts; but what’s important is that we have a mechanism in place to safeguard our interests, especially in the unlikely event that assessments for profitability and valuation submitted by the seller are off track.

Undoubtedly, a final agreement scrutinized by finance and legal experts will contain a myriad of safeguards, including loans and indebtedness at time of closing, working capital sufficient to cover all regular business needs in raw materials, supplies and services procured from third parties, and necessary funds to operate the business at the Production Capacity.

Clearly, big risks mean big rewards, and this is precisely why Emerging Markets have always been a lucrative target for multinationals. But the setting may be even more attractive for Iran.

Driven primarily by oil exports and a rise in oil prices, the country experienced considerable growth over the past several years. Moreover, government support to fuel growth, in terms of loans and subsidies has been on-going and has only reached a hiatus due to heightened sanctions. In essence, the transition to a full-fledged capitalist economy started years ago, post conclusion of the Iran-Iraq war, and gradually slackened the years following 2013.

Nevertheless, what many of us may be oblivious to is that sanctions have only had an indirect effect on a small segment of industries—initially, those entirely dependent on imports of raw materials essential to function. However, even the most dependent companies managed to identify contingency plans and escape routes; not necessarily to crosscut sanctions themselves, but majorly in the direction of effectively managing their logistics and particularly cash flow cycle time. Fundamentally, sanctions have mainly affected companies with vital mismanagement issues; companies who did not have the knowledge and/or exposure to attract talent that could provide remedy and alchemy.

Even though foreign investments in Iran economy have been negatively affected, largely due to political uncertainties, there is little doubt that opportunities for the taking are immensely rewarding—perhaps unmatched anywhere else in the region.

In today’s competitive business world, many organizations are choosing to focus their growth strategy through mergers and acquisitions. The value proposition for leaders is that by joining forces with another organization, growth can be more exponential and accelerated when compared with attempting to expand organically. When an organization is considering a potential merger or acquisition, they often place a priority on evaluating the prospect’s industry segments, geographic footprint, revenue, and service offerings. While this is critically important to achieve the desired goals, if the people & culture component is overlooked, there is a significant risk of turnover, low engagement, and low performing teams which in turn affects the experience for clients and ultimately organizational performance. This is where HR leadership has a critical role to play.

Before we dive into some best practices, I’d like to take a moment to differentiate between a merger and acquisition as these words are used interchangeably. A merger occurs when two organizations agree to join forces to create a new, joint organization. The recent merger of BKD and DHG to become FORVIS is a good example of a merger. Conversely, an acquisition is where one organization is absorbed by another. The recent agreement for tech giant Oracle to acquire Cerner is an example of this type of transaction. It is important to note that since an acquisition can have a negative connotation as a “takeover”, it is sometimes informally referred to as a merger, leading to the use of these terms interchangeably. Now that the business lesson has concluded, let’s return to the topic at hand.

Regardless of the type of transaction that is taking place, it is essential to have people strategies as a central component, particularly at the onset of conversations between two organizations. For this to occur and for HR leaders to be invited to this conversation, a prerequisite is for these individuals to establish credibility as a strategic business partner so they can have a seat at the table. For more on this topic, visit my blog and download the whitepaper “How to Get a Seat at the Table”.

To truly put people first, here are five best practices to consider for your next merger or acquisition:

Conduct People Strategy Due Diligence

At the onset, a people workstream should be formed to conduct due diligence for the prospect organization. This team’s responsibility is to evaluate the following elements of the potential transaction:

• Cultural Values
• Benefits Structure and Philosophy
• Compensation Structure
• Critical Policies
• Personnel Structure
• Performance Processes

The focus of the people workstream is not to look for 100% alignment in all of these areas, but to envision what the future state of the organization would look like given this information and how it would impact the employee experience. Even if the prospect organization would be forced to transition to the acquiring organization’s policies and practices, how would this transition play out and would differences have an impact on employee morale and retention? Alternatively, would there be elements of the prospect organization that you’d want to adopt? These are just a few of many questions that you’ll want the people workstream to dig deeper into.  

Develop a Consistent, Repeatable Due Diligence Process

Especially if you are an organization that plans to have significant M&A activity in the future, there is great benefit to having a well-thought-out process that can be replicated and scaled up/down as you look to evaluate a variety of different prospects for a merger or acquisition. It is important to have an “apples to apples” comparison process so that you are consistently looking at the same metrics of each organization being evaluated so that you can be objective in the decision-making process. This does not mean you would need to have similar size organizations you are evaluating, but rather a consistent set of principles to operate from as you do the due diligence. For example, if you are looking at three different organizations, using the same principles for evaluating benefit structure and philosophy will help you clearly identify the best fit given your goals for the transaction.  

Develop a Robust Internal Communication Plan

Likely one of the most important elements of the M&A process is communication, and more specifically, internal communication. There are two components to this: the announcement and the integration. During the announcement phase, important elements will need to be considered such as how and when your employees find out about the deal, who they hear it from, and what type of medium the information is being disseminated in. Moving forward to the integration, employees need to feel as though their organization cares about them, regardless of what side of the transaction they are on.

Below are three key goals that should drive your communication plan:  

1. Engagement and Retention: How will you provide the opportunity for team members to stay informed, feel invested in the change, and have a compelling reason to stay?
2. Career Planning and Development: What will you to do help your team members connect the dots between now and the future as it relates to their career growth?
3. Team Building & Connection: When the transaction is complete, what will you do to empower your leaders to facilitate high performance and connection within newly formed teams?   

