M&A integration issues make integration work especially challenging for companies without dedicated “corporate” transaction advisory staff and resources to manage them. For companies executing strategic M&A transactions in the mid and lower markets, integration planning and execution can strain business continuity and become a demoralizing process for those involved.
The E78 team shares best practices and lessons learned from our carve-out and integration work in the lower to mid-market deal range (referred to as LMM and MM in this article), highlighting the role of M&A integration consulting in streamlining complex transitions.
The middle market is generally divided into two tiers:
- Lower Middle Market (LMM): Companies with $5 to $50 million in revenue.
- Middle Market (MM): Companies with $50 to $500 million in revenue.
The insights and recommendations in this article are based on our experience supporting an average of 50 transactions annually within the lower middle market and middle market segments. Our work spans a wide range of sectors, business models, and transaction types, providing us with a deep understanding of market dynamics at these levels.
Strategic M&A Integration: Common Challenges and Acquisition Integration Issues
For most companies, an M&A event is one of the most intense and seemingly chaotic periods they will ever experience. Think of all the things that are “in play” during a typical integration:
- The company’s strategic direction and business focus
- Corporate leadership and governance structures
- Individual roles and responsibilities
- Policies, processes, and business practices
- Corporate office and facility locations
- Financial performance
- Reprioritization of business investment and capital allocations
- Product and service portfolios
- IT and operating infrastructures
- Suppliers and customers mix
- Cultural changes
- Challenges regarding people’s feelings and aspirations
- Scale and synergies challenges
These are just the most common examples, as virtually everything is in flux during a full integration.
However, integration activities can also offer a tremendous amount of opportunity for growth, market, and geographic expansion, product and service expansion, personal growth, and a host of other levers to improve the market value and company performance.
The key is to proactively manage post-merger integration challenges so they do not derail the realization of value drivers, undermine morale, or disrupt business continuity. While every transaction has its unique dynamics and challenges, the four areas below tend to dominate most LMM and MM transactions and can adversely affect results if not addressed properly:
- Underestimating integration requirements and level of effort
- Not fully understanding culture and communication requirements
- Inability to identify and address scalability gaps
- Failure to prioritize strategic workstreams, value drivers, and organization planning early
We’ll now explore the following dimensions of each issue, specifically:
- Description and characteristics: What is the issue? How does it manifest in the integration setting?
- Adverse side effects: What are the most common negative impacts of the issue?
- Mitigation best practices: What are the most proven methods to avoid or mitigate the issue?
Challenge 1: Underestimating Strategic M&A Integration Requirements and Level of Effort
Description & Characteristics:
- Companies with this issue tend to treat integration as just another one-off exercise, like an internal project to be managed the same as any other.
- They underestimate the level of effort for full people, process and technology integration, often failing to recognize the merger and acquisition integration issues that can arise, leading to delays and inefficiencies. (Many of our clients are companies that tried to manage integration this way and do not want to repeat the experience.)
Adverse Side Effects:
- Failure to achieve integration objectives, address M&A integration challenges, and realize deal thesis.
- Delayed integration completion as the effort becomes bogged down and gets deprioritized.
- Poor experience for acquired employees will drive voluntary turnover and result in the loss of key personnel.
- Customers and suppliers are confused and frustrated by the poor execution.
Mitigation Best Practices:
- Confirm integration scope as part of the deal thesis (e.g., full, partial, none) and establish a timetable (e.g., integration complete target is 8 months).
- Articulate and prioritize value drivers and program-level integration objectives to flesh out what must get done and by which function.
- Review due diligence through the integration planning lens to identify potential integration challenges and expected level of effort.
- Gauge integration effort against current business priorities to confirm bandwidth challenges.
- Define a clear and universally agreed end date for the integration to be completed (and define what is meant by “completed”).
Challenge 2: A Lack of Understanding Regarding Culture & Communication Requirements
Description & Characteristics:
- These companies tend to undervalue the importance of communication in the integration process. Often, this is because they typically have poor communication practices or immature communication processes overall. Examples of “poor” communication practices include infrequent and sporadic (often reactive) communication efforts, underdeveloped or inadequate formal communication channels, no dedicated internal and/or external communication lead, and no champion to support better communication practices in the C-suite.
- They also are somewhat blind as to the cultural integration challenges inherent in any M&A event, often because they have made little effort to understand their own culture, let alone assess the culture of an acquired company to understand it better.
Adverse Side Effects:
- Lack of preparation for day one communication, often preparing only the bare minimum and leaving many questions from employees, customers, and suppliers unanswered or vague.
- Employee confusion and disengagement are experienced by both acquired and existing employees.
- Customer defections.
- Supplier confusion.
- Ongoing “what about?” questions that should have been answered as part of day one communication cause unnecessary distractions, as urgent open issues dominate the post-close period and adversely impact integration momentum.
