Scott Whitaker:

One of the steps we do to make sure we are ensuring delivery of the deal theses is to take the transaction documents, which can manifest as a confidential investment memorandum, and translate that into value drivers and integration of carve out objectives that will then translate into a kind of downstream charter and work plan.

So we think about why we’re doing the deal, and then turn that into specific integration of carve out planning direction. The other part of this is making sure that you have a proper allocation of time for planning and day-one preparations. There’s a lot to do. Are you starting with enough time to allow for proper preparation for your communications for all day-one change of control? If you’re carving out, there could be a lot of stand up required so starting early is key.

Robust focus on communications and cultural integration is required. What are you doing to prepare for all your stakeholders’ needs for acquiring employees, customers, suppliers, media? Then what’s your project management wrap around to ensure that you’ve got all this work under control, sequenced, and organised? Getting all that right on the front end is key.

Chris Charlton:

I think one element I would add is seeking clarity on the new target operating models as early as possible, both enterprise and functional levels. That’s really key to building and delivering effective integration roadmaps and clearly aligned synergies and KPIs.

Michael Holm:

I would add that during analysis, planning and execution, you think in five dimensions about functions and integrating it. With operations, think about the core processes and how to integrate them so the lead to cash are two separate processes, pre deal and post deal, and how to merge them together from the beginning. From sales and or from the supplier, think about culture in the function integration or in the process integration. Also, the culture is built into those processes and those systems. You have to think about culture and change. That’s the third dimension. The fourth dimension is leadership alignment, is the leadership aligned to deliver the deal value and changes in culture, because they are the culture bearers. They are also required to drive the operations in the business. And last but not least, is the geographical perspective. Integration tends to be headquarter focused around corporate functions. A lot of leadership is located in the headquarters. You have to think about the people out in the different subsidiaries. Is it a merger between two national players, you have to think about what they need in order to execute on the deal value. Who is going to be the sales force and what do they need to sell? How good is the office going to be in a remote location, so you have to kind of penetrate that in order to get the sales going in the go to market.

Chris Charlton:

Robust and extensive due diligence helps mitigate risk, and that usually should translate into better value delivery outcomes. That covers a number of different areas from our point of view, and how you link that diligence piece to fundamental components of integration and planning execution.

The first thing is really just making sure there’s a sufficiently broad scope, that engages all of the business functions in much more comprehensive diligence teams who can deliver the required analysis in shorter timeframes and all of this with the intention to enhance predictability. All of that, of course, allows early influence on all of the deal parameters and the integration journey ahead. Secondly, is really ensuring that all of those diligence outputs fundamentally inform the development of an integration strategy, which then goes on to feed the scoping and the prioritisation of integration planning and execution workstreams. And thirdly, and this is ideal, but it’s not always the case that those functional experts, particularly those from sales, HR ,operations, legal, and every other function that gets involved in the diligence phase, to make sure they also participate in the planning and execution of integration projects. This fundamentally allows for continuity of knowledge. It also focuses the minds of those completing the diligence to get it right. If they’re going to be accountable post diligence, it does make sure that they are a little bit more focused on the due diligence itself.

Scott Whitaker:

One of the things that we always try to do, in addition to focusing on the here and now, is the pending transaction, but also look ahead to what the M&A pipeline might be. Are you looking at acquisition archetypes in terms of people, process technology is required to scale during what might be a two to four year hold period for a PE firm, a period of substantial growth. So looking to the future as well, we try to future proof those things that we can probably handle.

Michael Holm:

On the flip side, from my corporate experience I’ve seen there is an over optimism in house and a lack of challenging the deal. How to do the deal operationally? What is the scope of it? How do you resource it? What are the costs? What are the risks? You kind of sit back and think we’ve got a great operational team and there’s a lot of people here and we will get it done. It’s more of an effort than an analysis in operational delivery, due diligence and you kind of oversee things perhaps as an example, systems integration to your company is a different thing and you underestimate the effort. So if you get those operational due diligence and a second opinion to compliment your own skill set internally, that helps a lot. And remember, these people normally in operations are not involved in M&A, maybe once every three or five years, so they don’t have this repetitive knowledge of doing this in an efficient way. So I think that’s the flip side of not doing it, and asking for help.

