Global Consulting Practice. White Paper. Navigating M&A Integration

Transcription

1 Global Consulting Practice White Paper Navigating M&A Integration

2 About the Authors Nagendra Kumar Nagendra Kumar is a senior practitioner with more than 17 years of wide-ranging experience in technology, consulting, and general management across diverse business domains and technology platforms. As part of the Integrated Offerings group at Tata Consultancy Services' (TCS') Global Consultancy Practice (GCP), Nagendra is responsible for conceptualizing innovative consulting solutions and services to address CXO priorities and challenges. As a consultant, he advises global businesses on digital transformation, globalization, and M&A-driven growth strategies. Nagendra holds a Master's degree in Management from the Indian Institute of Management, Calcutta, and a Bachelor's degree in Computer Science from the Indian Institute of Technology, New Delhi. Parthapratim Indra Parthapratim Indra is a Principal Consultant with TCS' GCP. He has more than 27 years of experience in several disciplines in IT. He has an excellent track record in various consulting, technical, as well as leadership roles across diverse business domains and technology platforms. Parthapratim is also an Open Group Certified Distinguished Architect and Master Architect. His experience, expertise, and current focus are in the areas of business problem diagnosis and solution evangelization; mergers, acquisitions, and divestitures; business evolution capability maturity and next generation strategy definition; IT-enabled business transformation; and business transformation strategy and roadmap definition. Pradipta Chakraborty Pradipta Chakraborty is a Strategic Business Solutions Consultant with TCS' GCP, and leads evangelization of CXO-focused solutions. He has extensive management consulting experience working with CXOs, business group heads, and enterprise architecture teams in developing their end-to-end strategic solutions. Pradipta holds a bachelor's degree in computer science engineering and has attended the postgraduate program in general management at the Indian Institute of Management, Calcutta.

3 Kausik Mukherjee Kausik Mukherjee is a Senior IT Consultant with TCS' GCP. Kausik has over 18 years of experience across various streams of IT services, ranging from consultancy, presales and system integration to delivery. Kausik specializes in areas such as IT planning and blueprinting for mergers and acquisitions, enterprise transformation, IT portfolio assessment and optimization, and strategic IT planning. In his current role, he participates in IT consulting pre-sales through fulfillment and delivery for senior IT management across multiple domains and business verticals. Kausik holds a bachelor's degree in science and a post graduate diploma in business management.

4 Abstract M&A integrations are highly transformative events, requiring sweeping changes across the functional and technology landscapes of the involved entities. Integrating two diverse organizations with independent operational practices and cultures, while effectively meeting shareholder expectations, ensuring regulatory compliance, managing customer impact, and preventing talent flight, can challenge even the best-run organizations. What steps can organizations take to address these challenges before the deal takes place, as well as during the post-merger integration journey? What goes into driving an integration strategy that successfully captures merger synergies, as well as realizes the target vision for the combined business? This paper outlines our perspective and approach to structure the integration journey, and address the evolving priorities and contrasting requirements through the various stages of the deal lifecycle to ensure successful realization of merger objectives.

5 Contents The Integration Challenge: Do the Pieces Fit? 6 Pre-Deal: Getting Ready 6 Pre-Close Setting the Course 8 Post-Close: Making the Journey 11 Negotiating the Roadblocks 12 Building Repeatability and Execution Readiness 14 The Key to M&A Success 14

