Why is M&A Integration So Hard?

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Nice job. So are you really going to host this conference yourself?

Yeah, of course. Why wouldn't I?

Well, what am I going to do?

You can make some eggnog.

I like that idea. I'm Kisan Patel and you're listening to M and A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals.

Foreign.

I'm your host Kisan Patel, CEO and Founder of Deal room. I spent 10 years as an M and A advisor and after seeing a bunch of industry wide challenges and outdated information management practices in 2012 I started the dream of building the greatest software to manage M and A. Joining me today is Galina Wolinecz, Managing Director at Verita's Partner where she heads her integration and separation practice. Helene is a multifaceted Senior Executive with 25 years of industry experience in execution of corporate strategic growth initiatives through mergers, acquisitions and other business combinations from portfolio strategy development to post merger integration. Also joining me is James Tim Payne, the Principal Consultant at Merger Integration Consulting. Tim has over 15 years of experience in M and A due diligence, execution, post acquisition integration and divestiture operations. He's participated in over 50 deals, completed 25 acquisition integrations and 13 divestitures. We've all heard stories about integrations gone bad. We're quickly realizing integration is where value gets created or destroyed. We don't want to see value get destroyed. So today we're discussing why M and A integration is so hard. Let's kick off with a little background on yourselves. Galena, if you want to kick off.

So yes, Kisan said. I am currently a Managing Director at Virtus Partners accounting and finance consultancy firm based out in Chicago. But actually we talk about my deal experience. Majority of my experience actually goes back to corporate environment Prior to joining Avertis, I spent about 25 years in corporate development, merger integration type roles at two companies. Largely 20 years with United Technologies. Many of you know them today as Raytheon Technologies. As about a month ago they were separated into three publicly traded companies. And with Stanley, Black and Decker, which I headed up integration management office for that company. At United Technology I would say most prominently I was the integration leader for one of their largest acquisitions at the time. In about 2011, 2012 Goodrich acquisition, which was about $18 billion transaction, 40,000 employees were being onboarded and brought together. So I have experience with these large corporate integrations on one hand. On the other hand with Stanley, Black and Decker spent several years integrating companies of various sizes and complexity from about million to over a billion, where I kind of headed up the integration team that was deployed at the time integrations were contemplated and put together. That's my background. And now at Virtus Partners we service various partners and various clients in various sizes and different types of affiliations, whether it's private equity, corporate and others.

Awesome, Tim.

Yeah. I've been 25 years in the information services and technology sector, including legal, information technology, software and services. The last six years I've been focused on hr, payroll services and technology sector. I've been involved, as Kisan said, in over 50m and a deals that have gone at least through due diligence. You look at a lot of stuff that doesn't even get to due diligence. I have completed over 25 acquisitions and their corresponding integrations. Unlike Elena, these are mostly smaller deals, less than 100 million and generally less than 50 million. A lot of small family owned, owner operated companies. Generally I would run the operations of the acquired company post closing during and through the integrations. I've also handled 13 divestitures, many of these with associated transition services that I ran. Most of these deals we use strictly internal corporate resources, but we have used consulting support for some of the larger ones and in particular for the divestitures to help devise the break apart of the assets.

Let's start off with what needs to be done to make sure integration is successful.

First and foremost, you have to acknowledge the fact that integration is a multifaceted, multifunctional, multidimensional project and a very complex one at that. And what I'm finding more and more as I'm talking to potential clients or even from my experience in my prior life as a corporate development individual, every time there's a transaction that doesn't meet a certain threshold, it Seems it seems like it doesn't get the necessary attention or kind of level of structural rigor that would be required for any other large transaction. Even if we're talking about a couple of hundred million dollars, half a billion dollars, it's still pretty sizable capital deployment that management is putting forward. However, after the transaction gets signed, it seems like we completely lose any interest from senior leadership standpoint at least, and any kind of level of focus from running that integration program, the transaction kind of gets thrown over the board to some management team or whoever is able to catch it. Inevitably that group is either not prepared, don't have resources, it's on top of their day job, and they don't have kind of this learned out tools and resources that they should be using in order to put integration management forward. And that's frankly where I see a lot of the integration programs kind of falter and just don't reach the potential and the strategic rationale, the value creation that the management team has been hoping to achieve through deploying that capital for M and A rather than other ways that they could have deployed that capital.

