The Do’s and Don’ts of Integration Planning

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Acquiring another company is a complex and multi-faceted process that requires careful planning and execution. At the heart of the acquisition process lies the integration phase, where the true value of an acquisition is realized. To ensure a seamless transition and maximize value creation, approach integration planning with foresight and precision. In this blog post, we delve into the crucial components of effective integration planning.

Integration Planning Tips

1. Plan Early

The integration plan should be tied to the strategy. If an acquirer wants to buy a business because they want to integrate the product into their product, then the integration plan should revolve there. Before pursuing the deal, understand what must happen in order to achieve full integration, the costs behind it, and the people necessary to make it happen.

The integration lead must be involved early in the process, preferably during the targeting stage, where they can provide inputs on the potential targets. According to Pat Belotti, VP of Corporate Development Integration at Zendesk, there is no reason not to include the integration lead pre-LOI.

“At the very least, involve the integration lead early in the process, certainly before the letter of intent, even before you make that first formal approach to the target. And the reason is that the integration lead usually has done dozens of deals.

The corporate development person probably does one a year or one every couple of years, And the business sponsor may never have done a deal. So the person who has the most experience is actually the integration lead, and they can bring to the table, in those early discussions, some learnings from the past that can impact the long-term success of the deal.” - Pat Belotti

2. Work Backward

After understanding the strategy of the acquisition, identify the desired end-state of the acquired business. Clearly define what “done” looks like, and work backward from there. It’s like solving a maze. Starting from the end is always easier.

According to Jim Buckley, Vice President, Mergers and Acquisitions Integration at VMware, working backward will help teams identify what is truly necessary at each step of the process, shortening the diligence process and improving integration speed.?

“When you're navigating, and you start to a point where you are one degree off from your desired state, over time, you become further and further away from your target. If you don't start with the end state and work backward, your navigation is going to be all wrong.?

So, once we understand what the agreed-upon end state is, that’s really driving the value for the deal, then we start working through the gates, coming back to the beginning." - Jim Buckley

3. Be Open-minded

When planning for integration, acquirers must be open-minded to the fact that the target business might do things better than they do. They are already successful in their respective field, which is why they were a good target, to begin with.?

Accepting feedback and input from the target leadership will help create better relationships and make them feel like they are a part of the process, which increases retention. Coming up with a joint plan for working together moving forward is a great way to increase the chances of integration success.?

4. Communicate the Plan

Communicate the intended vision with the target company, even if the plan was jointly created between the two leadership teams. If more people know the plan and how the business will be taken care of, the more cooperative everyone will be.

Also, understanding the non-negotiables early will give the target company more time to accept the incoming changes. Surprising them post-close is a recipe for disaster and might lead to employee attrition.?

“It's really important that those non-negotiables are very clear.?

The acquirer needs to help the acquired company understand what are the assets or products that they really need to preserve, things that are part of the deal rationale.?

Make sure that everybody knows that you are not going to impose your operating model on these three or four things because those are the things that you really want to preserve.?

For the acquired company, it is also important to know what are the things that they shouldn’t waste their time fighting. Because there will always be some form of integration.

You don't want to end up acquiring companies and having 10 different processes for the same objectives.” - Valeria Strappa, Head of M&A Integrations and Client Relationship Management at JPMorgan Chase & Co.

5. Focus on Retention

Every acquirer must focus on employee retention. Unless the acquisition doesn’t involve any people, retaining employees is extremely valuable in M&A. Losing people results in delayed integration, extra costs, and the tedious task of finding a replacement for those roles.

And even if people stay, if they are not happy with the acquisition, they are not going to be productive, resulting in poor business performance. Show empathy when dealing with people, and plan for solid communication on day one. If you want to know more about handling incoming people, read here.

“When acquiring employees, you don’t want to just buy their hands. You also want to win their hearts. If you don't have a happy workforce, you don't have a productive workforce, and therefore you don't have a profitable workforce. And that can really affect your deal outcomes.” - Klint Kendrick

What to Avoid When Integration Planning

Now that we have tackled some of the best practices for integration planning, here are some actions to avoid:

1. Gun Jumping

Derived from the term “jumping the gun,” this rule is something that every acquirer must avoid. The gun jumping law states that both companies must remain and act as competitors until the deal fully closes and clears regulatory approvals. In short, both teams can plan, but they cannot implement any changes preclose.

