1 + 1 = 3: Successfully Navigating Post-Merger Integrations

Although capital markets have cooled considerably this year following record-setting M&A activity in 2021, many experts expect the pace of mergers and acquisitions to pick up again as market conditions improve. A thoughtful and well-executed M&A strategy can be especially effective for growth-stage companies looking to grow revenues, expand geographically, or complement your product suite with tuck-in acquisitions.

However, experts estimate that anywhere from 70 to 90 percent of mergers and acquisitions fail – often because of challenges related to integrating the companies. With so many deals failing to deliver value, it can be intimidating to venture into the world of M&A. Dean Dorman, Partner, Portfolio Operations at TT Capital Partners, has led or helped guide dozens of acquisitions during his 30-year career, including eight of them at TTCP. 

In this blog post, Dean shares his insights on how growth-stage companies can alleviate the risks associated with M&A activity by leveraging a proven playbook to successfully manage post-merger integrations.

Why do so many acquisitions fail?

Dean believes that the lion’s share of acquisitions fail due to bad moves made very early in the M&A planning cycle and generally at the very top of the leadership structure. He cites three common examples:

• Weak integration leaders. Good integration leaders are a rare find. On one hand, they must be gritty enough to work and resolve complex and sensitive issues on a daily basis. This is the “roll-up-your-sleeves operator” skill set. Yet, they also need to be senior and savvy enough to earn the trust and respect of both integration teams, so they can guide them effectively.
• CEOs/COOs trying to lead the integration themselves. Top-level executives are too busy running the business and often lack the latest or most complete set of integration tools and processes. Thus, they tend to cut corners. And because they typically don’t have extensive experience leading integrations, they may fail to anticipate common problems.
• Poor use of advisors. CEOs and CFOs often don’t trust third-party consultants to guide integrations, and they don’t want to pay hefty fees (hundreds of thousands, if not millions, of dollars).

Six best practices for growth-stage companies to manage integrations

A successful post-merger integration starts well before the deal is actually closed. This can’t be overstated, particularly for growth-stage companies with limited resources across the board. It’s vital for you to work with investors that have successfully navigated these waters in the past and can actively and directly support an M&A and post-merger integration game plan. What should that game plan include? According to Dean, there are several critical elements for a growth company to consider:

1. Pick the right investment partner up front. An important first step is making sure you’re working with a private equity firm that has the capabilities and experience to help with tuck-in M&A and post-merger integrations. Ideally, the team will include not only professionals who have deep insight into the market and can identify deals to pursue in the first place but also people familiar with what it takes to make the integration process as seamless and successful as possible.

• Start the process early. To ensure a successful integration, don’t wait until the deal is signed to begin the work. Six weeks before the deal closes, you need to start building your integration plan and team. Start with a kickoff meeting that includes key leaders from both sides to define roles, establish goals, and set expectations.

• Determine which functions will be in scope. There are typically between eight and 10 functions that are critical to the success of a merger or acquisition – from sales and marketing to finance and operations to product and technology to talent acquisition and HR. Identify those functional leaders from both sides and have them establish a team and build detailed integration plans for their specific functional areas.

• Start with solid integration charters. Think of integration charters as the various chapters in your post-merger integration book that each functional team should create. During the first week of pre-close planning, each functional team should focus on simply identifying the “titles” of their chapters. The first drafts will be messy and light on detail, but that’s okay. In subsequent weeks, the “chapters” will be refined, and the appropriate level of detail will be added. For example, if you’re in HR, there may be 20-plus activities or chapters you need to fully plan for, including selecting a benefits package, aligning the compensation strategies, and integrating the HR information systems. Once the chapters are refined, added detail behind each chapter will begin to take shape.