That's interesting. So you're really sort of gravitating towards this just overall size fit and the way they approach integration in general. It sounds like there'd be multiple components within it, how you staffed it, the budget you put behind it. Maybe if you can share a little more details on that.

Absolutely. There's a lot of rigor that has to go in an integration program. I'm always shocked when I'm talking to a private equity firm and talking about doing in a roll up and say, well, how are you approaching post transaction? And they just say we'll just let management handle. Well, have they done this before? No, they really have not. You certainly need to have a certain number of dedicated individuals that will be focused on program management. I know that the word playbook has kind of gotten bad rap lately. Some people think it's a little bit too rigid, certainly doesn't cover all potential situations. But I'm a firm believer in having a real structure around how an integration program is going to run and put a lot of rig around what types of activities need to happen throughout the integration program so that you have a senior leadership focus, B, you have the resources available to support the integration activities, the level of resources from a capital standpoint, a budget that needs to be given to the integration program so they can kind of put forward their activities in a meaningful way and then, you know, level of accountability for the team. On one hand, it could be an accountability through various tracking mechanisms. You know, how we tracking against our work plan? How are we tracking our synergies? Are we creating value through this transaction that could be achieved through a really pretty rigorous governance that you would want to set up for an integration program? Is there a steering committee that has the ability to make decisions in a rapid manner that are required in this kind of very fast developing and fast flowing program? So on the other hand, I'd say some things that have worked well for me in the past is developing an incentive program for participants in the integration program on both sides of the transaction, on the acquiring side and then on the acquired side to first of all demonstrate to everyone how important this program is to leadership, but also provide them real incentives to perform and to draw and look under the covers and get creative and get innovative around how we want to achieve some of the objectives that you had set for your acquisition program.

That's actually an interesting point around incentives because I'm familiar with incentives around retention for key people. Sounds like you're going even broader than that in terms of just climate around making this integration process successful. Can you walk me through a little bit more details because I'm curious to know how do you actually incentivize it from both sides of the table?

Almost every acquisition that I have been involved with in the last several years we had set aside and in fact it's included in our business model a certain level of incentive pool of cash or funding that would be included so that we can design a program around whether it's revenue synergies, you know, hitting a certain threshold of synergies, whether it's revenue or cost side. And we define a group of individuals that have direct impact on whether or not those objectives have been achieved. And it's very simple. Ultimately goal and objectives, you set those out, set the target and then individuals get paid out. As those goals are achieved, they have some graduated way of increasing if we go above and beyond the target and so on and so forth. You got to be really crisp and you got to work with your HR team. I would say very directly to understand how a program like this should be structured, but also make sure that the people that you are including have actual ability to affect the outcome and have the ability to make changes so that they are able to achieve some of these results.

We often hear about the Corp dev team getting in the kicker for the deals they close. Integration folks are sort of left with the tough job.

Oh absolutely.

Delivering on the value drivers who would be the key people that you would sort of target to incentivize. I can't imagine it'd be every single person involved in integration.

It would be the program management office team, the leadership team at that level. So whatever you would have, if you have a PMO or imo, and then I would say each individual functional area, the head of functional area. And yet I would say on both sides of the equation, the acquired and acquiring company and those individuals that would have the most ability to influence whether or not those synergies are achieved.

Very cool. Tim, glad you made it back. You know, we're still talking about what actually drives success and integration. I'm curious on your thoughts around that.

There has to be management focus on the integration and there has to be a plan. That integration planning needs to start at the latest during due diligence. You learn a lot in due diligence about the company and what the impacts might be to the integration. You got to build in those integration costs as part of the deal. I've been with a lot of companies that seem to think that integration costs would just be absorbed by the departments that are going to be working on it. That's pretty unfair to them. And then it's hard for them to find the resources because they don't have any extra money to get the right resources working on it. I think you have to have that integration budget, which also helps you manage the plan, and then obviously having milestones and quantifiable goals and deliverables and then actually tracking them. One of the things that I've used a lot with smaller acquisitions are retention bonuses. So they're not exactly tied to the integration. But what happens a lot with smaller companies is the people you really need to retain are the ones that can find new jobs the easiest. So they're the ones that take off. And the people that may not be the top are often the ones that stay. So we've utilized retention bonuses that are simply stick around for six months and at the end of the six months you'll get this bonus to kind of give them time to learn about the new organization and not just leave because they've been acquired.

