How boards can promote post-merger integration success

Public and private companies in search of growth and value creation often pursue M&A transactions as a way to achieve greater long-term returns. In 2016, more than 17,000 such transactions were announced worldwide, with a combined value of more than $3.2 trillion. The industry is on track for a comparable year in 2017, indicating that M&A continues to be viewed as a promising opportunity for enhancing growth.

Despite the enthusiasm, a number of M&A deals fail to achieve their expected results, often driven by poor execution during the post-merger integration (PMI). In some cases, this can result in litigation. Every year since 2008, shareholders have litigated against at least 54 percent of all deals valued in excess of $100 million that involve Delaware-incorporated companies.

The disappointing results and potential litigation associated with M&A should be top of mind for the board a company pursuing a transaction. Boards play an essential role in the success of a deal and should remain present for its entire lifespan. Too often, all energy is centered on the early stages of a deal, leading to mistakes, but boards should consider maintaining strong oversight - particularly while navigating the complexity of the PMI.

It is not uncommon for companies to struggle with the PMI in some of the following critical areas: value capture, talent, technology, internal controls and strategy. Although the thinking behind the deal may be strong, delivering the requisite value is a complex and potentially disruptive process.

Many employees of a post-merger company feel unsure about their standing, leading to less productivity and significant departures. This talent shakeup can lead customers to question the relationship and defect to the competition. Business performance can also be affected by the difficulty of combining the systems and technological platforms of the acquired and acquirer. Melding both parties’ internal control systems and processes can be a challenge, leading to reportable deficiencies or material weaknesses.

In addition, many companies expect management to lead the PMI strategy while running the business, which too often leads to underperformance and miscommunication within the company.

GOVERNANCE OVERSIGHT

Boards can provide the governance oversight required to minimize the likelihood and impact of these challenges to successful integration and post-transaction performance. Today’s boards are generally comprised of directors capable of overseeing every aspect of the PMI. Boards also have the independence to question decisions by management and other advisers and are not influenced by the financial incentives involved with the completion of a transaction. This makes boards well-suited to oversee management’s PMI process without being constrained by running the day-to-day business.

To address the critical PMI issues, a board should consider pressing for the appointment of an integration leader who can be decisive and understands the complex challenges a post-merger company faces – and who has the authority to address those challenges.

The board should also be satisfied that the integration leader has cultivated an integration philosophy and developed a comprehensive strategy with a timetable and key milestones to track progress. This can relieve some of the pressure of the business leadership from being distracted by the need to run the business and plan the integration of an acquired company at the same time.

Competent integration leadership can also help the board to address areas that may not be necessarily within its customary areas of focus, such as HR and IT. Although the board may not have routine interactions with these and other day-to-day business functions, it should be able to rely on integration leadership to alert the board to integration challenges in these areas and to keep the board informed as to how these are being addressed, the timelines for doing so and anticipated outcomes.

Boards should recognize PMI as an integral part of a transaction and take a proactive role beyond deal approval, consistent with their governance oversight responsibility. By providing integration oversight, including being satisfied that a comprehensive plan is in place, and by interacting with integration leadership, boards can make the PMI more effective, enabling deals to succeed where they otherwise might not.

RECOMMENDATIONS

Key recommendations for boards overseeing the PMI process include: 

• The board’s focus in M&A transactions should not be limited to early-stage issues. Although price and key terms are critical, PMI challenges can cause even sound transactions to fail
• Board governance oversight should be applied to all stages of M&A transactions – including PMI issues. This can help minimize the likelihood and effects of PMI-related challenges
• A critical component of PMI oversight is the selection of an integration leader who understands the challenges of integration and has the authority and ability to address them
• The board might consider assigning a specific board committee as a primary contact for the integration leadership throughout the PMI. This adds a layer of oversight and can provide additional clarity between the role of the board and integration leadership
• The integration leader should consider providing metric-driven reporting to the board regularly on the integration strategy, obstacles encountered along the way, progress in addressing those challenges and the overall timeline, as well as anticipated outcomes
• The integration leader and/or company leadership should consider introducing the board to the top talent of the acquired company to provide a clearer understanding of new leadership assets and to create a faster, more seamless transition to the company for the new employees.

Deborah DeHaas is vice chair, chief inclusion officer and national managing partner with Deloitte US’ Center for Board Effectiveness. Joel Schlachtenhaufen is principal, M&A services with Deloitte Consulting.