Brett Shawn, Senior Vice President, Assistant General Counsel at Warburg Pincus LLC, gives a very practical explanation below.

“In M&A, you have a suspensory regulatory approval. Meaning, you're not allowed to complete the transaction until you get regulatory approval. And if you do something that is completing the transaction, that is considered gun-jumping and that is illegal.

In practice, it is very typical for an M&A agreement to have interim covenants that protect the buyer from the moral hazards that the seller faces. After agreeing to buy the business, buyers would want to make sure that the seller is not tanking the business or just being lazy and not working.

So there would often be an interim covenant that says the seller has to operate the business in its ordinary course consistent with past practice. They must use reasonable efforts to preserve the value of the business and they're not going to do certain material things without getting approval from the buyer. Like hiring a new CEO or entering into new material contracts.

Where you get into trouble is when that interim covenants become too tight. For instance, if the covenants state that before the seller can embark on any new advertising plan that competes with the buyer, they have to get approval. That is illegal because you're supposed to be competitors. You're basically giving a competitor control over the advertising of a competing product, and the same goes for pricing.” - Brett Shawn

2. Assuming Alignment

Never assume that the people are aligned with the integration plan. Everything has to be explicit, whether it’s the deal rationale, who is responsible for what, and the deadlines for deliverables.

The best way to achieve alignment is to have consistent continuous stand-up meetings. Avoid long meetings that waste everyone’s time. Make meetings short and frequent, to constantly inform or remind everyone about updates and deliverables.

2. Ignoring Cultural Differences

Ignoring culture can be a huge mistake as it can delay integration and cause massive value leaks. There are two types of risks that must be taken into consideration: operational risks and people risks.

Any changes in the way of working are going to impact the combined company’s ability to deliver products and services to customers are considered operational risks. Klint Kendrick, HR M&A Leader with several Fortune 500 firms, has a good story below.

“We purchased a company, at one of my prior employers, that built drones. Their procurement process was, they would go down to NAPA Auto Parts and they would buy the pieces that they needed to build these prototype drones. But after you pull them into a larger organization, that's a government contractor that has very specific rules about how you buy things, then all of a sudden, a process that used to take two hours, now takes weeks. Now you have to get supplier approval. You have to make sure that the part is in the catalog. These are important elements of culture that often get overlooked. And then when you get into operating the post-integration business, all of a sudden, you're wondering why you're not delivering things on time.” - Klint Kendrick

The ways that acquired employees blend in with their new environment are considered people risks. Keeping acquired employees happy and comfortable must be a top priority. If the cultural differences are too significant, the employees might not stay.

Creating a great culture for employees to work in is crucial in every deal. Make employees feel comfortable about the changes and preserve what matters to them. Kim Jones, Sr. HR M&A Manager at Microsoft, discusses the power of this below.

“The conversations we have and the trust that you're building with the leaders and the employees as you go is critical. You have to do what you say you're going to do. If we say that we support their culture, then we should allow them to continue certain things.?

We worked with a company with small teams in different locations. We had a small team located in one location that was moving into Microsoft office. They had their office in this home, they had all these cool personal things, and they had this red couch that when I went and visited their office and met with them, they told me the history and why they love this couch and what it means to them.

So, in my mind, if we tell them that we support and want them to be successful and we support their culture, I have to figure out how to bring that red couch.?

It's a very small example, but if we tell people that they can be who they are, and then we limit that type of stuff, that can erode trust. So we're constantly looking at how we back what we say, and that we want to learn from them and help them see what they can bring to Microsoft." - Kim Jones

Conclusion

In conclusion, integration planning is a critical step in any merger or acquisition. By establishing a clear and well-defined integration plan, involving key stakeholders, identifying and addressing potential challenges, setting up clear lines of communication, and taking the necessary steps to ensure successful cultural integration, executing a smooth transition is possible. Avoid common pitfalls such as rushing the process and neglecting the cultural integration aspect to ensure a successful merger or acquisition.

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