6 The Integration Challenge: Do the Pieces Fit? Mergers and acquisitions (M&A) are a fast and effective way for companies to scale up their operations or broaden their product and services portfolio. Companies are also going in for M&As to increase their market share, enter new markets, and divest portfolios to focus on core businesses. However, a significant percentage of M&A initiatives fail to realize their envisaged growth and value generation targets, with research citing unsuccessful integration of the acquired businesses as one of the main reasons for this. It's not easy to integrate two independent organizations with their unique business models, operational practices, and cultures into a single, larger, unified enterprise while delivering value synergies in line with shareholder expectations. The new enterprise needs a solid integration program to navigate this period of transition. An integration program involves risks and complexities arising from the multiple functional and cross-functional work streams that need to be rigorously planned and executed within a stipulated timeframe. All this needs to be done without disrupting day-to-day business operations, while addressing stakeholder expectations and concerns. Digitalization-fueled industry disruptions and globalization are forcing firms to increasingly look at acquisitions beyond their core business and geographic boundaries. This makes the integration challenge even greater. Pre-Deal: Getting Ready Ideally, integration-readiness kicks off when the firm formulates an M&A strategy, well before any actual deal cycle starts. The overall strategic context of the M&A strategy needs to be understood to identify its implications in terms of the expected number and size of acquisitions planned, the timelines involved, and the end-state vision. While a one-off acquisition aligned with a specific product line or geography may be a limited affair, a longer-term inorganic growth strategy may require building extensive M&A integration capabilities. The following steps can help businesses attain a sure footing before the deal: Set the Criteria for Success To be ready for success, it is important to clearly define what success looks like and how it can be measured. This involves translating the strategic intent of acquisition product expansion, operational efficiencies, increasing customer reach, or diversification into a clear set of goals. These should be defined in terms of specific combinatorial synergies that are to be achieved along with the end-state vision of the combined enterprise. Building a common framework for what constitutes success goes a long way in aligning the unit-level integration goals, engaging the right sponsors, and setting appropriate executive incentives to make them accountable for success. The post-merger integration (PMI) methodology should identify a set of success metrics at the outset and track them throughout the integration journey to ensure the core merger priorities remain in focus. Typical M&A Success Metrics: Target synergy realization Shareholder value Customer retention/growth Business-As-Usual (BAU) effectiveness Compliance issues Integration costs Integration timelines (adherence to planned timelines) 6

7 Specific value metrics aligned to the synergy goals should also be used to re-assess and refine original expectations as new details emerge during the course of integration. Evaluate Capabilities for Integration Readiness Post-merger integration is a two-way process, with success depending as much on the maturity and integration readiness of buy-side capabilities, as on the acquired business. A firm's current business processes, services, and systems can be a risk to the success of the integration if they are not able to scale up to a larger customer base, adjust to changes in product portfolio, or support the combined post-merger business model. To ensure integration readiness, a proactive understanding of the business and IT environment is needed to identify: n Homogeneity and maturity of business processes and practices n Availability of information and documentation to drive various M&A phases and integration planning n Technical maturity and scalability of core business platforms and infrastructure n Organizational values and work culture Having an advanced view of these aspects helps predict and plan for integration complexities, constraints, issues, and risks. Accordingly, the key constituencies can be engaged, required capacity gaps addressed, and specific policies and processes re-aligned to enable smooth integration. Existing in-house initiatives and resource commitments can then be assessed and re-prioritized. Establish M&A PMO and CoE Organizations also need to put together a strong integration governance structure as soon as possible. This structure should be led by a senior executive sponsor who is adequately equipped to make key decisions, coordinate resources, and mobilize cross-functional support. The sponsor needs to work alongside an effective Integration Program Management Office (PMO) responsible for integration planning as well as program execution. In our experience, having a PMO team established in time for the pre-deal due-diligence phase ensures greater continuity between integration strategies and pre-deal merger objectives. It also helps gain traction early in the process of mobilizing resources for integration projects. If the acquisition strategy involves multiple acquisitions over a period of time, it also makes sense to establish an ongoing acquisition integration Center of Excellence (CoE). This can help align integration initiatives across acquisitions to a common end-state vision, and cross-leverage integration expertise and resources. Make the Most of Pre-deal Due Diligence The objective of pre-deal due diligence is to evaluate the strategic attractiveness of the acquisition target, uncover potential risks, and gain crucial data-points for its financial valuation. However, its importance in building an initial view of the potential integration complexities and challenges cannot be over-stated. 7

