Despite the potential for synergies and value creation, more than 70 percent of post merger integrations fail to capture the planned benefits. We explore the primary reasons why post merger integrations often fail, highlighting the importance of three areas that can help mitigate failure; due diligence, strategic planning, and effective execution.
Lack of big picture alignment
One of the leading causes of PMI failure is the lack of alignment with the overarching strategic vision. During the M&A process, the focus is often on closing the deal and achieving immediate external benefits such as market share expansion and revenue growth. However, insufficient attention is paid to how the new acquisition will integrate with the existing operations. This misalignment can lead to disjointed strategies and missed opportunities for synergy. Covelent consultants and other strategy consulting firms emphasise the need for a coherent M&A strategy that considers both the external and internal factors to ensure long-term success.
A well thought-out and coherent M&A strategy needs to be established for your organisation to ensure all of the parts, especially newly acquired ones, work together to improve and enhance the overall organisation. Focusing on closing the deal alone without properly planning what happens afterwards can lead to a host of issues during the integration of the new acquisition. When deals are in progress and even in the final stages of completion, the focus is often on the external.
Typical questions
- How to quickly gain more market share and be afforded new opportunities to increase revenue are prevalent. However, once the deal happens, the focus quickly turns to the internal.
- How we integrate multiple payroll systems and who from which team is doing what are abound.
Poor planning
Poor planning is another significant factor contributing to PMI failure. While due diligence is crucial during the M&A process, it is equally important to plan meticulously for the integration phase. This planning should encompass financial projections, market factors, cultural compatibility, and day-to-day operations. Unfortunately, many organisations overlook these aspects, leading to a disconnect between the development and integration teams. Effective planning requires a detailed roadmap that addresses potential scenarios and aligns with the overall business strategy. PMI consultants can play a vital role in ensuring comprehensive planning and bridging the gap between different teams.
Whether planning is excellent or poor can literally make or break an M&A integration. While the best of intentions are often the focus in any M&A integration, looking at the deal through rose-coloured glasses can lead to significant issues down the road, long after the deal has been completed. Poor planning for post-deal issues isn’t simply limited to the integration of the new entities; in fact, poor planning can apply to revenue projections, market factors, cultural factors, and lots of other areas. However, poor planning regarding the M&A integration is one that can be easily mitigated with proper planning yet tends to be one of the most overlooked factors in terms of why M&A integrations fail.
Often, there can be a disconnect between company development teams and deal integration teams. Many deals fail to integrate well due to failure to bridge this gap. Many business development professionals tend to have experience in investment banking and are primarily interested in the potential financial upside. However, often these teams fail to communicate properly with the teams that will be integrating the two companies on a day-to-day basis long after the deal has been completed.
Poor execution of the integration
Even with a well-thought-out plan, poor execution can derail the entire PMI process. Successful post merger integration requires a connected and informed team that understands their roles and responsibilities. Many M&A integrations fail because of loosely connected groups, inadequate communication, and a lack of coordinated efforts. An integration management office (IMO) can help orchestrate the necessary activities, ensuring that all departments are aligned with the value creation strategy. Covelent consultants and other PMI specialists recommend establishing clear governance structures and workflows to drive effective execution.
A poorly planned or executed integration can severely reduce the value of the M&A deal, if not remove the value entirely. Poor execution of the M&A deal integration can be avoided by collaborating with a connected and informed team, an informed team that not only includes the people working on the deal but also the individuals responsible for the integration after the deal has been completed. Too often, integrations of M&A deals are performed by loosely connected groups, with a mass of data and lack of meetings to discuss the entire scope of the deal, from the financial goals to the integration afterwards. How will different teams, systems, and ways of doing things function after the deal is completed to ensure business continuity and smooth operations?
Cultural issues
Cultural integration is one of the most challenging aspects of PMI. Differences in corporate cultures can lead to conflicts, reduced morale, and decreased productivity. A thorough cultural assessment during the due diligence phase can help identify potential issues and develop strategies to address them. Open communication, team-building activities, and cross-functional integration teams are essential to bridging cultural gaps. PMI consultants often recommend investing in cultural integration initiatives to foster a cohesive and productive workforce.
Workplace cultures can vary widely, and you’ll want to ensure as much as you can that the workplace company cultures are similar enough that they will integrate smoothly without major issues that will cause significant time, money, and heartburn. Due diligence should include analysis of the two different working environments and anticipate the needs of both parties after the deal has been completed and at the outset of the integration and beyond. Some cultural differences or even minor barriers are common, but ensure they will not be so great as to hinder the M&A integration or at least try to anticipate some of the potential cultural issues beforehand so you will be ready to work through them.
Poorly executed due diligence
Due diligence is a critical step in the M&A process, and its poor execution can have severe repercussions on PMI. Inadequate due diligence can result in unforeseen issues that complicate the integration process. It is essential to perform thorough research and oversight to uncover potential challenges and plan accordingly. Proper due diligence helps identify financial, operational, and cultural risks, allowing for better preparation and mitigation strategies.
When the organisation’s leadership pushes through a deal without performing the necessary due diligence measures, a deal that looks promising can lead to failure pretty quickly. Deals can also occur without properly executed due diligence when teams become too overconfident in the merits of the deal without performing adequate research and oversight to optimise the deal’s chances for success post-deal. Due diligence is of the utmost importance, as it will unveil a host of potential issues and highlight the inner workings of the organisation being acquired so issues can be flagged, evaluated and worked through. Don’t overlook or minimise this enormously important step just to get what looks like a promising deal done. Adequate due diligence always pays off in the long run, especially in the integration afterwards! Modern M&A playbooks can help with that.