Create Great Onboarding Experiences   

Particularly in the case of an acquisition, it is essential to have a thorough onboarding process. This begins with the sharing of basic organizational information, operations, and benefits, but extends beyond the first day to help new employees become assimilated into a new culture. During their first 90 days, employees will begin to form opinions about their role, their leader, and the organization overall. How they feel about these components will drive the likelihood of retention. As a result, there is a great opportunity to create a world-class onboarding experience for new employees to include elements such as the following:

• Local social gatherings
• Team building events
• Exciting project opportunities
• Intentional coaching conversations
• And much more!

If you can envision the first 90 days like a “red carpet” treatment where each employee is taken through a personalized experience, the chances of that person feeling engaged and connected is high and the probability of them staying is increased.

Mergers & Acquisitions: Closing Thoughts

There’s no way around it; mergers and acquisitions are hard. Having been through many of these through my career as an HR leader and employee, I can attest that there are always challenges to overcome and varying perspectives to navigate. But the one thing you can control is to have a well-thought-out plan in place that puts your people first. If you do this, your chances of success will only increase.

If you are looking to learn more about mergers & acquisitions or are getting ready to go through one and would like a guide to lead you or your team, I’d love to help!

Summary

Surveys show that, in average, mergers and acquisitions destroy value. Highly publicized successes are not sufficient to compensate for disastrous operations. Yet, it is relatively easy to set the rules of good acquisition practices. M&A professionals know them well, but seem to keep breaking the rules: make acquisitions beyond the scope of their strategy, produce unrealistic business projections to accommodate for sellers exorbitant demands, or fail to implement integration plans. The mechanisms leading to these repeated mistakes are powerful enough to overcome experience and wisdom; because M&A is a fascinating activity, with stakes far beyond simple efficient business; because closing an Avoiding the acquisition curse is a short term objective, and making it profitable is a long term activity. A matter of egos, passion and consistency over time.

Introduction

Mergers & Acquisitions underperform

The measure of acquisition success is the Net Present Value of the operation: initial price and transaction cost (cash out), and resulting cash flows that would NOT have occurred, wouldn’t the acquisition have taken place. A positive NPV means the cash used produced more value than if it had been paid back as a dividend to the shareholder.

Surveys consistently illustrate that:

• one fourth of all acquisitions create value far in excess of initial expectations (very positive NPV, above budget)
• one fourth of all acquisitions perform less than expected, but pay the cost of capital (positive NPV, below budget)
• one fourth of all acquisitions destroy some value (negative NPV) even though cash flows remain positive
• one fourth of all acquisitions end up generating negative cash flows.

In half of the cases, the buyer would have been better off not doing the acquisition. And worse, the aggregated Net Present Value of all M&A activities seems to be significantly negative. In other terms, humankind would be better off without M&A… But we don’t really want to hear this, do we?

M&A is of course not only a matter of NPV. It’s a way to remodel industries, to create new businesses, to change corporate culture, to introduce new talents in the organization, and to bring additional growth beyond internal growth… And M&A is a lot of fun. In other terms, we would rather accept negative NPVs than live in a world without M&A. Fair enough. But we also want to improve the M&A process, don’t we?

The M&A curse

M&A teams are usually high profile professionals and acquisitions are under top management scrutiny. So why would bright people perform less in acquisitions than in other activities? Some deals occur that should have never closed. Some decisions to drop a deal are never taken, because acquisition teams are exposed to pressure that biases them towards closing deals at any cost:

• pressure for short term external growth: in publicly traded companies, boards commit to external growth; closing a deal is always a good short term result, while real NPV is measured many years later, and with unreliable measures…
• pressure from partners: Mergers and Acquisitions involve actors (banks and consultancies) whose retribution depends on the conclusion of the deal; they tend to heavily influence decisions toward making the deal at any cost; in the expression “success fee”, success often means “deal closing”,instead of “good deal closing” AND “bad deal dropping”…
• pressure from inside; acquisition teams invest a lot of passion, determination and intelligence, and the process is long; the more it progresses, the more it becomes difficult to interrupt, even when some rational reasons suggest that the whole project is uneconomical.
• pressure from top management: acquisition is not merely a matter of fine economy, but also a matter of leaders’ egos. The moral satisfaction of increasing the size of one’s business through an acquisition may help make bad decisions to buy… Overdeveloped egos have a cost.

In addition, the value of an acquisition comes from years of good operation. Yet, the team that makes the acquisition is not the team that will extract the value. Not one person or group can be made accountable for the whole process.

So yes, there is a curse on M&A. It is somehow like poker: players who drift away from purely rational processes lose money… And it is also like derivative banking: the transaction is a short term objective, disconnected from the long term profitability…

It takes outstanding procedures to remain on the safe side and resist pressure. Or it takes to be familiar with all the processes that may affect judgment at each step of the acquisition process.

Zooming on problems

All acquisitions are decided on the base of positive projected NPVs. If real NPV is negative, it means either that the initial projections were wrong, or that the post acquisition process goes wrong. Or a bit of both. And it may also mean that the acquisition should have never been considered in the first place! We will see how this can happen during three essential phases of the acquisition process:

• Target screening: this is where the global strategic fit of a target is assessed.
• Deal negotiation: the team builds a business case that provides a realistic NPV, given a fair purchase price
• Acquisition integration: a team is built to implement the planned integration process.

1 – Global Strategic fit

The theory

Targets that are not within the scope of the global strategy should not be considered at all. They are bound to become failures, even if they may look at first glance as good opportunities.

If part of the target business is within the strategy, and part is not, make it break apart before you consider buying the piece that fits your strategy.

The wisdom behind the theory

But why should we ignore a business “just because it does not fit our strategy”? After all, we are in business to make value for the shareholder.

Efficiency

We all dream of being omniscient geniuses, but we are not: we develop over time a competence and a culture in specific sectors, and this is where we can strive for excellence. Entering a business where we have not competence is costly. If we do it, this cost has to be considered, as part of the company’s strategy.