8 A common pitfall is to focus on the financial, legal, and commercial due diligence while ignoring the operational and IT aspects of the organization. These aspects can indicate whether the acquisition target has the capability to meet the buyer's strategic and operational objectives. Lack of thorough due diligence is one of the most critical reasons for failure to realize expected synergies. Organizations need a comprehensive operational and IT due diligence toolkit that provides early validation of the identified synergies, leading to faster integration with reduced risk, and greater likelihood of success. Pre-Close Setting the Course Once the merger has been announced, the firms should utilize the time until the deal is closed to define the blueprint for the new, combined organization and plan the integration. Regulatory constraints and merger control risks limit access to the target company's information, hindering the collaboration needed to proceed with detailed integration planning. However, firms can use the clean room mechanism, involving third-party expertise if needed, to resolve critical people and technology issues and take steps to build a baseline framework for successful integration. Select an Integration Model For an Effective Due Diligence Exercise: The integration model to be adopted determines the overall approach, scope, and pace of post-merger integration. Figure 1 shows four integration models based on how similar or dissimilar the merging firms are in terms of the nature and size of their businesses, their need to maintain strategic and operational autonomy, and their cultural profiles. n n n Identify risks and gap areas in operational health of the target firm Validate target synergies in terms of underlying operational and IT capabilities and identify potential deal-breakers Gather an initial view of the scope, complexity, and potential cost of postmerger integration Low Level of Integration High Relative Size Similar Dissimilar Preservation Portfolio Symbiosis/ Transformation 1 Absorption Slow Fast Speed of Integration Diverse Similar Type of Business Figure 1: Post-Merger Integration Models Matrix 8

9 A one-sided Absorption model is typically applicable to scale and efficiency-driven acquisitions. These involve smaller sized targets where the objective is to rapidly assimilate the acquired firm's operations by migrating to the acquirer's processes, structures, and practices. The key objective in such an integration is to eliminate the operating costs of the acquired firm and realize cost synergies by consolidating and rationalizing a combined asset base. The Preservation model on the other hand focuses on retaining the unique business capabilities and culture of the acquired organization. By preserving its existing value and establishing minimal organizational linkages, the goal is to ensure coordination and strategic oversight. While these two models define the extremes in terms of the speed and the extent of integration, the Symbiosis model takes a balanced approach. It aims to combine the optimal, best-of-breed elements from the merging firms to build a hybrid organization. This approach is most effective in mergers driven by product or geographical expansion where cross-fertilization of knowledge, information, and operational practices needs to be balanced with standardization-driven cost efficiencies. In specific scenarios, where the objective is to re-invent the business model by transforming the merging firms into a superior business, a more rigorous Transformation model is needed. This involves incorporating elements from the individual operating models of the different merging entities to create an entirely new one. Table 1 provides an overview of the four integration models and the integration strategies they entail. Integration Model Integration Objective Integration Strategies Absorption Preservation Symbiosis Transformation Fully and rapidly assimilate acquired firm into buyer's operations and culture Continue independent operation of acquired firm, retaining its individual capabilities and cultures Combine the most effective processes, structures, and systems from each company to form an efficient operating model Synthesize disparate organizational and technology pieces into a new business model and operating model Consolidation, rationalization, and elimination of redundant capabilities Coordination, communication, and selective intervention Standardization, interoperability, and harmonization Re-organization, re-design, and innovation Table 1 Integration Models Each model lays out a specific architecture for integration not only in terms of the pace and extent of integration, but also synergy timelines, program structure, and people strategies. Take a Capability View The selection of the integration model sets the stage for detailed capability-level blueprinting of the post-merger enterprise. As part of the approach outlined in Figure 2, the Day-2 operating model needs to be defined against the core integration strategy parameters established by the choice of integration model, the target operating vision, and combined product market strategy. 9