Loss of momentum
Maintaining momentum is crucial for successful post merger integration. A loss of momentum often indicates a lack of prioritisation and can lead to stalled projects and unmet objectives. To prevent this, it is essential to establish clear milestones, maintain open communication channels, and provide the necessary resources and support. Regular updates and feedback mechanisms can help keep the team focused and motivated.
Momentum is what drives a team or project forward; it’s what grows a company, and it’s what can transform a one-year project into a six-month project. When you lose momentum during the integration process, it often means one thing: the project, process, or objective has no longer become a priority to those working on it. Teams can lose momentum for several reasons: they’ve lost sight of the end goal through a lack of or a convoluted roadmap, they experience internal conflicts, they feel discouraged by a lack of achievable milestones or targets, they feel like they don’t have a voice and/or their opinions aren’t valued, and they don’t have the needed resources. Of course, many of these issues can be fixed. But often, the hardest part of momentum loss is discovering the cause of it. That’s why communication is so crucial. Ensure the team has enough channels to express their opinions, give feedback, and request additional training.
Lack of leadership
Effective leadership is fundamental to navigating the complexities of PMI. Strong leaders provide vision, direction, and decision-making capabilities, ensuring that the integration stays on track. They also play a crucial role in maintaining employee morale and engagement during times of uncertainty. Transparent communication and a commitment to addressing employee concerns are vital for successful leadership during PMI.
Good leadership offers vision and direction: effective leadership provides a clear vision and direction for the newly merged entity, and they should be able to communicate this clearly. Decision-making and prioritisation: post-merger integration involves numerous decisions, ranging from strategic choices to operational details. Leaders need to make informed decisions promptly, balancing the interests of both the merged entities. Employee engagement: mergers can create uncertainty and anxiety among employees. Effective leadership is essential for maintaining employee morale, engagement, and retention during the integration process. Leaders should be transparent and honest with their teams.
Essential preparations for day one
The initial phase of post merger integration is critical. On day one, companies must have an integration governance structure and workflow process in place. This includes a steering committee, an integration management office, and workstream leads for all major departments. Effective communication is essential to ensure that employees understand the integration plan and their roles within it. Customers and the marketplace should also be kept informed to mitigate operational risks.
Management should have an integration governance structure and workflow process in place. This structure should encompass a steering committee to oversee direction, and integration management office to drive delivery and workstream leads and sponsor for all major departments to execute. The company must also be prepared to seamlessly deliver to its customers on day one. It is essential that the plan for the combined companies is communicated clearly to all employees, both in the platform and the add-on. For employees to fully execute on the plan, they must understand it. Customers and the marketplace should not be left out of the communication loop either. Delivering a clear message internally and externally allows management to mitigate operational and process risk. However, this takes deliberate planning. Many merged companies lose out on value creation because they underestimate the time it takes to communicate effectively with the various parties.
The critical first 100 days
The first 100 days post-merger are pivotal in determining the success of the integration. Management should focus on achieving short-term, attainable goals and effecting changes that will last. This period is crucial for confirming long-term integration plans and managing various factors such as communications, change management, and financial analysis. PMI consultants recommend developing a comprehensive 100-day plan that addresses critical business requirements and captures quick-win synergies.
The first 100 days are also critical because it is when management is most likely able to effectuate change. Employees are expecting change during this period of time. Changes that are made during those first 100 days are more likely to last than changes made after, when it is common to see a return to a “business as usual” attitude. During the first 100 days, management should confirm the merged company’s long-term integration plans, including the process and technology efforts that need to be completed. In these early phases of the integration, many different factors should be carefully managed such as external and internal communications, change management, legal and regulatory issues, and costs and financial analysis. The first 100 days and quick wins should not be confused with long-term integration plans and transformational change. During the first 100 days, the goal is to execute projects which meet critical business requirements and capture quick-win synergies from the combined company. During this time, departments can develop their future operating models and begin to transition towards a combined state.
Long-lasting value creation
To capture the full synergy and value expected from the M&A deal, long-term optimisation initiatives are necessary. These initiatives require a well-coordinated effort driven by a strong integration management office. The IMO provides the processes, tools, and resources needed to realise an optimised future state. A clear vision and focused execution are essential for aligning long-term projects with the overall value proposition.
Working with a strong integration management office from start to finish will facilitate the focus required to help buyers meet their long-term optimisation objections. The integration management office provides the process, tools, and resources required to orchestrate the necessary activities to capture deal value and realise an optimised future state. The buyers and senior leadership of the combined entity should establish a vision for an integration from the very beginning. Without a well-coordinated effort to drive this vision into the projects being executed by individual departments, it can never be realised. Some projects may be expected to take two or three years. Those projects require extra focus to ensure they stay aligned with the value proposition of increasing EBITA, reducing risk or remaining compliant – which should translate into an increased enterprise value and successful liquidity event.
Post merger integration is a complex and challenging process that requires meticulous planning, effective execution, and strong leadership. By addressing cultural issues, maintaining momentum, and ensuring proper due diligence, organisations can enhance the likelihood of successful PMI. Strategy consulting firms like Covelent consultants can provide valuable support in navigating the intricacies of PMI. Ultimately, the key to overcoming the challenges of post merger integration lies in proactive planning, open communication, and a commitment to creating a supportive and inclusive work environment. With careful attention to these areas, companies can achieve seamless PMI and position themselves for long-term success.
