Post-merger integration (PMI) is rarely straightforward, but the approaches most businesses take have made it slower, less effective, and more expensive than it needs to be.This may help explain why, in study after study, so many deals fail to deliver their expected value.
The irony is that massive investments of money and time go into most deals. Why, then, do they so often fall flat? In our experience it's because it is much easier to develop the investment thesis justifying a deal than to create a workable plan to transform two companies into one. Even the most well reasoned strategy, thoroughly vetted target, and comprehensive financial model are of little value if you cannot integrate quickly and effectively.
The good news is there is a solution. We have seen that structuring decisions up front about how the newly combined businesses will operate makes it much likelier that an M&A deal will deliver the envisioned shareholder value.
The Certainty of Uncertainty
It would be easy to attribute the failure of past deals to the natural uncertainty that accompanies M&A, as many textbooks do. But such an explanation seems like the pronouncements of armchair quarterbacks who've never really managed a PMI team. Uncertainty is absolutely relevant, but it is also surmountable if you understand its dynamics: it is not a matter of knowing enough, but rather a matter of timing.
As soon as a deal is announced, external stakeholders react. Markets immediately pronounce their judgments through share-price movements. Customers and trading partners wonder about possible near-term disruptions and the longerterm implications of the deal. Competitors begin to whisper in the ears of both firms’ key customers, hoping to poach a few in the wake of disruption.
Meanwhile, internally, and at the worst possible moment, the deal becomes a source of gossip and distraction. Precisely when the rest of the market needs reassurance, employees have astrong urge to look inward. They wonder about new bosses, new budgets, new policies, job security, and a host of other important issues.We believe it is this misalignment of focus at the most inopportune moment that often causes M&A value to dissipate, even more than a lack of good strategy or thorough due diligence.
The Siren Song of "Discovernance"
Many, if not most, companies try to overcome uncertainty with process, money, and effort. They employ exhaustive process discovery and elaborate program management governance—a one-two punch we have termed "discovernance."
Employees descend into the uncertainty and, despite good intentions, often magnify the drama. Current-state capabilities are exhaustively mapped. Cross-company integration teams and supervisory committees proliferate. Senior management delegates important decisions to these teams, which hesitate to make the wrong call. Accountability weakens the more distributed it becomes.
In the absence of clear decision-making authority and accountability, many integration teams focus instead on strict adherence to the PMI process as provided to them by their advisors. Unfortunately, this is a poor replacement for the decision-making that actually fuels integration. All it does is aggregate the complexity of how things operate today.
We typically ask clients the following question: "What decisions will you be making during the integration team’s kick-off meeting?" Usually, the answer sounds something like this: "Understanding the PMI process taxonomy and methodology, ensuring fully-representative team composition, establishing the template to be used for reporting the team’s activities, and mapping all possible stakeholders from whom the team will need to seek input." All are important things to understand, but in and of themselves they do not help you actually do anything.
Rather than cataloguing the complexity of today, what is really needed is a clearer understanding how things will run tomorrow. This would serve the dual purpose of resolving employee uncertainty and improving signals to outside stakeholders.
In order to do this, integration planning and execution should be driven by how the newly combined company will operate. Therefore, the paramount activity must be to make the foundational decisions that will define this future operating model. Everything else—especially process and governance— exists to enable this goal.
The fundamental operating decisions that comprise the future operating model ultimately boil down to four basic options. Consider the following high-level example: