Getting ready for Mergers & Acquisitions

History indicates that Companies across Globe predominantly focus on organic growth plan rather than inorganic growth plan. However the recent trend indicates a shift in the paradigm and the fact that Global M&A activity has reached $1.5 Trillion in the first half of 2011 itself, a 22% increase from last year levels, it clearly depicts the pace at which the gap between the organic and inorganic growth is reducing.

Sounds interesting, doesn’t it, but the primary question to be answered is “are you ready?” Is your Company enabled with perfect operating procedures and a well placed plan of action? Well, that’s the first step. Prepare yourself for the change, identify the right candidates, scrutinize and acquire the Company with perfect synergies and be ready for the post merger hiccups. It’s a marriage and you got to have the right bride to keep your family intact and grow it too!

Pre M&A Planning - Implementation of Standard Operating Procedures:

Setting up Standard Operating Procedures (SOP) is definitely a strategic planning process – a success factor for sustainable corporate development, which prepares the ground for long-term growth that creates value. Corporate strategy defines the company's vision, sets targets for the long term and outlines the nature and scope of its business. Effective strategies can give the company a decisive competitive edge.

There is of course no such thing as the right process for strategic planning. But, existing planning processes do clearly contain avoidable weaknesses, which must be identified and eliminated. Further, the Company ought to be prepared to minimize the losses from unavoidable weaknesses.

SOPs lets you put into operation documents such as plans, regulation, compliance, and policies. SOPs distil requirements contained in these documents into a format that can be used by internal / external members in their work environment.

It is essential to carefully structure the procedure system individually for each of the process / business segment and Company as a whole. Caution, too many standard operating procedures could lead to a breakdown of the whole System. Minimum recommended period for review list is three years and changes to the SOP should essentially be triggered by the process or the procedure changes or the adaptations, led by the internal site controlling procedure. A clear focus on updating the coherent standard operating procedures regularly is indispensable.

SOP implementation must be planned for the whole Company which would further be split into business segments SOPs and functional departments SOPs. The steps of planning must begin with target planning, i.e., identification of vision, mission and goals. Next step should be strategic analysis (both external and internal analysis) of the Company situation as a whole and for each of the business segment. Post which careful formulation, selection and implementation of the strategy must be executed. Strategy must include product and business portfolio management plans, designing of structures and systems to achieve Company & Management goals and formulating & quantifying competitive strategies. The process definitely doesn’t end here and without performance measurement the entire hard work will have no value. It is very essential to track implementation success through operational checks and performance feedback from each of the business segment and functional department. Finally, corrective actions in case of issues identified would prepare the Company to proceed to the next step.

Key questions to be addressed while setting up the SOPs are:

Pitfalls in the existing system - Effectiveness of your early warning system - Sufficient attention to what competitors are doing – Underpinning of strategic alternatives with quantitative data – Fortification of value-based management - Strategic planning must be bridged with the medium-term and operational planning -Effective strategy implementation tracking system – Transparency in information flow to secure active commitment from the employees.

Pre M&A Planning – Acquisition Strategy:

The acquisition strategies are no different than any other strategic plan or work plan. Development of criterion before an investigation on possible acquisition targets and set up of goals to focus on the time and energy to the type the right candidate. Prior to scouting of targets, the Company must have absolute clarity on its vision and mission and identify its weak spots. The targets identified for acquisition would either assist the acquirer in overcoming its flaws or contribute directly to the primary aim – growth. The targets being looked at for acquisition should result in positive post merger synergies.

Determination of the financial resources to acquire the potential candidates or identification of the source of acquisition financing is another important step for planning. Any blemish on the acquisition financing plans could mark the beginning of doom for the acquirer.

A Pre Merger Planning would be a blueprint for the entire M&A transaction. Continuous research on potential acquisition candidates and developing the business cases for and against acquisition is essential to optimize resource utilization. Of course, like any other strategic plan, pre merger planning is also a dynamic document which will need to be tailored for each of the targets and each of the situational changes.

It is important for the acquiring Company to understand the Acquisition Risk, Integration Risk and Alignment Risk involved in the process, mitigation of which must be factored in the M&A Plan.

M&A Planning:

One would need to consider nature of the transaction, minimum (and maximum) income, geographical location, geographical coverage, years and post-merger management in the home, the ability to transfer Business, turn-around situation, capital requirements continue to grow the business and / or service line of products for your existing business.

The core areas of investigation on the target company should be on the Business Context (historical – current – future), Structure & Composition of the Board, Leadership Team and Business Units, Identification of Critical Positions and Key Contributors (High Potentials; High Performers; “Rising Stars”), Culture Analysis, Analysis of Talent Strategy & Mindset.

It would be useful to determine well in advance the information which will be needed to make an informed decision and look at only serious players who must be willing to realistically meet your needs, their responsiveness and maintain the necessary documentation.

Absolute clarity on the acquisition strategy and growth plan is necessary for the acquiring Company. This should be effectively communicated to the target Company once the decision to acquire is crystallized. A proper communication plan pre M&A is essential to ease the post M&A hiccups.

Due diligence is an important process while considering the targets to be acquired. In spite of an external consultant work on the DD, it is good to have an expert on the board to integrate the various DD reports delivered by different experts like CAs, Lawyers and technical experts.

Valuation is the key in any M&A Transaction to make or break the deal. Clear understanding on the value add by an internal expert is essential, to assess the post integration synergies for the Company.

M&A Plan must contain a detailed insight into the business and organizational risks associated with the degree of fit and match with the target company in terms of people and culture. Acquiring Company must clearly understand the target company’s overall leadership capability and talent inventory. It is essential to identify key leaders who could be targeted for specific retention initiatives, critical positions and post-integration strategic succession planning.

Post M&A Integration

It doesn’t end with a deal closure, an infallible post M&A integration strategy needs to be in place in order to achieve the objectives of the transaction. The skeleton plan will need to be modified and adapted to the specific acquisition targets based on their purchased goods, technologies and techniques to grow both companies together. Since the acquisition may represent a considerable investment of capital, resources and time, in the Companies’ own interest, the integration should be made as easy as possible. A thorough action plan framed by the management along with the consultants and experts in the areas of need is required for a successful result.

M&A creates value only when the value of synergies exceeds the acquisition premium paid. The integration plan must identify and unlock the full value post M&A which should include enhancing revenue and asset efficiency, reducing OPEX and cost of capital as well as tightly monitoring integration costs. Industry-specific benchmarks and synergy opportunity must enable the Company to spot the areas with the greatest value potential in addition to the regular consolidation and reconfiguration benefits.

It is vital to have a “road map” for a smooth integration process that further reduces key talent and customer “run off” and that does not distract key personnel from maintaining the focus on achieving the necessary synergies to achieving value.

The best practices on operating procedures set up in the Company will aid in easy adaption post M&A. Based on the integration master plan, the new business and operating model should be clarified and effectively put into place. Continuous meaningful communication and a cultural change program will be needed to ensure sustainable employee support of the merger.

Change and resource management towards success will be the key objectives from the Day One post integration. The entire focus of the strategy and structure development must be on organizational and management alignment through an accelerated transition. The spot light must be on the priority initiatives with clear communication of the same to all the stakeholders.

M&A process is not standing ahead alone but standing ahead together!

The article is written by Aparna RamMohan, Chartered Accountant and a professional Investment Banker with expertise on Financial Advisory.

All Copyrights reserved. Any unauthorized usage of the article is subject to prosecution in India courts.