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After a historically long economic expansion that encouraged transformational deals, M&A is seeing a significant shift in an environment upended by a global pandemic. This shift demands an approach to M&A integration that leverages both established practices and new tactics and tools – aimed at capturing and protecting a deal’s value.
As PwC’s 2020 M&A Integration Survey shows, companies that once pursued transformation through deals are now considering other types of transactions. Absorption and tuck-in deals have surged in the past three years. The former allows acquirers to efficiently scale within their industries. The latter provides access to new technologies to stay ahead of competitors.
The swings in deal types suggest companies are rethinking their M&A strategies, which have become even more critical during the health crisis and ensuing economic turmoil. In PwC’s 23rd Global CEO Survey, more than 60% of US executives said they expect economic growth to decline in 2020, and nearly 80% said they were concerned about the speed of technological change.
Mastering key elements of integration is elusive
Given these factors, the standard for successful integration is higher. After previous M&A integration surveys showed improvement in achieving strategic, operational and financial success, the latest survey features much lower marks, indicating a pause in progress.
One potential reason is a plateau in companies’ approach to integration, with many acquirers ready for new techniques and tools to manage new challenges. Another reason could be higher expectations, as senior management and boards of directors have become increasingly involved in M&A.
In a volatile economy, the 2020 M&A Integration Survey shows companies haven’t necessarily mastered the key elements of a successful integration. Along with the survey findings, this report includes insights in four critical areas – integration strategy, value capture, people and change, and the transition program – that can help acquirers navigate a turbulent landscape and experience a smoother integration journey.
Financial success remains a challenge
A company’s M&A integration strategy evolves with the deal strategy and overall corporate growth strategy, and integration is measured by strategic, operational and financial success. The survey shows a major shift in integration success, likely due to a few factors. Higher company valuations have elevated transaction prices, affecting financial success. Deals for emerging technology can bring innovation but require integrating different business models and cultures, making operational success harder to achieve.
There also has been a continued decline in high-performing deals, those in which executives reported significant strategic, operational and financial success. For the first time in the survey’s history, there were no high-performing deals.
Go-to-market goals are not being realized
A sharp split persists between what deals aim to deliver and how well they do so. While the importance of go-to-market goals increased from the previous survey, success in reaching those goals declined. Regardless of the deal objective, achieving go-to-market goals is harder given the lack of knowledge and capabilities in the new spaces being entered, along with challenges in integrating markets, products and channels.
This disconnect shows how company leaders need to better understand how integration should be executed. Management and the board may agree on what a transaction should ultimately accomplish. But that requires emphasis on earlier and extensive discovery to appreciate the different capabilities of an acquired business and determine the best way to leverage them.
Management is important, and the board of directors also has a big stake
Any acquisition comes with risks and requires governance, and a company’s board should be able to provide an objective assessment throughout integration. The survey found significant increases in linking the compensation of key leaders to achieving deal goals. And not surprisingly, deals that have dedicated leaders and personnel generally are more fruitful.
There also was a substantial increase in linking director compensation to achieving deal goals. As they face more accountability for deal performance, boards should consider how transactions align with corporate strategy, integration strategy, governance, risk mitigation and implementation. That can better prepare the board to remain engaged and monitor activity throughout the integration.
Defining critical integration components before deal signing is key to success
More than 60% of US executives said their companies had an integration strategy in place at the time the deal was signed. An important step to protecting a deal’s value is developing a roadmap to execute the integration strategy. A target operating model for the combined company should include a clear understanding of the integration scope and the timing and degree of integration across functions and geographies.
The target operating model should be iterative and updated frequently as the acquirer gains greater access to the target company. Only one out of five companies reported having a personnel assessment plan in place at the time of deal signing. That’s not surprising, but it illustrates how crucial it is for an acquirer’s target operating model to evolve once it gains that access.
Synergy capture continues to be difficult
Even though 70% of companies had synergy plans in place at deal signing, survey results consistently show that capturing value in M&A can be elusive. Companies that involve integration teams early in the deal process are 40% more likely to see favorable results. This year’s survey also surprisingly shows more favorable results in capturing revenue synergies versus cost synergies.
The value realized in an acquisition depends in large part on how well the newly combined company captures synergies, and buyers can increase their odds of success with a well-defined, disciplined and transparent approach. Similar to the target operating model, the initial synergy model developed before deal signing needs to evolve with more access to people and information at the target company.
Deal performance indicators are important to track deal success
The market can reward or punish shareholders depending on how much a deal succeeds. So it’s critical for an acquirer to realize synergies, capture deal value and communicate the resulting performance to all stakeholders. And effective communication depends on adequately tracking progress against synergy goals and other deal objectives.
While specific business units and functions may have to deliver certain synergies, a centralized process and set of tools for monitoring and reporting deal objectives and synergies is essential. But many companies aren’t tracking all of the revenue- and cost-related KPIs – including more common metrics – used to measure deal success. Whether the objectives are defined by qualitative or quantitative measures, specific KPIs can help companies set realistic synergy targets and achieve their goals.
People objectives are hard to achieve
Engaging and retaining talent in an acquisition is critical to capturing deal value, and it’s important to provide clarity and direction to key people and effectively manage change throughout integration. About two-thirds of companies said access to key personnel was very or most important, yet few said this objective was completely achieved, and both responses were down from the previous survey. The shift from transformational to absorption deals could be a factor, but preserving workforce stability is still crucial in acquisitions.
More than three-fourths of companies reported moderate or significant success at retaining key employees in deals, down slightly from the previous survey. Within those responses, however, there was a substantial drop in significant success, possibly related to declines in employee morale and employee understanding of company direction during the deal.
Change management programs are insufficient
People issues should be a priority well before a transaction closes, yet companies often don’t have an effective change management program that aligns people to deal objectives and motivates them to achieve those goals. More than 60% of companies said they had a change management program in place at deal signing, but none reported having all seven critical drivers in the program.
Culture was the most common element in change management programs, while only a handful of companies said their programs include incentives. Overall, the survey responses show that most companies don’t understand all the drivers impacting a successful change management program. That lack of understanding makes achieving people goals in M&A more challenging.
Dedicated leadership to integration has increased
An integration management office (IMO) provides strong project governance and is essential for deal success. An IMO defines and implements the integration strategy throughout the process and drives the integration efficiently across the enterprise. Such robust governance and advisory insights better enable companies to achieve their synergy targets, business imperatives, and people and change management goals.
In establishing effective transaction oversight processes, management and boards have increasingly seen the value of appointing a dedicated executive sponsor, often a “chief integration officer.” In fact, 78% of survey respondents assigned an executive sponsor to their integrations, which is two times more than in the previous survey.
The integration team should be involved earlier
Engaging integration teams earlier in the deal process is critical to developing a sound target operating model, validating synergy assumptions and identifying areas of risk to integration execution. About half of companies involved the integration team on or after deal signing, with less than half being involved during or before due diligence.
The type of deal also affected when integration teams were first involved. Compared with all deals, transformational deals saw a higher rate of engagement during due diligence, while absorption deals saw more engagement between deal announcement and closing. But regardless of deal type, a fast, well-executed integration enables leaders to quickly start managing the daily business of the combined company and minimizes potential employee confusion and frustration.
Next steps for your business
A coordinated approach to M&A integration is critical, and the value of a company can be shaped greatly by how well it integrates an acquisition. Taking early, deliberate steps can help enable a smooth transition in the weeks and months after closing. Companies that can answer the key questions detailed in our full survey report will likely be better equipped to execute M&A integration in a challenging economy and help position their organizations for long-term business success.
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