The M&A Lifecycle: Execution Phase

The final phase of the M&A lifecycle involves executing the Sale & Purchase Agreement and undertaking the challenge of integration.

The Execution Phase Overview

We are past the Evaluation Phase and into the Execution Phase. In the final phase of the M&A Lifecycle, we will execute the SPA, transfer funds, and begin integrating the target company. Value is captured or lost based on the results of the integration.

Acquisition Financing

Before the close process, financing considerations have long taken place, having been explored in strategy creation.

There are a variety of ways that buyers can successfully finance a transaction. Most transactions will use a combination of the below methods & capital sources to cover the purchase price.

  • Cash
  • Equity
  • Equity Rollovers
  • Earnouts
  • Traditional Bank Loans
  • SBA Loans
  • Seller Financing
  • Mezzanine Financing
  • Junk Bonds

More on Earnouts 

An earnout allows a buyer to negotiate to pay a portion of the purchase price contingent on the target company's performance after the transaction. In theory, this is an ideal situation for the buyer and a challenge the seller may be up for if it means securing a higher purchase price. In practice, earnouts can lead to many unintended consequences. For one, negotiating an earnout is a maze of "if this, then that" stipulations. For example, on Day One, who is operating the target company? Are there aligned incentives if the buyer may have to shell out a large sum of additional money after the seller meets performance thresholds? What is to stop the buyer from siphoning strategic resources from the target to enhance its own PnL and the target doesn't meet its earnout threshold? What about the disruption of ongoing integration efforts? The seller's attorneys must ensure a protected post-transaction environment to earn the earnout.

From the buyer's perspective, what happens when the target doesn't hit its earnout threshold? Suddenly, the buyer may face a mob of disgruntled employees who worked hard toward the earnout threshold and subsequent checks in their bank account.

View earnouts as a possible negotiation tool when vying for more leverage in the deal, but think twice about maintaining them as part of the final agreement. There is a lot of active earnout litigation that you are wise to avoid. For the record, we are providing a one-sided perspective on the effectiveness of earnouts. There are industries and deal circumstances where an earnout is a practical tool with common usage, but remain cautious.

Note on Leveraged Buyouts (LBO)

An LBO is an acquisition of another company primarily financed through debt. An LBO may still use equity consideration, but it will comprise a much smaller portion of the purchase price than the debt. The debt will be some combination of the above forms of borrowing, establishing several tranches of different types of debt. These tranches of debt have varying costs to the buyer or financer. The objective of any acquisition is to finance the purchase price with the lowest financing cost possible. In a real-world scenario, the buyer will negotiate with the bank to lend as much low-cost debt as possible before resorting to high-yield bonds and other subordinated debt to cover gaps in the purchase price.

Post-Merger Integration (PMI)

Day One represents the first day of new legal ownership. Post-closing is where you will realize all your plans for the acquisition. Most integration planning efforts will be developed concurrently with due diligence so that you hit the ground running on Day One. You chose the target for strategic reasons, seeing potential synergies with your existing business or eliminating the costs of competition. The integration process is long, arduous, and significantly more complex than composing the deal itself. Most studies report an M&A failure figure of 70-90%, primarily pointing toward integration failures as the cause. Any prior issues will become apparent during integration, including overpayment, poor diligence, and more.

So why do leading organizations cite M&A as a reliable and low-risk way to achieve growth? There are a couple of answers here. One answer is that a minority of companies have figured out how to acquire companies effectively. A second answer is that successful deals outperform and make up for the losses associated with losing deals. The first answer is accurate, and the second is misleading.

It's not a reliable strategy to make many acquisitions and wait for the star performer to save the day. Simply becoming a serial acquirer won't solve your M&A challenges. The experience of multiple acquisitions does not always translate into improvements in M&A prowess. On average, serial acquirers have the same failure rate as occasional acquirers. Instead, the emphasis should be placed on identifying the correct approach early to overcome challenges.

Every PMI consulting firm will boast their integration playbook as superior. There is no one correct way to structure and manage integration, but we will walk you through some opportunities and pitfalls you may face in any transaction.

Integration Management Office (IMO) 

From start to finish, integration is a deep exercise in change management. The IMO is a large, complex team with an enterprise-level view of all sides of the integration, requiring contributors from all major functions throughout each organization. In large companies, the IMO may be comprised of hundreds of personnel from both companies. It is a myth that only large transactions with highly complex synergy environments require an IMO. Every transaction can benefit from an IMO, and the size and complexity of the office will scale with the transaction.

The IMO's job is to ensure the integration process captures the most value from the deal while reducing disruption to normal operations. The IMO will track the integration status versus expectations through a cadence of report-outs. Using a synergy tracking scorecard, the IMO will monitor actual versus expected synergies captured. 

An IMO is not the same as a Project Management Office (PMO), and leaders need to appreciate the difference in complexity, scope, and objectives. The IMO may manage functional workstream leaders directly or set up multiple PMOs to execute a given set of workstreams. Generally speaking, the IMO is focused on coordinating the integration, and the PMOs will focus on siloed execution.

Workstreams

Workstreams are functional teams that execute on the most narrow objectives in the integration. The number and variety of workstreams will vary based on the acquirer's strategy, transaction complexity, and more. Workstreams in some transactions may be combined or separated based on the above factors. Common workstream examples include:

  • Finance & Treasury
  • Accounting & Tax
  • Human Resources
  • Internal Audit
  • Synergy Oversight
  • Supply Chain
  • Communications
  • Information Technology
  • Sales & Marketing
  • Risk Management
  • Many more 

Culture

We know from earlier that failure in post-merger integration is a cause of many failed deals. Many integrations run into serious challenges thanks to the mismanagement of cultural integration. Still, cultural clashes are often one of the most overlooked challenges of the integration process. Numerous studies analyze the best approach to solving the culture challenge depending on the cultures and industries of the merging companies. We recommend establishing a dedicated culture workstream to manage this process closely.

Communications 

The right communication strategy is another critical component of the integration's success. The communication strategy will vary based on the company culture and stakeholder involvement. Communication strategy surrounding the transaction begins with the announcement of the deal and increases in frequency through integration.

The question on everyone's mind is, what impact will this acquisition have on me? Employees want to understand structural changes and how the company will operate post-acquisition. Existing customers want to know if there are any changes to how they interact with the organization. 

A part of the communication workstream will involve the creation of a matrix that identifies the correct stakeholder audience, content, and timing of the communications. On Day One, tailored messages with timetables need to be delivered to each group, ensuring most critical groups are handled first. In larger organizations, cascading communications can be effective so that employees hear directly from their supervisors. Beyond Day One, there needs to be a cadence of communications with updates as necessary. 

Innovation and Agility

To succeed with any business strategy, you must balance rigorous adherence to a comprehensive plan with rapid transformation in the plan based on new information. Blind over-commitment to the plan will lead to failure, just as constantly recharting the course will.

The importance of these corporate strategy tenets is intensified through the integration process. Your teams need a shared vision that accepts these guiding principles and encourages open dialogue throughout the organization.

Want regular insights on finance and leadership?

Subscribe and we will send you the latest articles and resources to help you better run your finance function.