In the example above, 60% of this business is not within the field of competence of the potential buyer. The buyer will not be able to maintain the operating margin, because he does not know this business. The acquisition will not be profitable.

Sustainability

Sooner or later, the acquired business will require some investment. And investment money is a limited resource: inside a corporation, projects and businesses are in competition to obtain a share of available investment money. It is highly unlikely that the acquired business will get investment money in 3 years time, even if he deserves it, just because it is simply not in the focus of the company. A business outside the strategic scope is bound to fade and fail.

The reality

The target screening process is very subjective, and non-measurable factors have a very heavy influence. Few corporations have a clear strategy, with an easy-to-use and objective model to assess the strategic fit of an acquisition. This leaves a lot of room for manipulation.

Twist the strategy

Starting with a sound strategy, with proper market definition and clear core activities, it is easy to widen the scope of the strategy to make it encompass the target:

• Define “necessary complementary activities” to core activities: typically, a service activity that was not considered initially can become part of the strategy if someone explains clearly that the core product business cannot develop without services. The problem is that service activities require a very different skill set, and provide very different returns…
• Extend the definition of a market to encompass the activity of the target.

Influence the perception of the target

It is very easy in an analysis report on the target business to reduce the importance of the non-core businesses, or increase their apparent profitability to make them more appealing, underestimate costs, or overestimate the capability to divest non core businesses.

Work around strategic priorities

Some external factors help soften the rigor of the strategic fit analysis:

• if a business has not received acquisition money for some time, its targets may be considered with more tolerance
• the candidates of a political heavyweight may be exposed to a more lenient screening
• than others.

2 – Realistic NPV given a fair purchase price

The purchase price negotiation is an external process (between the buyer and the seller) AND ALSO AN INTERNAL PROCESS, as the acquisition group negotiates the NPV of the deal. The goal is to make it not only positive, but also more attractive than the NPV of other competing acquisition targets! The NPV projections for the deal attractiveness (short term) are also the base of post acquisition integration budgets.

The theory

Terms – To express the theory, we need to remember some simple terms:

• P1 is the amount of money that this business represents for the owner today, as it is: Net Present Value for the seller of the cash he would generate with his business, with reasonable growth and sustainable profitability.
• SP is the minimum price the seller wants (in technical terms, the seller’s reservation price). SP is often way higher than P1 (can be double), as business owners add emotional value to the true realistic economic value.
• P2 is the amount of money that this business will represent in the hands of the buyer: Net Present Value for the buyer of all future cash flows that can be attributed 100% to this acquisition, once all the synergies have been calculated.
• BP is the price the buyer’s acquisition group negotiates internally: it represents the buyer’s maximum price, also called the buyer’s reservation price. BP is lower than P2, but often close.
• P is the negotiated purchase price.

Basic negotiation theory

The conditions to make a deal possible are:

• P2 must be above P1, so that the acquisition makes sense from an economic point of view;
• SP must be lower than BP, so that it is possible to make a deal.

P1⇒ SP ⇒ P ⇒ BP ⇒ P2 ⇒

The seller starts somewhere above SP. Buyer starts somewhere below BP. P is somewhere in the middle depending on the very complex mechanism of negotiation.

The wisdom behind the theory

From a purely rational and theoretical point of view:

• P1 represents a value that belongs to the seller.
• P2-P1 represents a value that should go to the buyer, as it is the value of the synergies that the buyer will be able to extract from the acquisition.

The negotiation will split P2 –P1 in a part that will go to the seller (P –P1), as a result of his negotiation capability, and a part that will go to the buyer (P2 –P), as an extra benefit for his cash.

The reality, beyond pure negotiation

The buyer determines initially his P2 and BP, based on his perception of the company, and an anticipation of P. Over the course of the negotiation, he may revise both P2 and BP, if he finds relevant and valid reasons to do so.

The seller drifts

What the seller has in mind at the beginning of the negotiation is an opinion on SP, but not an accurate P1, for 2 important reasons:

• the seller is emotional
• to compute his P1, the seller always projects a business where HE continues to put efforts everyday (and night) to make it grow,taking chances, using all his entrepreneurial skills. In reality, P1 is the opportunistic cost of stopping this business to start doing something else (holidays,new business, or salaried job with buyer to continue running the business post acquisition).

In addition, the seller can claim that the value [P2 –SP] only exists if he accepts to sell… And he will try to get a share of this value during the negotiation, in particular if there are several potential buyers. The seller is a “lean and mean” guy, tough minded, and a shrewd businessman.

Hence the almost crazy prices that some sellers announce. It may happen that SP is higher than P2. Or that the seller’s entry price is above P2. If buyers were rational, they would of course negotiate down quietly, and walk away if the seller persists.

The buyer drifts

The buyer’s team is under pressure to make the deal, as we saw earlier. And P2 is subjective… because it integrates synergies, which are financial projections of future efficiencies… It is easier to re-work P2, rather than take a chance to break the negotiation, or tell the boss that the deal is impossible. So, the acquisition team goes back to Excel. Excel does amazing things when handled properly to justify about anything:

• Shift costs from recurring to extraordinary: long term post acquisition profitability will increase
• Shift revenues from extraordinary to recurring (same effect)
• Increase the marginal profitability of synergies
• Increase the scope of some synergies
• Transfer some synergies from “possible” to “certain”
• Reduce and delay some future investments

Anything that improves the final year cash flows boosts the value of the perpetuity… In the end, the acquisition team may negotiate a price way above anything acceptable, and the acquisition will NEVER be a good one, because the price is way too high.

None of the above is dishonest. And nobody can blame an acquisition specialist for fine tuning his perception of the business. But when needed, fine tuning will mean increasing P2 more often than it should.