10 M&A Context Merger Scope and Strategic Principles Combined Day-2 Vision Synergy Objectives Business Integration Strategy Integration Program Structure and Governance Product Portfolio and Go-to-Market Strategy Day-2 Operating Model and Enterprise Blueprint Operating Model Realignment Supply Chain Reconfiguration Optimization of flow of goods/orders/ information Production/distribution footprint Organizational Re-structuring Functional re-organization Business service consolidation (finance, corporate services) Business Process Harmonization Process standardization and integration Role and competency re-alignment Performance metrics re-definition Technology and People Realignment Business Platform Consolidation ERP and CRM consolidation IT portfolio rationalization System migration and re-engineering Business Data Harmonization Business data consolidation (customer, product, inventory) Data standardization and integration Master data management Cultural Re-alignment Stakeholder engagement and communication People transition and competency alignment Organization change management IT Service Consolidation IT sourcing and vendor consolidation IT infrastructure consolidation IT service standardization, integration, and transition Performance re-engineering Figure 2: Post-Merger Capability Integration Defining the Day-2 model involves reconfiguration of baseline sourcing, distribution, and production capabilities to align with the new business lines and expanded geographical presence. It requires harmonization and integration of existing processes and operating practices to realize end-to-end business flows and leverage enterprise shared services, and redefinition of existing roles, performance metrics, and reward systems to support the new structures, processes, and value outcomes. The operating model footprint needs to be supported by corresponding changes in the systems and data infrastructure over which it runs. The combined technology landscape, which includes the core business platforms such as enterprise resource planning (ERP) and customer relationship management (CRM), needs to align with the overall integration model. End-state functional and process requirements, as well as IT-specific cost synergy targets, must be addressed. Core business data, including product and customer information across the merging firms needs to be harmonized. This will help in the identification of new customer segments and realization of crossselling synergies. 10

11 Once the combined operational and technology blueprint is in place, the specific integration initiatives needed to realize it can be identified and planned. The capability integration initiatives need to be prioritized based on synergy potential, criticality to business, and cross-functional inter-dependencies. They need to be structured into a set of cohesive work-streams that can be planned in detail. It's also important for the people and cultural implications of the integration to be clearly understood and adequately accounted for while planning the transition. Plan for Day-1 Readiness As the deal closing date approaches, an interim strategy is needed to ensure a smooth, issue-free Day-1. Apart from various legal and financial compliance requirements associated with closing the transaction, a range of operational, process, and infrastructure requirements need to be proactively identified and addressed to ensure Day-1 readiness. This includes basic day-one essentials like work facilities, security access, and the core technology infrastructure. It is also important to identify and address the potential impact to critical business flows, and ensure that appropriate transition service agreements (TSAs) are in place for all remaining dependencies on sellside services. Day-1 is a high visibility event that sets the pace for integration. It is thus imperative to establish a dedicated task force under empowered leadership that can manage cross-functional dependencies and coordination needs. Meticulous planning, detailed checklists, and a range of measures including early 'dress-rehearsals' and appropriately staffed 'command rooms' to address exigencies, can all ensure a smooth Day-one transition. Post-Close: Making the Journey Once the transaction is closed, and Day-1 requirements have been successfully met, the actual task of merging the two organizations starts. The organizations need to balance the requirements of integration projects along with ongoing business imperatives by managing priorities, resource investments, and stakeholder expectations along the integration journey. First 100 Days: Preserve Value The priority during the first 100 days after closing the deal should be to ensure business continuity and preserve the value of the acquired firm. This involves preventing customer attrition and revenue loss by engaging with customers and ensuring seamless customer migration; establishing an interim, top-level organization structure by identifying key people to drive the transition; and proactively identifying key personnel dependencies and potential people-related issues to initiate appropriate change management, employee communication, and talent retention. In parallel, work must begin to build early momentum to realize the Day-2 vision by mobilizing integration teams and engaging key vendors. The focus should be on integrating core business capabilities such as customer facing processes and primary operational flows, core business systems and data migration, and transitioning of critical business services. Figure 3 outlines the key activities to be undertaken immediately before and after integration. 11