• Define the most critical milestones. At this point, each functional integration team should select a handful of key milestones they must achieve to ensure a successful integration. These are often the milestones with the greatest impact or ones on which other areas have strong dependencies. If you select three critical milestones per function, you’ll end up with roughly 30 for the entire integration, a good target. Mapping them out on a six-month calendar will create another level of visibility and will uncover key dependencies. For example, it might inform your technology team that until the product team makes a particular decision, they’ll need to move a portion of their own project further out. With these milestones in place, your teams then go back and produce second and third drafts of their more detailed functional integration plans. Those final drafts become the playbook they follow from pre-close all the way through the integration process. 

• Embrace (and brace yourself for) Day One and beyond. The success of post-merger integrations is directly related to the foundation built during the pre-close buildup. Once you hit Day One, a three- to four-month post-merger integration management period begins. This should include weekly meetings with the full functional integration leaders from both companies, where functional leaders give updates on what’s going well and what’s not and resolve issues in real-time. Since much of the work will happen behind the scenes, this is more of a high-level weekly review. After three to four months, roughly 80 percent of the integration process should be complete. The remaining 20 percent can take anywhere from another month to a year, depending on the complexity of what’s needed. For example, an elaborate technology integration could take a year or more to fully complete.

Five fatal flaws that put mergers at risk

While there are steps that businesses should take to give themselves the best chance at post-merger success, there are also a number of missteps you should avoid to reduce the risk of failure. According to Dean’s view, these include:

1. Not pre-planning before the close. Start the formal integration planning (with a workshop) six weeks before Day One. Some businesses don’t have this option because they have restrictions on who can know what, but that’s rare at the growth stage. Plainly put, skipping the pre-planning stage almost guarantees that you won’t see the full value of the deal until much later in the process. What’s worse, it could do permanent damage. For example, if you don’t communicate thoughtfully to employees about the acquisition, you risk losing valuable talent. Being transparent with key leaders means you have built-in champions that understand the vision and value of the deal. And when news of the deal eventually rolls out, these are the people your employees will go to with questions and ease concerns.

• Not having leaders from both sides participate in pre-planning work. A merger without participation from both sides becomes one-sided very quickly. This could lead to a level of resentment and, ultimately, a loss of talent. It’s important to remember that everyone involved in a merger is playing for the same team, and they should be treated as such. Even if a particular talent is not designed to go forward post-close, or if that person is only needed for one to six months post-close, be clear with them about your intentions and make it worth their while so they remain committed to the success of the integration.

• Not assigning and empowering an integration leader. It’s vital to install a leader that people can go to for answers; it helps keep teams on track and operating energy high. If for some reason your goals or milestones start slipping, the leader can take a high-level look at how it might impact other functions and craft a revised plan to address the issues. The integration leader needs to be multi-faceted, as mentioned earlier. And the CEO needs to empower the integration leader with unfiltered access to the C-suite and the ability to make on-the-spot decisions to keep the integration on track.

• Not creating a communications plan. A merger without a clear Day One rollout strategy could be doomed from the start. Your communications plan should consider all of your key audiences, from employees to customers to partners to other various stakeholders, including the media. It should include a variety of communication channels, like calls to key customers, employee town halls, and FAQs to address common questions. And it should define a clear cadence of communication on Day One and beyond. Beyond communications, there are Day One function necessities, like email, payroll, benefits, etc. 

• Not holding regular integration team reviews and steering committee briefings. If you don’t make a concerted effort to sync formally on a weekly basis, you incur a number of risks, including disjointed teams and siloed information. The weekly integration team review should include all designated integration leaders from both sides and should be a dedicated meeting, not just an agenda item on a broader leadership meeting. The review should be run by the assigned integration leader. A weekly cadence of meetings that extends for three to four months keeps the operating intensity high post-merger, and nearly always leads to a successful outcome. 

In summary, mergers among growth-stage companies that are thrown together hastily with little or no attention to detail have a high risk of failure. However, when executed thoughtfully and successfully, mergers and acquisitions can be integrated smoothly and can achieve their intended results.