Good practice – On the right price

Determining the right price is complex, and there is a lot of literature on the topic. Some gurus stick staunchly to one method (see in the box) that usually provides a very low price. Of course, life requires a little flexibility, but there are still some rules with which none should cheat, and that negotiators should repeat as a mantra before any negotiation exercise:

• Anything above P1 (no-growth no synergy) belongs to the buyer, not to the seller. Because the value of growth belongs to the manager that makes it happen.
• Any cent above this value is strictly a matter of negotiation skills, and that’s where the negotiator is evaluated.
• he negotiator’s maximum price should be the NPV of the most likely synergistic case,with three years cash projection, no investment and a simple perpetuity.

A good practice is to establish negotiator’s incentive to reduce pressure on deal closing and increase pressure on “bad deal dropping”. The negotiator should be rewarded if he loses to a competitor, but forces the competitor to buy at a price OVER P2.

Good practice – On NPVs

NPV is both a necessity, and a fool’s game. It is a necessity because of the amount of work it takes. Making proper projections brings a better knowledge of the target business. It also is a necessity to compare projects competing for the same acquisition money. But it also is a fool’s game because then, it may only tell who is the most talented and credible liar…

Finally, computing NPV can become a toxic exercise when acquisition teams start building NPVs to justify a purchase price. As NPVs look like math, they may influence decision makers, and comfort them in bad decisions. NPVs should only be made by the people who are going to manage the business, as they are their budget.

The negotiator should never be entitled to discuss the NPVs. Not even “under supervision”: if the negotiator is good, he will negotiate P2 up with his supervisor!

Synergies should be discussed ONLY with business people not involved in the negotiation process.

3 – Sound integration process

If there is one thing on which all modern managers agree, it is the importance of the integration process. And still, in reality, this process is mostly overlooked. The study of best practices gives the following guidelines:

• Dedicated integration team
• Free the previous owner in the first year

Yet, in reality, things happen very differently, and always for apparently very sound reasons.

Dedicated integration team

The theory

Recommendations based on commonsense are:

• Include the integration team cost in the acquisition costs, or as a negative synergy, or as a cost of synergy, and budget it.
• Create an integration team made of one person from the acquiring company (A) and one person of the target company (B) FULL TIME FOR AT LEAST SIX MONTHS, and some more part time resources from A and B;
• Create an integration review committee, meeting once a week for 6 months, then monthly for two years, including one of the key people of A’s negotiation team.

The wisdom behind the theory

Integration team:

• The goal is to have on both side a person from each culture making the transition, and solving the problems through a JOINT approach taking A’s AND B’s culture, not just A’s culture.
• The two workers from A and B have as a mission to get to understand the culture of the other company, to explain the discrepancies, and prepare the “action” phase.
• People who have two part time activities tend to favor the easiest and most rewarding activity. Integration work is very difficult to reward based on incentives. If people are not full time o such activities, they may end up doing little to nothing for their integration duties.

Review Committee:

• the member of the negotiation team is a key element: the negotiation process brings a lot of information on people’s hidden agendas, company’s informal processes, and it also creates scars that only the people who ran the negotiation may understand.
• Review committee must not dissolve once an “action list” has been exhausted: problems appear after several months, as a consequence of the acquisition, and someone must be there to monitor it.

The reality

Integration teams are budgeted part-time, because in general “none in A or B can all of a sudden stop doing his usual work and dedicate his time to pure integration tasks…” I agree, it may look particularly straining on an organization to dedicate so much time to integration. But it is so easy to destroy value that it is worth doing it.

A common practice is to select the most open persons in B, ask them to get to know A on their spare time, and act as transmission chain for B towards A. This ignores that A also needs to talk to B, and that A may have to adapt marginally to B, not just B to A!

The acquisition integration team comprises some people from the due diligence team. But the negotiators are usually high profile guys, who immediately jump on their next negotiation, far more valued than an integration.

DUE DILIGENCE DOES NOT PROVIDE THE SAME UNDERSTANDING AS NEGOTIATION. So this valuable information is lost.

Action plan

The theory

“Observe for three months, prepare for three months, announce after 6 months, implement in a week, fine tune over 6 months, everything is finished after one year”.

The wisdom behind the theory

The reason for this is not a male display of action oriented management style. It is based on several human rhythms:

• It takes some time for people to speak up. People in B will not speak openly: an acquisition is a trauma, and it will take some time before people open up. So please remain patient and only listen for three months.
• It takes six months for anyone to understand a new environment: a new job, a new house,a new organization; you cannot expect to make sound decisions before.
• People expect changes to happen, whatever has been promised to them. If changes do not appear, after a year, people are disappointed and start playing a new game.
  • People cannot perform in the first months following an acquisition: because of stress, because of the additional burden to understand and adapt to new constrains; because there is an easy scapegoat when things do not go right: the acquisition! After six months people are ready for change, and change is urgent.
  • If things do not change, there are bad side effects after a year: relationships between former colleagues spoil, and some irreversible moves are made. It takes a year to disaggregate a human system that goes through the trauma of an acquisition.

In B, people know who is good, and who is bad. They expect the bad people to be let go, and the good people to be identified, promoted and rewarded. A must not disappoint this expectation. This means listen, plan, and act.

Of course, acting after 6 months may cause to make some mistakes. But mistakes made at this time hurt much less than expected actions not undertaken. And mistakes will be quickly forgotten if people are back at work with clear objectives, and a confident future.

The reality

People speak before they listen. We all do. And we all tend to agree with the simple idea that “there is no reason to wait to make the administrative integration, so let’s proceed now”. It is wrong for 2 reasons.

• Existing administrative processes usually match operational reality and sometimes some human particularities: B may have some very specific habits that are not compatible with A’s standard administrative processes. Of course, B will adapt, but it may affect operations adversely.
• A’s stiffness on processes may be a good business practice, but it will be perceived by B as a lack of care, or worse. Acquirers have a reputation of being arrogant: as A is in a dominant position, A’s middle management may be tempted to abuse. Any process that reinforces this impression during the initial phase is negative, and often useless.

