The High Stakes of Post-Merger Integration
According to Harvard Business Review, studies show that 70% to 90% of mergers fail during the post-merger integration phase. This alarming failure rate highlights the critical importance of proper planning and execution during this stage.
Often, companies are so focused on the excitement of finalizing the merger that they concentrate primarily on financial aspects such as cash flow, balance sheets, assets, contracts, and client relationships. While these are vital, they overshadow another crucial element: how the two companies will unite to function as a unified entity.
The Overlooked Importance of Cultural Integration
One of the most significant reasons mergers fail is the need for more attention to cultural integration. Many companies need to plan how to merge their distinct organizational cultures. When two organizations with vastly different cultures attempt to combine, the result can be a lack of cohesion, making it difficult to retain talent, integrate management, and preserve the unique value each company brings.
This issue is significantly pronounced when companies of similar size merge, as is standard in the lower middle market. With a pre-existing plan to address cultural integration, finding common ground can be a manageable task. On the other hand, when a larger company absorbs a smaller one, this cultural clash is typically less problematic, though it still requires attention.
Key Considerations for Successful Integration
To ensure successful post-merger integration, companies should address several key questions:
- Technology Integration: How different are the technology systems of both companies and how will they be unified? This includes considering the software in use, data capabilities, and cybersecurity measures.
- Physical Locations: How many locations are involved, and how will they be incorporated into the company’s communication and management structure?
- Organizational Structure: What does the organizational chart look like before and after the merger? How will roles and responsibilities change? Who will need training in new skills and technologies?
- Compensation Structures: Are the two companies’ pay structures significantly different? If so, how will these be reconciled to avoid high turnover?
- Decision-Making Processes: How do the companies make decisions? Is one more top-down in its approach, while the other relies on committees?
- Processes and Procedures: How well-developed are the existing processes, and how will they be integrated? What are the training and hiring practices, and how will the acquired company’s processes fit with those of the acquiring company?
The Cost of Failure Versus the Investment in Success
Planning is essential. It can help companies avoid unforeseen liabilities, such as unused gift cards, expired warranties, incomplete contracted work, or mismanaged vendor credit lines. Given the high stakes, post-merger integration should be a top priority.
The integration process typically spans 12 to 24 months and begins with establishing a semi-autonomous team responsible for planning, resource allocation, and leadership. This team also identifies external experts who can assist in making the integration successful. Although this process may seem costly, it is a necessary investment compared to the potential losses from a failed merger, which could jeopardize both the acquired and acquiring companies.
Preparing for a Successful Integration
When planning a merger or acquisition, the first step should be to designate individuals within your company to begin outlining your organization’s culture, structure, and technology stack. This team should start developing a comprehensive integration plan early in the process.
Once a potential merger target is identified and after a letter of intent is signed, it is beneficial to involve stakeholders from the target company in the planning process. While some companies may hesitate to discuss integration before a legally binding agreement is in place, these discussions can begin at a high level and become more detailed as the merger progresses.
Ultimately, having a detailed integration plan and a dedicated team to oversee it is essential. With this, the risk of failure is high, and as business owners, failure is not an option.