Post-merger integrations are racing against The 4 Clocks
Our first in a series of insights about post-merger integrations…
Most mergers and acquisitions fail to achieve their intended synergies and deal rationale, because most post-merger integrations (PMIs) fail. Most post-merger integrations fail because they did not beat The 4 Clocks. There are 4 clocks counting down in PMI, a clock each of the four major stakeholders in a PMI: employees, vendors, owners, and customers. The clocks also largely parallel areas of synergies. The name of the game in PMIs is to complete the integration and achieve the synergies before the clocks hit zero.
The Employee Clock
The Employee Clock measures the opportunity for two key synergies, internal synergies through consolidating excess capacity and external synergies via retaining top performers. Human capital and physical capital are under the microscope of the Employee Clock. Integrations often create excess physical capacity, e.g., plants, locations, and a common source of synergies is consolidation of physical plant.
The human capital element is a race against a brain drain. Top performers from the integrated companies will typically stay on board to see where they fit in the new company, but they will not stick around forever. When the Employee Clock hits zero, top performers have decided to move on. Losing top performers is perhaps the most damaging impact to the long-term strength of the integrated company. The high stakes for talent retention are usually why most PMIs begin with determining everyone’s role in the new organization.
The Vendor Clock
The Vendor Clock counts down the opportunity to capture cost efficiencies. A common source of synergies is the consolidation of vendors and systems. The initial gains are seen in lower per-unit costs due to the larger volume of the integrated company. The starting time on the Vendor Clock is usually higher than on the Employee Clock, but vendor and system integrations also take longer, leaving no time to delay. If the clock runs out and the systems and vendors are not adjusted, you not only fail to capitalize on the investment, you most often achieve the opposite: higher costs and greater complexity. Not completing the system integration on time increases the cost and complexity of almost every business process across the enterprise. That is because every business process that uses a system, its output, its data, etc., will take longer and have more built-in error if the systems integration is not complete when the clock runs out.
The Investor Clock
The Investor Clock tracks the patience maintained by the enterprises’ sources of funds, e.g., capital markets, private equity firms, or in the case of public universities, state government. The starting time on this clock is the most varied, because it is the most dependent on factors that are unique to each integration. Achieving synergies before the time runs out ensures that the enterprise’s relationship with it sources of funds remains strong. If integrations fail to achieve synergies before the Investor Clock runs out, the cost of capital can increase, which is an anti-synergy. In deals approved by regulators, completing the integration before the clock runs out, especially any divestitures or spin-offs required by the regulator, are not just ‘nice to have’, but a ‘must have’.
The Customer Clock
This clock counts down the opportunity to capture revenue synergies, e.g., improved pricing power, expanding cross-sell opportunities. Before these synergies are realized, important strategic questions must be answered. What is the new integrated offering? What is the new revenue structure, and what are the new prices? How do we brand that? Through what channels do we spread the brand messaging? What incentive structures must change for our teams? Capturing the revenue synergies can look a lot like go-to-market / commercialization by another name. Many PMIs fail because companies don’t leverage the same strategies that they use to create new revenue streams.
With the effort underway to build new revenue, the Customer Clock also counts down to the loss of existing revenue in the form of customer churn. Choppy or slow integrations can compromise customer service and customer experience, resulting in unhappy customers picking up sticks. Preventing the loss of customer revenue requires sophisticated real-time analytics, nuanced client communications, and an organized vigorous outreach plan.
Integrations are racing against 4 clocks and must achieve their synergies before the clocks run out of time. The time on each clock is different and depends on the unique circumstances. While you can put time on the clock with robust communication plans and speedy work that meets timetables, it is more important to focus on achieving synergies before time runs out.