Some things go quickly, and some other things never occur! In some cases managers in A will say: “the best thing is NOT to touch anything! It will be business as usual; the acquisition will be transparent”. It is not only wishful thinking, it is a mistake, and it often covers the reluctance to do changes. There is no such thing like business as usual after an acquisition. For many reasons including three major:

• The owners have sold: they were the fearless devoted leaders, they are now the fat Ferrari drivers. Their troops do not consider them as before the acquisition, and it is in itself a drastic change.
• B was permanently at risk, B within A is NOT anymore: this may not be true, but it is B’s employees’ perception. And this is again a major change.
• Customers of B do not have the same perception and attitude as before. Funny enough:they will NOT accept anymore some mistakes that they were tolerating from B, and at the same time, they will expect B to inherit all the bad habits of A!

In addition, action is not always nice. It means firing people. It means taking chances selecting the people who should go and the people who should stay. For some managers in A, it is the first time of their professional life that they have to restructure. The first time is not easy. And when things are not easy, it is often simpler to postpone them. BUT, people in B expect things to change. They expect some restructuring, and from day one, they have started to anticipate: single out the least appreciated people, promoting oneself, all the non-glorious attitudes that we animals tend to adopt when threatened. It is struggle for life, and it also creates wounds. These wounds, if not healed, get infected, and infection propagates.

Good practice

All integrations are transitions. The virtues of transition management compared to ordinary management are now well understood in all industries. Integration should just be handed to transition managers for 18 months, until they are ready to hand back the business to standard operation. No more, but no less.

I may add that some things should be purely and simply prohibited:

• pretend in any way that business after the acquisition will be “business as usual”.
• make an integration task list, and consider that once the final box has been ticked, the integration job is over.
• pretend that line managers are able to handle an acquisition without special skills and training.

Conclusion

The economic crisis that we are experiencing has demonstrated at length that professionals with excellent technical skills could work their best to create major failures affecting people’s lives. Some of the lessons learnt were:

• short term goals may lead to major wrong decisions
• excessive trust in technicality obscures economic reality
• self interest make people lose all commonsense
• passion for figures and money challenges consideration for other human beings.

Lessons learnt from acquisitions are very similar in many aspects. But money pains are not the most important.

Integration is a matter of helping professionals who had dedicated their working time to a certain way to do business, transition to a new professional life. There is much more than figures at stake. All acquisitions result in some people losing their job. Fair enough: business also follows some kind of Darwinian evolution. But bad integration results in unnecessary and often irreversible human damage. And managers should never accept that. It’s not an operational mistake anymore, but a human fault.

It may also result in simple destruction of an activity, of a production capability, of a previously dynamic business, of a creative or innovative momentum. I will describe such a thing in a next paper. Then, beyond the fault, it’s a lack of elegance, a “crime against business aesthetics…” Not to be forgiven.

“Someday, on the corporate balance sheet, there will be an entry which reads “Information”; for in most cases, the information is more valuable than the hardware or software which processes it.” Rear Admiral Grace Murray Hopper, US Navy (Ret)

As the economy goes digital (and global), competitive advantage is increasingly synonymous with information. More and more organizations are dependent on information systems to store their assets, be it a pharmaceutical company’s novel drug formulations; a music company’s original recordings of artists’ latest albums; or a tech firm’s code for new software applications.

Gaining competitive advantage through a merger or acquisition means that a company acquires the information assets of the target entity. How both acquirer’s and target’s information assets are integrated and shielded from various types of risk during the M&A can play a role in the success or failure of the new entity.

This paper discusses the challenges of managing information risk for several types of M&As and introduces a framework that can be used to address those challenges. The paper also offers a checklist of best information risk management practices for an M&A, based on the author’s experience as a Certified M&A Advisor.

CHOOSING AN INFORMATION RISK MANAGEMENT APPROACH

Companies pursue M&As to enhance their market position, drive growth, or to expand capabilities, products or services. Senior management typically focuses on four major areas during an M&A: brand protection, customer retention, cost reduction, and change management.

A robust information risk management (IRM) strategy supports the areas of management focus while creating value for the new entity. In this author’s experience, managing information risk can be a challenge during an M&A, because it is typically a time of intense change and rapid execution.

Understanding the type of M&A the company is undertaking allows for more effective information risk management. M&As can be broadly categorized by the type of buyer (financial vs. strategic), the size of the deal, and the extent and speed of integration. These factors affect the overall integration strategy and call for different approaches to managing information risk (Figure 1).

The first M&A category are financial buyers who seek targets outside their market that will enable them to create value through transformation. These buyers will usually extend their existing products and services into a new geography or diversify by connecting with large conglomerates or private equity groups. Integrations are usually done slowly so as not to rock the boat for the target or distract people through rapid change.

For these financial buyers, the information risk management strategy should focus on compliance issues, laws and the regulatory frameworks that will impact the business. There is likely to be minimal formal integration and IRM teams must understand the resultant complexities in governance. The policies and procedures, although used to run distinctly different businesses, should be consistent across the two organizations. On the people side, IRM teams must recognize there are two different levels of risk awareness, skills and cultural knowledge. Since there is not full integration, there is little scope to bridge the gap between entities; this increases the complexities of governance. If not managed properly, this can adversely affect the strategic agility of the entities.

Figure 1:

The second M&A category is the strategic buyer pursuing market leadership by consolidating two large entities to eliminate redundancies, improve operations, and leverage economies of scale. These M&As often warrant a full integration and are usually done at a modest pace. Pushing forward at a rapid pace could be risky, jeopardize the full value of the deal, and burn out resources from the sheer size of the effort.