Mitigation Best Practices:
- Complete the following communications materials and have them ready to distribute on day one: employee key messages & integration guide, employee FAQs, customer key messages and FAQs, supplier key messages and FAQs, and other materials as needed.
- Ensure a well-coordinated day one by preparing a detailed “run sheet” with all meetings and logistics outlined and agreed upon in advance.
- Complete a culture scan or assessment to better understand cultural integration challenges.
- Update employees and other key stakeholders throughout the first 90 to 120 days post-close with integration success stories, key news and events, and recognition for employees.
Challenge 3: Inability to Identify & Address Scalability Gaps
Description & Characteristics:
- Management assumes the acquiring company’s people, process, and technology backbone can absorb acquisition targets with minimal or no investment.
- Management is not aware of where the scalability gaps are for their own company, or what the demand of the newly acquired company may do to stress existing operations or processes.
- There is a lack of understanding of human capital and whether existing and/or acquired employees have the skills and experience to handle the demands of the newly combined organization.
Adverse Side Effects:
- Failure to achieve investment thesis.
- Delayed integration timetable as scalability gaps are discovered during the integration process.
- Employee fatigue and burnout, as employees are put into difficult positions they may not be prepared for.
- Inability to handle additional and planned M&A due to business continuity disruptions and delayed integration.
Mitigation Best Practices:
- Assess critical functional areas in the business through the lens of the investment thesis.
- Test key transaction assumptions against platform and target capabilities.
- Pinpoint areas of development required to support increased platform M&A activity. Examples of areas to explore:
- Product management
- Product development
- Go-to-market
- Order-to-cash
- Procure-to-Pay (P2P)
- Human capital hire-to-retire
- Professional/ancillary services delivery
- Customer support/service (final list customized by platform)
- Definition of current capacity (how much business the company can handle given its current organizational structure, staffing, processes, and systems)
- Prioritize and incorporate findings into current or planned integration efforts or normal business infrastructure optimization efforts.
Challenge 4: Failure to Prioritize Strategic Workstreams, Value Drivers, and Organization Planning Early
Description & Characteristics:
- Pushing off or deprioritizing key strategic workstreams like product roadmaps, go-to-market strategy, and branding until later in the integration process.
- Struggling to address difficult strategy and/or personnel decisions early on.
- Lack of proper due diligence in integration planning handoff, leading to unforeseen M&A integration issues that complicate execution.
Adverse Side Effects:
- Failure to codify integration value drivers and program-level objectives obfuscates the ability to define the target integration end state and key milestones required to get there.
- Consequently, delayed organization alignment can frustrate employees, delay integration, and result in the loss of key employees.
- Insufficient integration planning timeframe.
Mitigation Best Practices:
- Address and solve strategic workstreams early in the integration planning process, so that output and decisions can cascade down and inform detailed workplan development.
- Organizational planning decisions and a well-planned roll-out timeline with supporting communication should be the first 60 to 90-day deliverable (or the sooner the better).
- Synthesis of investment rationale and deal decks into specific integration planning objectives (i.e., separate deal rationale from integration objectives)
- Start integration planning at least 30 to 45 days pre-close
Integration Planning & Execution Mandatories for LMM and MM Acquisitions
Assuming you have addressed some of the common challenges outlined in this article, making sure you have the basics of integration planning & execution covered should be your next priority.
The following is a helpful summary of some of the more tactical basics to consider.
Planning Framework:
Establish a planning and execution regimen calibrated for the most typical M&A scenarios for your small- to mid-cap acquisitions.
The process should be designed to maximize internal resources and follow a logical flow that helps empower integration teams to plan and execute flawlessly.
Governance:
Design and deploy a simple but effective governance process that facilitates the creation of solid planning direction and ensures rapid risk and issue mitigation.
Synergy Program Management:
If required, be sure to establish a synergy program management approach for organizing and tracking all cost-saving and revenue-enhancement synergy initiatives.
Synergy initiatives should be embedded within the overall integration program so that dependencies and accountability are vigorously tracked and managed to ensure realization timeframes don’t slip.
Communications:
From signing to closing and for at least 120 days post-close, make sure your communication planning approach keeps employees, customers, suppliers, and any other key stakeholder audiences engaged and informed during all critical procedures of an M&A event to avoid any apertures.
Tools, Templates & Technology Platform:
Even if mergers and acquisitions might be infrequent events, establishing an arsenal of tools and templates will help speed through some of the more routine planning and execution challenges in M&A.
Program Management & Reporting:
- Ensure weekly tracking and reporting packages are designed to add value, inform rapid decision-making, and accelerate execution.
- Be ready to scale up issues as soon as they appear (or even before they appear).
Partner with E78 Partners for expert M&A integration and transaction advisory services. Our team delivers finance, technology, and business transformation solutions tailored for middle-market CFOs, CIOs, corporate leaders, and private equity sponsors. Get in touch today to see how we can support your next transaction.
