You can not predict success of merger based on investor reaction at closing. It is only after the first 12 to 18 months of integration and after companies have reported the performance of their first year that the markets can reliably predict the success of the deal.
The most successful large-deal transactions follow four key practices during integration execution.
To better understand what made those deals successful we refer to McKinsey research who surveyed experienced integration practitioners and observed that companies going through successful large deals.
Protect business momentum
While integration creates value from synergies, this should not come at the cost of disruption to the existing business. Successful acquirers are able to keep growing revenue on a pro forma basis within the first year, whereas unsuccessful deals see a decline or “dip” in revenue.
“We would start every meeting talking about protecting the business, then cost synergies, then revenue synergies, then finally transformational opportunities”
“This was true across every integration team, and for every functional owner and line executive. It was with this implicit hierarchy that we were able to exceed all of our objectives.” Leading acquirers systematize this dialogue with scorecards that track the performance of the base business and alert top management to issues such as account loss, declining customer satisfaction, or unwanted sales force departures.
Accelerate synergy capture and integration
Ensure line leaders own synergies. Business-unit and department heads must commit to their synergy targets. While the integration management office plays a vital role preclose, making the integration plans stick requires ownership from the accountable executive. Top acquirers build synergy targets into operating budgets that exceed the public target. They are also diligent about the transition of not just synergy targets but also the specific synergy initiatives. They establish a hand-off process that goes through detailed milestones linked to financial impact and include the people, capital, and capabilities needed to achieve.
Institutionalize the new ways of working
Many CEOs underestimate the complexity of shifting the combined organization to new ways of working. In our survey acquirers expressed regret that they did not dedicate more resources to culture and change management during the integration process. Successful acquirers dedicate these resources to getting the right accountability system and managing change in critical processes.
Make new behaviors nonnegotiable. Operating model and cultural changes need to be supported by clear employee expectations and consequences. This consistency requires building a high-functioning accountability system. Moreover, it also allowed the organization to more directly address opportunity areas.
It is vital to signal to the organization the new way of working at the process level. For example, by changing the approval levels, metrics, and expectations in the capital allocation process, a company can increase the flow of capital to new project innovation. The processes that are critical to get right most often include direction setting, growing the company, and running the business. The involvement of senior leaders is critical to ensure that the processes support the desired new behaviors.
Catalyze the transformation
To achieve the full potential of the combination, CEOs pursue transformational synergies that require significant enterprise-wide, structural change. Some of the most common examples include embracing outsourcing, launching new business models, or adopting disruptive technologies.
A multiyear transformation requires significant management attention throughout its duration to deliver the anticipated benefits. This commitment must be visible and clear to both employees and investors.
The pathway to a large-scale transformation leads through several phases of integration, stabilization, and transformation, and each one requires refueling the resources and refreshing the priorities and governance. Despite a common perception that the intensity of an integration decreases over time, in some cases more or different resources are needed in successive phases than in initial ones. Companies must make these decisions up front and balance the trade-offs of early personnel-based synergies against sufficient resourcing for transformational actions. The new talent not only injects new energy into the leadership but also reprioritized activities and helped ease organizational fatigue.