This article is written by Nikunj Arora, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com.
Multinational corporations are looking at cross-border deals for several reasons such as to diversify, to sustain growth objectives that cannot be achieved onshore, to build a global supply chain and infrastructure and to acquire new skill sets and capabilities they cannot build themselves efficiently. Mergers and acquisitions (“M&A”) can be one of the most complex and challenging activities a company can do, particularly integrating cross-border acquisitions. Time zone differences, cultural differences, geographical distance present common hurdles to integration efficiency. Some of the most critical drivers to cross-border integration success centre around leadership, accountability and change management. It’s important to rapidly secure integration leadership across borders, and communicate decision rights, information flow and reporting requirements. It’s also important to focus on priority initiatives and clearly define the degree of integration across functions and geographies including what is in and out of integration scope and aligning ownership and accountability to KPIs (key performance indicator).
The integration challenge which is difficult enough becomes much harder if a company doesn’t have the right strategic fit, operational fit or people fit. Therefore, it is important to begin the integration planning from as early in the deal process as possible.
In this research article, the researcher tries to explain the cross-border merger integration process by the virtue of pre and post-merger integration and listing the factors which can influence the post-merger integration process a success. The researcher has analysed the issues/challenges associated with the Post-merger integration along with possible solutions to the same, as described by Boston Consulting Group (BCG).
Pre & post merger integration
- The pre-merger integration phase is also known as the run-up phase. It is used to develop an awareness of the likely challenges and pressure points. During this particular phase, the challenges which the companies (domestic and foreign) or the employees are going to face are listed to create awareness of the challenges which the company or the employees would be facing because of such arrangement.
- The companies generally concentrate only on the strategic aspects and legal issues during the pre-M&A planning period. Though the company and employees are aware of the likely challenges the management of the company normally concentrates on the strategic and legal issues during this phase and human issues like organizational decisions, staffing decisions etc. are ignored.
- The post-merger integration (PMI) is the process of bringing two or more companies together with a sole motive of maximization of synergies to ensure that the arrangement deal lives up to its predicted value. This process is also known as the post-acquisition process.
- This is a complex process of combining and rearranging businesses to materialize potential efficiencies and synergies that usually motivate M&A.
- The PMI is an important aspect of mergers as it involves combining the original logistical-socio-technical systems of merging organizations into one new combined system.
- One of the key issues with post-merger integration is that when the companies buy other companies, whether they are large acquisitions or smaller acquisitions, they often pay very high premiums and they pay these premiums to acquire capabilities.
- Between 80 and 90% of all post-merger integration, work fails to capture the benefit of the merger as it was intended.
The following are the three factors that can make post-merger integration a success:
- Right leadership: The leadership has to be aligned around the goals of integration, which means truly understanding what the integration is supposed to be about, what it is trying to achieve, and the companies need to make these goals highly visible to the organization.
- Right plan: The second factor is to develop the right plan for how the companies shall execute the integration. A good plan is one which can be easily explained to all the stakeholders that are going to be affected by the merger that has been communicated throughout the organization.
- Right implementation: The most important thing here is that the road map described tangible outcomes. This shall describe the specific outcomes that must happen at a given point of time with clear financial or other deliverables. The companies shall have track and measure the progress diligently but in a routinized way, thus, establishing a regular operating rhythm of reviews that shall talk about the progress of each of the key work streams that would come from the merger.
The two key benefits of achieving post-merger integration are the following:
- Achieving the financial outcomes that were expected.
- Maintaining and developing the capabilities that were originally acquired.
The cross-border M&A has many advantages, but despite these advantages, cross-border transactions pose several Post-merger integrations (PMI) challenges that can undermine a deal’s long-term value-creation potential. Thus, the following are the five biggest PMI challenges and possible solutions by the Boston Consulting Group:
GAINING ACCURATE PICTURE OF TARGET’S BUSINESS:
The most overlooked challenge in a cross-border M&A is to obtain information on a foreign target. The lack of reliable information or misinformation can make acquirers into making false assumptions about the target’s financial status, decision-making style, organisational structure, etc. The employees of the target company, their knowledge and experience are another key source of information.
For example, taking a case, where a UK retailer acquired a regional retailer in the US. The buyers wanted to increase the business quality as well as a bigger share of their label. Later, the British Company found out that the target’s IT and management systems could not support the level of centralization required to increase own-share label. Thus, the integration didn’t work and the acquirer divested the business.
