People Due Diligence Critical to Success
By Tom Rollert, Vice President, Wray Executive Search
Merger & Acquisition is often cited by business as an important and strategic growth strategy. In our current high flying business environment, more companies are looking at available opportunities to acquire and the level of M&A activity is increasing. Key reasons for restaurant and retail M&A include geographic or customer market extension, enhancing business capacity through increased distribution, extending the value chain by acquiring suppliers or distributors, or acquiring technical and product knowledge that would take too long to develop in-house.
Unfortunately, M&A strategy is not risk free, and in fact research consistently shows that results are often less than anticipated. For example:
- 75 percent of M&A’s fail or turn out to be disappointments,
- 50 percent of M&A’s lead to lower productivity during the first 4-8 months,
- Almost 50 percent of key people in target companies leave within the first 12 months.
(Source: CFO Magazine, Business Week, Fortune)
In a number of studies 65-90 percent of reasons cited for considering M&A decisions relate to intangible assets, but when it comes to due diligence processes and audit work done prior to the merger or acquisition, most activity relates to the tangible assets like financial structures, IT systems, or intellectual property, leaving out the intangible assets like organisational capital, relational capital, and human resources. In people heavy restaurant and retail organizations over 70 percent of a company’s value could be attributed to intangible assets, and that Leadership Capability was the most significant asset in an organization.
Realising the Value of Intangible Assets
Research by the London Business School sought to understand the reasons for M&A failure. Many of the key reasons can be described as “soft” issues like lack of shared vision, leadership clash, cultural mismatch, procrastination, lack of management commitment, and poor communication. Also, poor integration planning and change management processes appear highly on the list.
This research suggests that there is a strong case to be made to deploy effective change management skills and capabilities early in the M&A decision.
Every M&A case is unique. However some key success factors can be identified that will significantly reduce risk of failure and help to realise the full value of M&A strategy.
- Start integration planning in the due diligence phase. Integration planning is a comprehensive and strategic framework to ensure value growth in the new business. If integration planning starts after closing and the take-over of the new management, the integration process will often be too slow and costly;
- Make integration management a ‘one-business’ function. Successful integration needs full time focus and is often best handled by a specific function responsible for the integration – the Integration Manager. This key person should be selected based on their general experience and high potential. The Integration Manager is focused on the needs of the merged business, and is able to take a holistic view.
- Identify key intangible assets and make plans to retain them early. As soon as practical, analyse the target company to identify key managers, specialists and knowledge owners. Who owns the customer relationships, who provides the leadership to the team? These are key people who need to be engaged early to ensure their retention. What other hidden talent – high potential individuals and teams – exist who will provide new value within the merged business? In a ‘friendly’ merger, gain access to and assess the key people before closing.
- Effective and fast implementation of integration plans. A key area of value for an acquiring company is the speed with which anticipated synergies will take effect. Too slow integration can delay business strategy execution, diminish staff motivation, scare customers and lead to loss of key talent in both acquiring and acquired companies. A general rule is that top management should be in place two weeks after the announcement. Restructuring and outplacement programs happen within a few weeks after, usually as part of a planned “First 100 Days” program.
- Understand and plan for cultural difference. What is important here is to deeply investigate, for instance, business relatedness, cultural and values, relative organization sizes, organizational ages, and the performance of the acquired company before acquisition. One way to get a successful cultural integration is to bring people from both companies together early as part of project teams to work with business issues that have a short term impact. This practical work will demonstrate synergies and help people become familiar with each other’s way of working.
- Communication is all important. Much communication is needed in a merging process – internal first and external second. An ambitious communication plan must be published at the outset and managed throughout the process. Communication mode and message will vary for different time frames – 48 hours, weekly, monthly – and for different target groups.
All the best,
Tom Rollert | VP | Culture Integration
If you enjoyed this article, please subscribe to Wray Executive Search Executive Connection. Our monthly newsletter includes industry news, executive movements and thought-provoking articles.