For this strategic buyer, IRM teams should focus on classifying sensitive information to ensure the right people have the right level of information access, and the wrong people do not. The risks of any downtime and availability of information from systems migrations and integration of disparate systems should be well thought through; any downtime could affect customer retention and brand reputation. All obsolete and non-standard systems should be eliminated. Poor migrations and integrations often result in data accuracy and integrity issues, which have a huge impact on an organization’s key business processes.

The third M&A category are those financial buyers who execute a series of “bolt-on” acquisitions to create a new platform for growth. These expansions could be geographic or involve vertical integration. The speed of integration is rapid, leveraging the skills and scale of the platform company. There is likely to be low extent of integration beyond eliminating redundancies and overlaps in corporate functions and the back office.

Here, the IRM teams should focus on compliance with specific regulations. Access risk and residual access risk must be evaluated and acted on quickly. There also needs to be a tight level of integration at the governance level, similar to that needed for the “transformational” financial buyer.

The strategic buyer who is absorbing a competitor – usually of a smaller size – are the final M&A category. This buyer seeks to capture operational synergies by eliminating excess capacity and enhancing efficiencies. This often includes merging sales functions, scrapping product lines or services, or closing offices.

While this is a full integration at rapid speed, extra care must be taken not to alter the risk profile of the target so much that it diminishes in value and takes on too much agility risk. In addition, access risks play a very important role in this kind of a merger, having the same level of impact as consolidation with full integration. The use of non-standard or obsolete systems stand a negligible chance and hence much time and effort is not spent on this area during absorptions thereby reducing accuracy risks.

Frequently the methods used by the acquirer for managing availability risks are adopted by the new entity.

THE ‘4 A’ FRAMEWORK: UNDERSTANDING RISK PROFILES

M&As create environments more complex than steady state operations, and thus should be viewed differently when managing information risk. It is also important to have a common IRM framework during an M&A, so that the integration and IRM teams can ensure changes are visible and controlled.

To manage, mitigate and monitor risk in this highly complex environment, it helps if the framework is robust enough to be customized by the type of M&A. The framework should allow for integration between the tactical tasks that help manage risk and the strategic imperatives of the transaction. Such an information risk framework also aids in building a common language of alignment between business design and the information environment.

Figure 2:

The 4 A Framework is a model that allows IRM teams to look at all aspects of risk. Using this framework for M&As allows IRM teams to customize to the transaction, maintain transparency and connect risk management to strategic goals. Entities undergoing M&A can evaluate the risk profile of the acquirer and the target company, and that of the combined entity based on these parameters:

• Availability – keeping existing processes running and recovering from interruptions, while avoiding negative incidents such as outages and security leaks
• Access – ensuring that the right people have access to appropriate information and that the wrong people do not
• Accuracy – providing accurate, timely and complete information to all relevant stakeholders
• Agility – supporting changes in the business with acceptable cost and speed.

With the 4A Framework, the IRM team can manage top-down, rather than get bogged down in operational details right away. This can simplify execution. It’s important to note that the 4As are not independent of each other. For example, overengineering access can reduce agility, while overengineering agility can increase availability or accuracy risks. Ultimately, balancing the 4As in alignment with business objectives leads to better integration and risk management.

Figure 3:

INTEGRATING RISK PROFILES

Seasoned M&A professionals usually tend to select either the acquirer’s or the target’s IRM approach because similar choices usually work for other functional areas.

Traditional information risk management professionals, on the other hand, tend to lean towards standards or regulatory frameworks during an M&A. While this does work for steady state operations, it often leads to issues during the transaction, because the risk profile of the new entity differs from steady state.

IRM teams also should avoid using either company’s risk profile for the new organization. The best practice approach, the acquirer imposing approach, or a standard approach might work for other areas of integration, but not for information risk management.

An organization’s business architecture revolves around five broad areas: customer segments, scope of products or services, geographic coverage, strategic differentiation, and profit pools. During an M&A, organizations tend to alter one or more of these areas. This impacts the IT strategy needed to support the new structure. As a result, the new entity is likely to have a different risk profile than either the acquirer or target. The information risk profile for the new entity should align with the new business architecture as well as the new IT strategy, thereby creating and protecting value for the new entity.

An example would be if the acquirer’s focus has been historically skewed towards access and availability risks because of the nature of their business, while target’s agility risk management was a competitive advantage for them. By imposing the acquirer’s profile on the target, there will not only be erosion of competitive advantage and loss of value, but also perhaps new exposures for the new entity.

BEST PRACTICES FOR MANAGING INFORMATION RISK DURING AN M&A

Based on the author’s experience, these tactics are best practices for M&As from an information risk management perspective:

1. Get the information risk management teams involved right at the due diligence phase.
2. Form the governance committee upfront and get agreement on the merger imperatives.
3. Understand the risk profile of both organizations and agree on the risk profile of the new entity.
4. Ensure the risk profile, IT strategy and business architecture of the new entity are aligned.
5. Align information risk management with the overall risk management work stream supporting the business rather than have it as a work stream within IT.
6. Understand the strategic intent of the transaction and get a solid handle on the speed and extent of integration.
7. Some mergers are heavily focused on capturing synergies through cost reduction; make sure this does not come at the expense of increasing risk beyond the appropriate threshold.
8. Understand and classify all sensitive information early in the transaction. Know where information resides and ensure adequate controls are in place to protect it during the integration and in transit to the new control structure.
9. Critical skills and knowledge reside with people and both acquirer and target need to retain good people to make integration successful. Loss of key people during the M&A could increase project risk and increase costs while impacting efficiencies in other areas.
10. Understand the regulatory environment. Regulations such as SOX, HIPAA, Basel II, GLBA etc., may come into play. Though some regulatory guidelines might overlap, addressing one does not mean compliance with others.
11. Understand and document all cross border issues with respect to legal possession of systems, applications, transactions, data rights and regulations that might come into play.
12. Use of non-standard technologies can result in loss of agility and affect speed to market, procurement, invoicing, or other critical business processes, thus eroding competitive advantage.
13. Pay attention to all information migrations; most accuracy and integrity risks arise due to poor migration executions.
14. Give immediate access to information on Day Zero. People will need it to do their jobs. Improper integration or poor consolidation of access control systems could lead to access risks, potentially violating SOD rules.
15. Look for hidden liabilities in licensing that can increase costs.