POLITICAL AND REGULATORY PITFALLS:
There is a serious impact of political and regulatory issues including anti-trust considerations and employment law on the cross-border mergers. The following are the important issues acquirers should consider:
- Nature of employment law.
- The procedure of regulatory approval in the target country.
- The predominance of regulatory authority.
- Level of governmental influence, etc.
The famous case where General electronic tried to acquire Honeywell in 1990s (see here), GE managed to cross all the regulatory hurdles in the US without any difficulty. The GE abandoned this deal because the European authorities imposed severe restrictions in the deal. The possible solutions to this are the following:
- The acquirer shall first identify the most likely political restriction and then in the view of such limitations, set the economic limit of the company.
- To minimize the regulatory pitfall, the regulatory authorities shall be approached long before the deal is closing.
- Acquirers should anticipate the regulator’s objections and prepare a proactive approach to its defence.
RIGHT SPEED FOR INTEGRATION:
The decision or step to choosing an effective and efficient speed for the integration process is very important. The factors which shall influence such decision are the following:
- Analysing whether the deal is for consolidation, growth or a combination of them.
- Analysing whether such a deal is a takeover or merger of equals.
- Analysing the scope of integration, i.e., whether it would include a unit or units.
In a cross-border PMI, there is a possibility that different parts of the organization shall be integrated at a different speed as compared to a domestic merger.
A gradual integration shall work well in sectors such as the biopharmaceutical industry where it is important to retain and nurture the target’s research and development (R&D) portfolio, know-how, and talent.
The Cultural differences between the companies are a common challenge in PMI. A cross-border M&A transaction provides an opportunity to re-classify or re-define the culture of an organization because PMI incorporates building of a new senior team, defining new roles of the organization, etc. to meet the objectives of the organization. Communication, holding meetings, decision-making is important aspects which define the cultural differences in a cross-border M&A arrangement.
To avoid this conflict of culture the acquirer needs to analyse the culture instinct of the target, i.e., to analyse how are the decisions are taking place by the target, how does the target hold meetings, and how does the target company communicate with the employees.
An acquirer shall conduct a cultural diagnosis of the two companies using techniques like employee survey, etc. Leaders shall also assist in building a new culture and clear communication outset.
FOREIGN FEAR FACTOR:
Many times, it is seen that the acquirers target those companies in the countries which has the same culture as them. Many companies fear to merge or acquire with companies not known to them or are out of the bounds. Therefore, it is important to turn the unknown into known, so that the fear of foreign powers and environment can be abolished.
To minimize this fear, it is important to turn the unknown to known by creating an open environment and transparency. Acquiring or merging companies should bring their employees together and create ways to share information and establish transparency.
Many companies are quite skilled and have well-developed M&A capabilities, including creating a well-articulated deals thesis during the diligent process. However, it has been observed that many companies still stumble out of the gates when it comes to kicking off an integration program because they fail to take the intermediate step of developing an integration thesis. It turns out that a deal thesis is great for doing diligence, but it is entirely insufficient for running and starting an integration program. An integration thesis takes that deal/arrangement thesis and puts more specificity around it. It usually starts with the integration ambition, i.e.,
- what are the scale and the scope of integration?
- what are the sources of value?
- what are the key levers?
The pre and post-merger integration techniques in a cross-border transaction also talk about how and what is the integration structure, what are the team of integration looks like, the governance model, and what are the operating principles. Thus, articulating all these things into a well-defined integration thesis puts in a place a blueprint for an integration leader and integration teams of both the companies to stand up quickly out of the gates.
The pre-deal procedure consists of two things, i.e., training and building. The former includes the training of the integration team and carve-outs, and the latter includes setting up of in-house centres of excellence. The pre-signing procedure consists of M&A strategic analysis, opportunity analysis and negotiation advice.
In 2019, the financial services industry witnessed various M&A deals and cross-border M&A deals too, on the other hand, in 2020, when the whole world experienced Covid-19 pandemic, M&A increased as a direct result of firms seeking opportunities to rebound from the economic aspects from Covid-19. Through such an arrangement, if both the companies need to gain maximum benefit from the deal, they must both incorporate the post-merger integration process as early as possible and adapt their integration strategy.
- PwC US.
- Brain & Company.
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