Post Merger Integration Management

Contents

List of figures

1. Introduction
1.1. Mergers & acquisitions overview
1.2. Motives for engaging in M&A transactions
1.3. Types of M&A transactions

2. Importance of pre & post merger integration management

3. Successful post merger integration management
3.1. Challenges
3.2. Short-term versus long-term success
3.3. Operational integration
3.4. Cultural integration
3.5. Common mistakes

4. Conclusion

References

List of figures

Fig. 1 Risk percentage of M&A phases

Fig. 2 Types of integration approaches

Fig. 3 Progress rates of cultural and operational integration

1. Introduction

1.1. Mergers & acquisitions overview

Today's economy is shaped by globalization with market conditions changing rapidly and competition growing in many areas. In order to stay competitive, in every region of the world very often companies try to merge with other companies from either within their own market or from other regions or markets. Mergers and acquisitions (M&A), the term itself is used for diverse kinds of cooperation between companies, received a lot of public attention during the past decades as several major M&A transactions have been effected. Although during the current worldwide economic struggles the global M&A transaction volume declined, expansion through M&As remains a central corporate growth strategy tool.^[1]

To merge companies successfully, integration and harmonization processes which require a lot of attention and resources are very important in order to align the previously separate companies' operations, strategies and culture. As only very few M&A transactions generate satisfying results and achieve their strategic and financial objectives, subject of this paper is to determine the requirements for successful post merger integration. After describing the range of motives for companies to engage in M&A, I will explain the challenges and the importance of post merger integration management (PMI) and provide guidelines how it can contribute to make a M&A transaction a success.

1.2. Motives for engaging in M&A transactions

The causes for companies to engage in M&A transactions can be diverse and differ between buyers and sellers. Most of the motives for companies to merge with others or to acquire other companies are growth related. This means that they often intent to aim at new target groups and obtain better growth opportunities by expanding into new geographic markets or product lines which will improve their competitiveness towards other players on these markets or eliminating these competitors by acquiring them. As M&A activities lead to a diversification of the company's operations, it can contribute to minimize the overall risk of business failure.

Cost savings are also a common intention when entering alliance with other companies. These are expected to be realized by e.g. profiting from scale effects or by creating vertically integrated value chains within the new company structure. Aligning and integrating the assets and structures of the former independent companies is also expected to realize synergies.

For sellers, motives to be acquired by another company are e.g. the need of additional capital, clearing of debts or operative and strategic difficulties that cannot be solved with the given resources within the single company. Especially in small family-driven companies also very personal motives can play a crucial role, e.g. due to familiar conflicts or a missing successor.^[2]

1.3. Types of M&A transactions

Depending on the origin of the participants of a M&A transaction, one can distinguish between different types of M&A transactions. Going by the stage of a certain product or service market in which the involved parties originally operated, one can differentiate between horizontal, vertical and conglomerate integration. Horizontal integration occurs when two companies from the same market merge so that a new entity with a larger market share arises. Vertical integration is given when companies that originally operate on different levels of a production process merge. Conglomerate mergers mean that companies from different markets which originally produced different products or services decide to merge.

Going by the geographic or product market origin, a differentiation between product extension merger or market extension mergers is widely accepted. Product extension merger involves companies that produce complementary products so that the new company covers a wider range of products. Market extension mergers take place when companies that act in different geographic locations merge so that the new company is present in a wider area.

The company that results from a M&A transaction can either be a new legal entity which is often the case when companies merge but it can also happen that in case of an acquisition one entity does stop to exist and its business continues under the name of the buying company.^[3]

2. Importance of pre & post merger integration management

It is estimated that less than half of all M&A deals achieve their objectives and create additional value for the shareholders. Due to mergers being complex and diverse and at last very confidential and sensitive it is difficult to provide reasons for such large-scale failures. But in many cases, failures of M&As can be traced back to the fact that the necessity and the importance of integration tasks in the post merger phase are strongly underestimated. Several researches and many practical examples underline the importance of a proper planning and execution of the integration of the involved companies for any merger or acquisition.^[4]

A study conducted by the management consulting firm A.T. Kearney also revealed that the post-merger integration phase contains the highest risk for a merger transaction. Under risk aspects, the integration phase is more important than e.g. the due diligence or the negotiation with potential partners at the early phases of such a transaction.

illustration not visible in this excerpt

Fig. 1: Risk percentage of M&A phases

As creating value and improving the financial and competitive situation is a key motive for companies to engage in M&A, in the end financial key figures are important indicators to illustrate how successful the transaction has been effected. However, synergies can only be realized when the cultures and the structures of the formerly independent companies get aligned and efforts for realizing synergies are considered not only after the M&A deal has been legally closed but as early as possible. Considering chances and potentials for a successful merger or acquisition realistically in the early stages of the transaction can help to avoid frustrating results and high costs at the end.

Therefore, post merger integration management depends on a thorough pre merger integration management. This usually starts with the development of a M&A strategy based on the corporate strategy with specifically defined financial and strategic goals. The selection of an M&A partner should be based on these strategic figures in order to avoid spending huge efforts and many resources on bringing companies together that show differences which cannot be overcome. Therefore the definition and precision of criteria like the industry of the potential M&A target, its strategic positioning, its size and the definition of a maximum transaction prize narrow the selection of M&A partners and set the framework for post merger integration management.^[5]

[...]

^[1] Cf. A. Ianas (2009): Key Success Factors in Post Merger Integration, p. 4

^[2] Cf. Ianas: loc. cit., pp. 6-10

^[3] Cf. ibid., pp. 11-12

^[4] Cf. Ianas: loc. cit., pp. 14-15

^[5] Cf. B. Polster-Grüll, H. Zöchling, G. Kranebitter (2007): Handbuch Mergers & Acquisitions, pp. 878-879