Michael Holm:

Carve outs come in many shapes, complexities, and so forth. They can be a pure asset carve out, but it could also be a fully standalone legal entity. So there’s huge differences between carve outs. I would say that the most critical items is the day one requirements to define the operating model during integration, and base your transitional services on those day-one requirements, as well as the operating or interim operating model, when you’re going to negotiate the terms and conditions and the TSA is with the seller of the carve out. Another very important item is resource planning. What we have seen is companies themselves on the estimated resources needed in order to complete the carve out between signing and closing and also after closing. Another important item is data migration. So you might want to migrate data from the seller CRP system to your own earpiece system, you might want to do it from a CRM system, to your CRM system, it could be Salesforce to Salesforce, there are things that need to be done to that data to clean it, to groom it and to put it in and to make sure that there is no overlaps. So all this needs to happen between signing and closing or signing and day one, when you go live with the carve out. Talking about going live, flicking the switch of moving from the previous owner and the mother company to your company, you need to have a structured approach of how to load the data, and how to turn on applications in your environment in order for the business to be transferred over. And you’ll be fully operational on day one. Communication is important. To communicate the journey to get the transferring employees to transfer, for customers and suppliers to understand what they need to do because they will have a new legal party perhaps then to deal with employee transfers, is important to get that right. Compound bans take a long time after closing normally, and you have to think about the gun jumping rules. You need to know how to handle all data prior to closing and perhaps sometimes also to do a clean team in order to really be prepared for closing. Are contacts movable from one legal entity to the other? Lastly, you do this to get synergy and make money out of the carve out. You need to have a baseline for synergies.

Chris Charlton:

There are so many things to think about in carve outs, no question about that. And one element, actually, is an asset that we use in our own proprietary carve out methodology. And it’s a key ingredient to establish really early on. And that’s what we call a detailed business function process analysis. What effectively it is trying to do for each of the high level process areas, across all of the business functions, is to identify the people, processes, applications, data technology, and importantly, third party suppliers that are going to be required for the carved out business to operate standalone. Ultimately, this assists in the identification of likely key TSA requirements. But that will also then fundamentally depend on the integration strategy of the buyer. So, as a tool it becomes very helpful to do that analysis of pace and do it quickly and comprehensively. That allows no balls to get dropped further down the line.

Scott Whitaker:

One thing we’ve noticed on a few recent transactions is that it’s always good to check on the acquiring by the people that are going to be recipients of the people process and technology that’s coming after the TSA period. Do they have the skills and bandwidth to handle that? Sometimes what the carved out entity was handling is more sophisticated, maybe a more sophisticated business model and increased volumes in some areas, and you’re giving that to somebody that may not have this extensive experience or required bandwidth to handle that kind of volume. So it’s always good to check that during the process, make sure that the people that are going to be handling this can actually do it.

Scott Whitaker:

The poor linkage between the diligence process and the integration process can kind of hamstring you and cause some unforced errors in terms of time and preparation required for good integration planning.

Chris Charlton:

On the flip side, rather than the pitfall, what are some of the good things that we’ve seen. And then I’ll flip to what the pitfall is. We’ve certainly seen considerable investments in recent years in M&A capabilities and resources, not just during the deal phase, but crucially in the planning and execution phases as well. And as a consequence of what we’re seeing, significant increases in the likelihood that well governed and resourced M&A projects are reliably delivering successful deal value. Now, when we think about the investment in those resources, when you compare it to the deals themselves, and indeed the work that goes on in diligence phase, ultimately, it’s a pretty small outlay, but it can have extremely high returns. So the pitfall is really that, and this is one to avoid is, skimping on the investment in experienced practitioners, whether they be in house or external, particularly in post signing phases, rarely leads to a positive outcome in our view.

Michael Holm:

I have my three items here on pitfalls and that’s not aligning the leadership. I think that’s one of the pitfalls and not having attention to detail within leadership and not being involved in the deal after closing is one thing I see as a pitfall. And that there is too much top down, it’s hard to create a passion for the deal if you have too much top down direction. And remember, the Swedish have a consensus society and culture. So we believe very much more in a bottom up way of working with an integration and building that passion from the deal within the organisation rather than top down. If they get involved then you mitigate that a lot. And a soft factor is important within it. In all our different answers to the questions is about communication, clear communication, staking out the journey ahead for all for the integration, it’s about change, how to change something has to change when you merge two companies and acquire something when you integrate. It’s about culture, understanding each other’s culture, not to change it, but understanding first and then work on continuously bringing together so that everybody feels passionate about the company and the culture.

Chris Charlton:

Global PMI partners, we’re a specialist consultancy firm supporting our listed company, and our private equity portfolio clients with everything to do with M&A, integrations and divestments ultimately providing expert on demand M&A services and resources leveraging our market leading M&A approach and methodology. Our track record now extends to well over 1000 projects. And these are operational due diligence, acquisition, integration divestment carve out, and many other types of growth and value creation type projects. Our global team is made up of over 300 seasoned professionals spread across EMEA, North America and APAC. And ultimately, our goal is to help our clients achieve their projects at a faster pace, lower overall cost and lower risk. We have just released our latest art of M&A survey, which you can find online, both on the Private Equity Insights website, but also at GPMIP.com. And we hope that you’ll get some great insights into some successful M&A projects from that.