12 Day 0 (Letter of Intent) Close / Day 1 <-----Transition Period-----> Day 2 (TSA in Place) (TSA Exit) Future State Pre-Deal Transaction Post Merger Integration Post-Integration Steady State Define M&A strategy Target identification and profiling Target screening/due diligence Target valuation and deal support Plan and execute Day-1 readiness Establish interim IT model and critical linkages Support legal/financial compliance requirements Define Day-2 blueprint and integration strategy Complete Day-2 infrastructure and facilities consolidation Implement Day-2 organization structure and operating model Integrate/consolidate core applications platforms Enable user transition to Day-2 platforms and processes Assess synergy realization targets Transition IT integration projects and resources Refine/update M&A IT playbook Plan/initiate next-level IT optimization Establish synergy targets and realization plan Consolidate IT services, vendors, and contracts Set up IT integration governance Establish TSAs Manage and track IT synergies Plan and manage TSA exits Figure 3 Integration Roadmap Beyond Day-100: Harness Synergies and Realize 'End-state' Vision By Day-100, the merging firms should be operating as a single organization. Now the focus should shift towards realizing transformative synergies that are the key to unlocking the inherent value of the deal. Initial synergy targets should be re-assessed and revised. New sources of synergies, uncovered as part of integration, should be incorporated in the synergy realization plan and metrics. As part of the TSA exit strategy, the handover process for BAU teams should be initiated towards driving ongoing refinement and optimization of post-integration business operations. Negotiating the Roadblocks The M&A journey is risk-prone and there are several hurdles to be crossed between the pre-close and post-close stages, and beyond. These could emanate from customer expectations not being met, or gaps in employee communication leading to loss of talent, or even risks to business continuity or revenue. The success of an M&A transaction hinges on identifying those hurdles early and building the required readiness to negotiate them as they arise. Prioritize People Aspects People integration is one of the prominent integration challenges, and need to be proactively identified and addressed. It assumes higher prominence in specific merger scenarios where there is an overlap or redundancy in roles, responsibilities, and structure across the merged organization. The need for considerable adaptation and re-alignment to the acquiring organization's culture and operating style adds to the pressure. When employees don't identify with the new organization's vision, it causes discontent and disconnect, directly impacting employee engagement and productivity in executing the integration plan. This delays and negatively impacts synergy realization, escalates integration costs, and triggers the flight of key talent. The organization's image is also impacted when key people leave and external stakeholders become aware of the discontent. 12

13 Moreover, cultural incompatibility due to differences in operating style, geography and ethnicity can be roadblocks to open communication, coordination, and collaboration. Early attention to people issues, along with a range of proactive people and change management measures can help arrest and neutralize such risks by: n Building a talent retention strategy and incentive mechanism for smooth short-term transition and long-term value retention. This involves evaluating which employees are strategically critical from an integration and knowledge transition point of view n Putting in place a communication strategy for timely dissemination of information to all employees and stakeholders n Assessing differences in organizational culture between the two merging entities in the due diligence stage to help harmonize them to a common organization culture Track Program Cost and Risk Despite meticulous planning, an integration program may incur excess costs and a range of program risks due to inaccurate initial estimation, unpredicted complexities, program schedule slippages, or competency and experience gaps within the integration team. Other factors may include distributed teams, and inadequate participation and support from key stakeholders. Complex vendor or contractor ecosystems, TSA schedule slippages, service quality issues, and compromised information security guidelines could also result in integration projects going over budget. Whatever the cause, delays contribute to failure in realizing synergy goals, or worse, impact operations and customer relationships. The due diligence process should help identify program risks as well as pragmatic solutions to them. The suitability of the M&A governance processes as well as the CoE to mitigate and manage these risks should be assessed. Customizing the existing processes and calibrating them to deal with identified risks will also improve the chances of success. A cross-functional steering committee and the PMO have to work in conjunction with business units and function leads for the integration project to be completed within budget and schedule. Periodic, synergy-driven integration diagnostic assessments will help with tracking of program success, early detection of program risks, and advanced course correction. Keep Customers in Focus When taking consolidation and integration decisions focused on realizing operational and cost synergies, firms tend to get blindsided by the customer impact of those decisions. Customers from the acquired entity, already concerned about the impact of the merger, may be further alienated by changes in branding, product portfolio, pricing, and services. The process to migrate customers to buyer platforms may lead to further deficiencies in the customer experience, resulting in customers moving to competitors, and an eventual slide in market share. Proactive measures to prevent customer churn should therefore form an integral part of any integration strategy and plan. Strategies that help retain customers during an M&A transaction include: n Incorporating customer views as a critical dimension for evaluating the integration plan and its success n Creating clear and effective communication channels with customers and ensuring cohesive engagement initiatives during the merger or acquisition process. The message to customers should always be direct and simple, but compelling, in order to win their confidence n Coordinating and sequencing the integration activities to ensure minimum disruption to customer experience and services. Customer experience concerns should form an important part of the integration strategy and plan n Prioritizing actions that improve and demonstrate the value of the new entity and its services to customers 13

