The 10 Principles of Post-Merger Integration and Holding Synergy
- Develop a common strategy
Strive for a game plan that clearly indicates how you will work together to bolster your competitive position. The main question is: where is the potential for synergy and how can it be achieved?
- Are the business units’ strategies so similar that any corresponding core competencies could help generate a lasting competitive advantage?
- Do any of the units possess unique core competencies that would enable you to outperform the competition?
- Could these core competencies improve performance in other business units’ value chains to such an extent that it makes sense to invest time and energy into organizing an exchange?
- What role do the holding and business unit managers play in order to achieve synergy?
- How do you garner and maintain the necessary support?
- Ensure that post-merger integration is explicitly included in your due diligence audit
Achieving synergy in mergers and acquisitions starts with guaranteeing a focus on integration from the very get-go in the preparation of a deal. This is equally true of hard and soft aspects of integration.
- Decide what kind of integration you want for each business unit
There are two main variables that determine the shape and extent of integration: the desire for organizational autonomy and the need for strategic coherence. When combined, these variables can result in four types of integration:
- Begin by disentangling
In many cases, integration is preceded by a process of disentanglement. This presents the following challenges:
- Guaranteeing continuity during the entire transition, preventing chaos and customer and employee churn
- Minimalizing dis-synergy
- Guaranteeing effective collaboration between buyer and seller during the transition
- Set goals and action plan for Day 1 and for the first 100 days
Day 1 of a merger or acquisition is crucial for several reasons.
- It’s the day when the transaction actually comes to fruition in all respects (balance sheet, transfer of shares, legal/managerial merger, etc.)
- It is necessary to maintain value during the merger/acquisition.
- No disruptions from Day 1 on as a result of the operational transition
- The operation remains under control from Day 1
- Customer and employee retention
- Day 1 is when the tone is set and expectations are raised.
Preparations for this day focus on six areas:
- Completing the transaction: legal transfer, completing the deal financially, dealing with fiscal issues
- Interim management: senior management, changes in reporting lines, governance processes
- Control of finances: authorizations, management reporting, outstanding payments
- Customers and suppliers: keeping customers satisfied, dealing with terms and conditions, change of control clauses
- Employees: retention plan, pension plan, consultation
- Communication: with both workforces, with key customers and suppliers, with the media and various stakeholders
The first 100 days are crucial.
- Make use of momentum, everyone expects change
- Create clarity for stakeholders as quickly as possible
- Restore full focus on ongoing business as soon as possible
- Guarantee basic conditions for integration
Ensure that the main tasks are lined up and the people who are going to carry them out are ready for action at the start of the mobilization phase.
- There is a shared vision, strategic intention and priorities
- The leaders have been appointed, it is clear who is accountable for what
- Organizational principles and frameworks are clear and specific
- Project structure, organization and assignments are clear
- Everyone knows what method and techniques will be used
- A project management office has been established
- Consistent use of formation and financial data has been established
- Teams are engaged and ready to go.
- Organize processes separately if necessary, shared wherever possible
The motto for the processes should be: focus where necessary, shared if possible. Decide how high you want to raise the bar for shared processes.
Make more room for focus if:
- the PMC has many brands and products with individual identities in the market;
- the PMC needs more freedom to operate effectively in the market;
- the processes define the PMC’s identity.
Make more room for shared processes if:
- the need for efficiency and economies of scale is paramount;
- manageability is a priority;
- the processes do not define the PMC’s identity;
- the processes require hard-to-find expertise.
- Mobilize resources and management focus
Resources and management’s attention must be focused on:
- achieving synergy (quick wins, cost-cutting, profit/margin growth);
- creating conditions conducive to collaboration (coherent business model, common vision, cooperative spirit and conditions);
- guaranteeing that the store is minded during renovations (business as usual, value retention, customer retention, key employee retention);
- managing stakeholder relations: with customers, employees, shareholders, etc.
Ensure adequate management
- Set clear priorities.
- Safeguard the hard aspects of integration (monitoring progress and tracking synergy).
- Safeguard the soft aspects of integration (identification with the PMC’s new identity, willingness to work together, ownership and consensus, integration of cultures, development of competencies).
- Manage the risks.
Prepare for several integration ‘waves’
- To make use of unexpected opportunities for synergy.