M&A programs are crucial for an enterprise. Many M&A actually fail because of inappropriate preparation. They are an economic adventure but also a human adventure, in which each member of the enterprise has a part to play. CEO Worldwide offers enterprises (which are willing to succeed) the experience of top managers, who have already succeeded in setting up several M&A programs. Experience is a key factor in this field.

A) The Myth

Conventional wisdom is that most merger and acquisition (M&A) transactions fail. Or put another way, only about 20% of all mergers really succeed. Yet M&A activity is prevalent. Why? Because the reality is that M&A does succeed on average. M&A clearly pays for shareholders of target firms, especially if they are shareholders of private firms acquired by public firms. And most studies of targets and buyers combined indicate that these transactions create net value.

B) Initiation of an M&A Program

Successful companies develop critical core competencies that drive their competitive strategy. In order to increase the chance of success with a M&A program, successful companies must also develop core competencies that make them superior acquirers, something that is difficult to do when each acquisition is considered a unique event. When companies announce they are undertaking a series of acquisitions in pursuit of some strategic objective, generally their share price rises significantly. The stock market’s systematic positive response to such announcements suggests that most corporate M&A programs tend to create value over the long haul.

3) The Three Key Factors to a Successful M&A Program

Strategy

All else being equal, acquisitions of companies in related fields (“focusing acquisitions”) is the most likely path to the discovery and exploitation of synergies and generally provides a better return than an acquisition strategy that does unrelated diversification. Furthermore, focusing acquisitions should only occur when it advances the overall strategy of the company in compelling ways. It is essential to ensure the transaction is in alignment with the company strategy. Always question the strategic rationale of each transaction. If the strategic rationale is wrong it doesn’t matter how well the deal is executed or integrated, it is still a bad deal. But if the strategic rationale is right you still can fix a bad deal or a bad integration. Having a sound strategic rationale defines the purpose of a transaction. There should be absolute clarity within the organization on the purpose of the acquisition and why it’s important. Not only is this critical to motivating employees and shareholders, but an acquisition justification can serve as a beacon to point the way during problems, complexity, and confusion that inevitably occur during integration.

Sponsorship

To ensure success of an acquisition, the deal must be sponsored by the head of the business unit (the “BU”). The CEO or the deal team can manage the transaction but if it doesn’t have a sponsor after the transaction closes to ensure that the details of a successful merger are addressed, the transaction will fail to meet expectations. And the BU head must be accountable and rewarded for performance. It is essential to have a stakeholder that is willing to spend the political capital to make sure the transaction is a success. If it is a new area for the company without an established BU head then the CEO must appoint a BU head, generally from the acquired company. Using an earn-out structure in this circumstance can help ensure the BU head from the acquired company is working for the good of the combined company. Furthermore, the BU head must have the bandwidth to put in the required time and effort as making synergies happen is not without cost – time spent on coordination and interaction to realize synergies, additional training and relocation costs, and additional travel time.

Integration

It is easy to lose one’s focus when the deal is closed but that is when the work begins. You must have someone, a program manager, who can stay attentive to the details. Start preparing for the unexpected. Laying out the first integration moves in advance frees up management time to deal with the issues and problems that could not have been anticipated in advance. Probably the most important of these items is to ensure that the first payroll does not have any problems. There is no better way to signal to employees of the acquired company that you don’t care about them than to mess up their first paycheck. Each integration plan must address the following four basic principles:

1. Accountability – individuals must be made accountable to oversee and direct the integration effort

2. Specific action steps must be created – a specific time frame for completion of integration must be created and followed

3. Communication – internal and external procedures and processes must be addressed

4. Measuring success – for each acquisition the company should establish benchmarks of performance with provisions for evaluation, control and corrective action

D) To Conclude: Nothing Replace Experience

If there are any basic principles to succeed in M&A, experience is definitely the key factor (to success). There are so many variables to master that a theoretical or purely economic vision cannot resolve the different problems. CEO Worldwide provides a vast number of top managers who have succeeded in achieving M&A. They can intervene in an autonomous way or assist you directly in this vital step for your enterprise. For a temporary mission or for a permanent job, they will allow you to take advantage of your business opportunities in the best possible way.

About the author: A senior executive officer and industry expert in corporate acquisition and business development with the ability to provide complex strategic planning and M&A execution for accelerated corporate growth. Excellent ability to conduct thorough due diligence requirements coupled with keen business savvy to identify emerging opportunities.

Click to view Michael’s short bio

Alberto Elli looks where the resources are concentrated during the three major temporal blocks of an acquisition

After so many years of being involved in business development, I think one of the most critical moment in an acquisition is the integration phase, when there are great chances to destroy shareholders’ value.

Let’s see where the resources are concentrated during the three major temporal blocks of an acquisition:

1. Strategic intent, target setting and proforma decision to justify the deal price. Great focus from top management, quite unrealistic expectations pushed both from inside (needs for growth) and from outside (bankers driven by fees as a percent of acquisition price).
2. Negotiations and closing. Seller, buyer and advisors have strong vested interests to get the deal done, also stretching proforma. Maximum peak of resources involved: multi-functional team from the acquirer and handsomely paid consultants from outside: lawyers, environmental experts, tax experts and accountants, bankers for financing and for advising on the deal. Once Due Diligence is completed (and at times it is done too quickly and without depth) and Purchase Price is set, all these actors tend to disappears because they have reaped the biggest rewards.
3. Once Senior Management is on a new acquisition and the “clock” of external advisors has been stopped, the local team and a bit of divisional support is left with the huge task of integrating the new acquisition and to deliver the shareholders’ value they are committed to.