14 Building Repeatability and Execution Readiness M&A deals are rarely a one-time exercise. With acquisitions emerging as key strategy for achieving organizational growth and competitiveness, there is a clear case for taking a longer-term view and building strategic capabilities for successful post-merger integration. This is especially true of firms pursuing a number of acquisitions to realize a strategic growth plan, where successful integration of each acquisition is critical to the overall end-objectives. Figure 4 illustrates the M&A delivery excellence framework. It lays out two key levers for developing M&A integration as a strategic capability. Expertise M&A Playbook M&A Repeatability Integration PMO M&A Execution Experience Figure 4 Building M&A Delivery Excellence M&A repeatability is about institutionalizing M&A integration activities as an adaptive, but repeatable exercise by standardizing integration processes, program practices, enablers, and key decision parameters as part of an M&A playbook. It also means investing in building a CoE comprising experienced M&A experts to assimilate, develop, and apply PMI expertise in various acquisition cycles. The second lever, M&A execution readiness, is about establishing M&A program governance and delivery capabilities for efficiently executing integration cycles while minimizing costs and risks. This requires setting up an ongoing Integration PMO to manage the acquisition pipeline and integration program portfolio, manage M&A resources, and track cross-integration synergy realization. Another component of M&A execution readiness is an integration factory. This should aggressively deliver specific, repetitive I ntegration tasks in a consistent, time-bound, and cost-effective manner, through efficient, standardized execution, robust skills, and an effective toolset. To ensure sustained acquisition success, strategic acquirers should ensure that the learning and experience gained as part of each successive M&A execution is effectively channelized into the repeatability levers, just as the repeatability levers are effectively used to drive execution of integration programs. The Key to M&A Success Each integration is different, and there is no standard recipe for success. However, thinking about the integration process early in the merger or acquisition cycle will increase the odds of its eventual success. Organizations need to initiate integration-readiness and planning early on in the deal cycle. By building a capability level blueprint and following a systematic and phased approach to the integration, businesses can ensure a steady pace of integration while retaining focus on the key areas of program cost and schedule, customers, and talent. By retaining sight of value synergies during integration execution, and building acquisition integration expertise as a strategic capability, firms can position themselves for continued M&A success. 14

15 About TCS' Global Consulting Practice TCS' Global Consulting Practice (GCP) is a key component in how TCS delivers additional value to clients. Using our collective industry insight, technology expertise, and consulting know-how, we partner with enterprises worldwide to deliver integrated end-to-end IT enabled business transformation services. By tapping our worldwide pool of resources onsite, offshore, and near-shore our high caliber consultants leverage solution accelerators and practice capabilities, balanced with our knowledge of local market demands, to enable enterprises to effectively meet their business goals. GCP spearheads TCS' consulting capacity with consultants located in North America, UK, Europe, Asia Pacific, India, Ibero-America, and Australia. Contact For more information about TCS Global Consulting Practice visit: global.consulting@tcs.com Subscribe to TCS White Papers TCS.com RSS: Feedburner: About Tata Consultancy Services (TCS) Tata Consultancy Services is an IT services, consulting and business solutions organization that delivers real results to global business, ensuring a level of certainty no other firm can match. TCS offers a consulting-led, integrated portfolio of IT and IT-enabled infrastructure, engineering and TM assurance services. This is delivered through its unique Global Network Delivery Model, recognized as the benchmark of excellence in software development. A part of the Tata Group, India s largest industrial conglomerate, TCS has a global footprint and is listed on the National Stock Exchange and Bombay Stock Exchange in India. For more information, visit us at IT Services Business Solutions Consulting All content / information present here is the exclusive property of Tata Consultancy Services Limited (TCS). The content / information contained here is correct at the time of publishing. No material from here may be copied, modified, reproduced, republished, uploaded, transmitted, posted or distributed in any form without prior written permission from TCS. Unauthorized use of the content / information appearing here may violate copyright, trademark and other applicable laws, and could result in criminal or civil penalties. Copyright 2016 Tata Consultancy Services Limited TCS Design Services I M I 04 I 16