In the 2006 book, “The $10 Trillion Opportunity,” authors Richard Jackim and Peter Christman describe the financial tsunami that would spur the largest wealth transfer in history. Baby Boomers, people born between 1944 and 1964, would be winding down their careers in unrelenting droves. The book is a consultant's guide on how to address the burgeoning opportunity for comprehensive professional advisory services wrapped around exit planning.
The generational wealth transfer hasn’t accelerated smoothly. The brakes were slammed in late 2007 through mid-2009 due to the Great Recession, but Boomers continue to age. The trend line may appear saw toothed, but the pace of merger and acquisition volume advances unavoidably. A November 2019 Forbes article, “The Greatest Wealth Transfer in History: What’s Happening And What Are The Implications” raised the overall wealth transfer estimate to $30 trillion.
This is all to say that businesses have been acquired or absorbed into other organizations at a historic rate - with no signs of abating. Considering the volume, one might conclude that outcomes have improved because we have gotten better at it. Most studies estimate the acquisitions failure rate to be between 70% - 90% - Harvard Business Review’s study being the most notable. With all the time, effort, and expenses for professionals that go into mergers and acquisitions, it is alarming that acquirers find success so fleeting. That is until you examine where the emphasis is placed and resources spent.
When Company A seeks to acquire Company B the activities pre and post letter of intent (LOI) typically extend for a protracted period; it is an laborious and expansive examination conducted by lawyers, accountants, bankers, IT experts, industry advisors, and owner-executives. They pour over leases, contracts, financial reports, tax returns, vendor and supply chain relationships, key persons and employee demographics, insurance coverages, inventories, work in progress, intellectual property, and an exhaustively long list of other company data. Collectively, they work their checklists, model industry and company projections, and formulate risk assessments. If one were to plot the timing of when these things happen during a merger or acquisition, it would reveal a bell curve with nearly all of its area falling to the left of the closing date (pre-transaction closing)… generally, capitalized costs.
Yet acquisition success or failure is most often attributable to culture and integration of the people: things that happen after the close. Forbes Councils Member, David W. Garrison, smartly penned the leadership article, “Most Mergers Fail Because People Aren’t Boxes.” Perhaps it is the self-assured attitude of buyers or transaction fatigue? “We’ll take over from here and use our team to get the seller’s employees doing things our way.” While that in itself is not folly, the buyer’s employees may not be proficient in integration; most often it is not what they do day in, day out.
There are many ingredients that go into integration success, but most important is choosing the right framework. The integration team should be directed by a person that is a proven leader with an Operations bias.
Key Integration Team considerations:
- Eliminate “us” and “them” references. After the LOI, due diligence, and the transaction close, the two entities become one. The perspective must shift to, “We’re now one company working towards a common goal.” It is always in a company’s long-term best interest to strike out “us” and “them” language. At the onset, it is also helpful for Team members to be well versed in the advantages and opportunities of the business combination. Everyone must have a clear understanding of the “Why” from both the company and employees perspectives.
- Equally weight the Integration Team with key buyer and seller employees. Fair representation is important to the go-forward psyche of the seller’s employees. If employees are considered a company’s greatest assets, it makes little sense to allow a subset of them to feel disenfranchised and unheard.
- Experienced leadership matters. Integrating people, processes, and systems that affect the lives of a great many people is not for the faint of heart or inexperienced. Companies have historically underinvested in integration leadership; the adverse consequences of failure can be staggering.
- Build a multidisciplinary team. Few departments will be completely devoid of acquisition-related impacts. To the extent possible, the Integration Team should be representative of the whole organization.
- Role for project management. Frequently, the Integration Team will be comprised of high-achieving Type A personalities. It is critical that an experienced project manager steward the Gantt charts or other tracking mechanisms to hold the team and its members accountable.
- Define the scope. Tasks like new logos on business cards are important, but an overly narrow interpretation of the Integration Team’s role would be a mistake. Successful integration will be measured by employee engagement and productivity; tasks only represent a small subset of the true work of the Integration Team.
- Flexibility to absorb, not exclusively impose best practices. Sometimes the selling firm may be doing certain things better. A Hobson’s choice of a take it or leave it proposition seldom yields optimal results. People execute best practices. If you don’t have the hearts and minds of the people, you cannot achieve best practices.
- Authority to make decisions. The Team should have the latitude to make some, but not all decisions. There will be layers of decision-making authority in an acquisition. The Team must have a direct line of communication with all decision-makers. It’s not advisable to grind progress to a halt while the Team waits for answers.
- Don’t disband the Team too early. Once the operational blocking-and-tackling are done, the true test is measuring how well the combined company performs going forward. The Integration Team meetings can be less frequent, but it is vital that they stay engaged and have a vested interest in long-term success. Extra bonus consideration for Integration Team members 12- or 24-months post-transaction would be money well invested.
The Rodefer Moss (RM) Mergers and Acquisitions Transaction Advisory Services professionals have extensive experience in Business Valuation Consulting, Due Diligence, Quality of Earnings reporting, Capital Financing & Analysis, Strategic Planning, and Operations & Integration Execution.
With six offices in Tennessee and Virginia, RM has been serving clients across the U.S. for over 30 years. The Firm’s multidisciplinary industry expertise extends across: construction & real estate, manufacturing & distribution, government and nonprofit, insurance, broker/dealers, financial institutions, retail, and more.
For further information about the role of transaction advisory services is your merger or acquisition, you may email Mike directly at mlevesque@rodefermoss.com or call (865) 583-0091.