RISK ASSESSMENT

To better understand the challenges of integration, an analytical risk assessment will help to highlight the areas that will need most management attention and dedicated resources. The following model can be run both in a qualitative way (describing the issues) and in a quantitative way (assigning values to each variable based on prior integrations experience). The latter approach is particularly valid for “serial acquirers” that will quickly size the risks and assign internal or external resources based on prior experiences and … lessons learned!

Nature of the transaction
1   Clarity of Strategic intent
2   Board of Directors Approval
3   Highly leveraged
4   Proforma on more than 5 yrs.
5   Acquisition and integration costs budgeted
6   Target, public or private
7   New Market Entry
8   Bolt-on acquisition
9   Transformational
10  Joint Venture
11  Minority Participation

Complexity “up-front”
12  Sales $10 – $50 Mill. Or more
13  Multi-divisional
14  Multi-geography
15  Plants to shut-down
16  People to reorganize / downsize
17  Due Diligence -> major adjustments
18  Net Worth Adjustments
19  Ear-out on multiple years

Customer Facing / Front Office
20  Key Management to Retain
21  Criticality of customers – Sales retention
22  Criticality of customers – Terms&Condition
23  Bad Debts Reserve
24  Compliance issues / severity – FCPA specific

Back Office
25  IT integration complexity
26  ERP to implement
27  Business Intelligence
28  Supply Chain established
29  Production Planning
30  Safety Procedure
31  Inventory management / slow moving
32  Centralized Purchasing
33  Critical Suppliers
34  Finance – closing and reporting in less than 5 days
35  Finance – monthly B/S reconciliations
36  Finance – Cost Accounting
37  Finance – Bank relationships, complexity
38  Finance – Cash Flow Management
39  Finance – Tax strategy
40  Risk Management – Insurance and Legal support
41  HR – Payroll (internal or Outsourced)
42  HR – Labor Contracts repository
43  HR – Benefits defined, perquisites definition
44  HR – Pension Plans assumptions understood and funded

Others
45  Culture, consonant or dissonant to acquirer
46  Regulatory and IP protection, criticality of issues
47  Warranties on long term sales contracts
48  Warranties on long term purchasing contracts
49  Documentation of Labs procedure
50  FX hedging in place

WHO HAS TO LEAD THE INTEGRATION PROCESS?

Every each integration is different but the best practices on the resources needed have informed the following considerations:

1)  CFO (Acquiring or the acquired)

Given the ultimate goal to deliver on expected shareholders’ value creation, the involvement of the acquiring CFO is very important but cannot be the sole responsible, given the many others concurrent responsibilities. At times, the acquired CFO has been asked to lead the integration; results are mixed because the internal knowledge can be over weighted by the temporary nature of his/her mandate. Only if the acquired CFO will have a long term place in the organization, the integration role works pretty well, actually if executed with excellence is the best entry in the new organization.

2)  Internal Project Leader (Full time or part-time)

PMO skills are needed; either imparted through internal training or available in specific professionals but the true integration leadership is quite different: best is to have a manager that is slotted to become the leader of the acquired entity or the leader of another acquisition.
Depending the size of the organization and the frequency of acquisitions, the investment of full-time resources is to be considered; the experience is usually multi-functional and the resource can be redeployed quite easily.

3)  External Project Leader

Solution to consider when the acquisition is one-off or is particularly complicated from a geographical/cultural point of view. Difficult to recruit the right profile but once is individuated the scope, the timing and the cost is fixed, even more important is the independence from internal politics and divisional agendas.

4)  Internal Team (permanent or ad-hoc)

Best practice is to form a full-time internal group of experts that can be redeployed after the acquisition is integrated or kept as a team if more are foreseen. To be noted that integration can be a relatively compressed time frame but full achievement of synergies can be a longer effort, like for Supply Chain and for IT in the contest of ERP implementations.

5)  External Team

Risky proposition in term of having the right quality and number of resources for all the time needed to complete integration. Once a resource is hired for a functional area, always ask to identify a back-fill. If possible, try to shy away from time and material contracts in favor of closed end sum, or based on payment at milestones’ achievement.

CONCLUSION

Clarity of the objectives to achieve, well defined timetable, proactive risk assessment and correct deployment of resources are key to a successful integration that will deliver the full value of an acquisition.

About the author: Alberto Elli for the last three years has been Interim-Chief Financial Officer for private and PE-owned companies in the space of consumer electronics and fashion, leading processes of turnaround and exit strategies.

From 2008 to 2013, he was Vice President and Controller of Sherwin-Williams Global Finishes Group (OH) (Automotive Finishes; Chemical Coatings; Protective and Marine Coatings and Emerging Markets) with about $3 billion Sales. Since inception, in 2008, the Group grew sales 70% both organic and with several acquisitions. Alberto joined Sherwin-Williams in 2006 as Vice President and Controller of the International Division after ten year experience in the pharmaceutical industry with Schering-Plough. His first assignment was as Finance Director in Italy and he was later promoted VP of Finance for the Healthcare Division headquartered in US-NJ and after three years was named VP of Finance, Pharma International, a group of $4 billion Sales. From 1985 to 1996, Alberto held various financial positions in Italy, the last of which was from 1989 to 1996 as Finance Director for SCA, a leading Swedish multinational in paper and packaging industry.

Alberto earned his degree of Dottore in Economia e Commercio from the Universita’ L.Bocconi, Milano, Italy