- To adjust to new market conditions.
- To capitalize on a growing understanding of each other’s business.
- Periodical assessments (post-acquisition reviews)
- Gradually shift from integration to optimization, with greater emphasis on:
- Optimizing leadership (1 team, empowerment)
- Creating a single identity and a collaborative climate
- Optimizing holding synergies
- Streamlining ways of working and implementing best practices
- Analyze goals and synergy
Synergy is the interaction that makes the whole worth more than the sum of its parts. Horizontal synergy refers to achieving permanent, substantial cost reductions and/or higher margins due to improved differentiation in one or (preferably) more divisions made possible by cooperation of decentralized entities and subsidiaries/business units.
Vertical synergy refers to the creation of added value through actions in the relationship between holding/division management and operating company, or between senior management and individual business units.
Use the four main categories of synergy. If you want synergy to be manageable, you need to dissect it.
This is how we arrive at the following types of synergies:
- Sales synergy
- Cross-selling: selling products and/or services to each other’s customers
- Combined product development: combining products and/or services to create unique solutions
- Shared sales skills: use the stronger sales expertise in company a to improve the sales performance in company b
- Strengthened market position: profit from a strong market position by using the strongest company image, shedding excess capacity, or making more profitable deals with retailers or customers
- Improved geographical coverage: serving extra customers by increasing physical presence (multiregionally or multinationally)
- Forward integration: ensuring continued demand by creating extra or exclusive distribution channel
- Investment synergy
- Lower investment burden thanks to common use of plants, production facilities, R&D, knowledge
- More centralized, cheaper financing (depending on holding’s credit rating), cheaper access to information or know-how
- Operational synergy
- Better utilization of staff and assets
- Economies of scale on the job market for the recruitment of management talent (lower recruitment costs)
- Exchange of management talent (imposed by the holding)
- Exchanging knowledge about new trends such as logistical solutions and software development and use
- Using international infrastructure
- Mutual supply without paying free market transaction costs
- Economies of scale
- Using each other’s know-how
- Joint purchasing
- Centralization of support: security services, catering, accounting, HR, training, ICT, legal, administrative systems, market research
- Joint projects: R&D, market research, etc.
- Management synergy
- Improved performance thanks to challenges set by holding
- Better and more effective interaction between Executive Board and Supervisory Board
- Better and more effective interaction between Executive Board and operating companies and business units regarding strategic positioning and periodical planning and control
- Improved decision making by senior management thanks to experience in other, related industries
- Joint reporting and governance costs, sharing the cost of fundamental research between operating companies
- Benefiting from investments in company brand name
- High quality staff
- Better management due to holding’s larger critical mass and higher level of development
- Operating companies accept bigger financial risks in relation to customers and innovation, increasing the odds of achieving breakthroughs
- Greater continuity and faster growth of cash flow than stand-alone
- Support in complex situations; wider network
- More powerful external organization: more political clout, better able to stand up to trade unions
- Better able to defend itself against sudden moves by competitors
- Specify the holding’s role
- The group or holding serves as financier, manager and strategist.
- Strategic planning
- Planning and control (business planning cycle)
- Allocator of capital across units, portfolio management
- Creating and maintaining a group image
- Formulating a group mission
- Identifying, cultivating and exploiting core competencies
- Management development programs
- Utilization of the relationships between units
- The holding can add more value than separate divisions.
- Better strategy
- Cheaper access to funding
- Purchasing power
- Geographical presence
- Power in relation to buyers
- Management development
- Increased size for shareholders
- Economies of scale (knowledge, manufacturing, marketing, etc.)
- A number of questions and business criteria can help you determine what role you want the holding to play.
- Two main variables determine the shape and extent of integration:
- the need for organizational autonomy;
- the need for strategic coherence.
In different combinations, these lead to four types of integration: preservation, symbiosis, holding and absorption.
Sources: G.J. Wijers, Horizontale synergie (Koninklijke Van Gorcum/Stichting Management Studies, 1994), Hans van Londen, De waarde en waarden van concerns (Koninklijke Van Gorcum/Stichting Management Studies, 1998) and Michael Goold & Andrew Campbell, Synergy: Why Links Between Business Units Often Fail and How to Make Them Work (Capstone Publishing, 1998)
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