Can we talk more about the leadership standpoint since that sort of comes up on both your responses? Does leadership really make and break success?

Bad management can certainly break a deal, but good management in and of itself may not be enough. So you need to have that structure in place, having a steering committee that's made up of the leaders of the organization that have control over resources. A lot of times the challenge with an integration is finding the resources to get the work done. Companies might have integration teams of varying sizes, but the integration team is never going to be enough to do everything. And so you're going to need to rely on departments to find resources to get things done. And so having a steering committee that includes people that control those resources can play a big part of that.

I agree. I mean, I think one of the things that I kind of mentioned before, I still kind of stand by the fact that integration is such a complex program, really at the end of the day, that unless management truly demonstrate by their action and those actions are participating on the steering committee, making decisions really fast. And frankly, the incentive program that we talked about that clearly demonstrates that there putting kind of their money where the mouths are related to the success of the potential integration program. Unless they demonstrate that through actions and not just words, that this is an important program for the company, for the shareholders or for the private equity owners, whatever is kind of the customer or kind of some of the key stakeholder, you know, it's going to be very difficult to get the team to focus on it. It's going to be very difficult to get the proper resources aligned in order to ensure the program actually succeeds. So, yeah, I'm completely in agreement that leadership is super important and they have to demonstrate their focus and their support of the program with actions rather than words.

I'm still curious on the steering committee model if that really actually helps and makes decisions get done faster. When I talk to anybody live on a deal, it seems like they're more frustrated with all this additional overhead of reporting they got to create for the steering committee, the cfo, the board, and next thing you know, they're just caught up doing a bunch of tactical crap. Instead of really focusing on the strategic work that creates value, it's all on.

How you leverage the steering committee. The steering committees I would create would have the leaders of various functional groups. I would bring information to the individual member about challenges that we were having with their organization, Whether it was not enough resources or problems they ran into. The last thing I wanted to do was surprise the business unit leader of some problem. At a steering committee. What you wanted to be able to do is that leader whose department is having a problem, be prepared that you're going to have to bring up the issue that this department isn't getting done or isn't where they need to be. But you want a leader to know that that's coming and so he can say yes. And here's what we're doing to get it back on track as opposed to getting really defensive. If you structure the steering committee right and leverage it in the right way, it can do a lot to keep the project moving forward.

It can look like it's just a level of bureaucracy to whom you are just presenting just to keep them happy. But that's not how I usually utilize the STEM steering committee. My objective is to bring topics to steering committee rather than conversation around. Well, we have 38 action items that we had to complete. We only completed 24, and therefore this person needs to get flagged, you know, or whatever. We had a separate section in each of the functional representatives presentation that would talk about what decisions do we need them to make today specifically, and we say, here's an issue. Let's say a senior leader at a factory left the company and needs to be replaced. Can we deploy, you know, a search firm or whatever else. Different types of problems that get brought up. My objective is always not to walk away from a steering committee meeting without a decision being made. So I would circle back as we inevitably will get off on tangents and we'll talk about other things. And I would always make sure that I'm the one bringing it back to, okay, I need you guys to make these 3, 4 decisions today before we walk off this meeting so that we can proceed with the program. It's really all about how you manage the steering committee to your advantage. And when I say you, I mean the IMO or the integration leader.

Yeah, I agree. That's a really good point. That the steering committee meetings become simply, here's a status report. We did A, B and C next week. We're going to do D and E. You're going to lose their interest and they're going to stop showing up. They're not going to be effective. So you need to bring to them the issues that you need them to act upon.

Why do you think there's a tendency to pass the buck when it comes to integration?

One thing comes to mind is having been on both sides, right? I would say probably majority of my career I spent in corporate development and I did the fun exercise of doing deals and the thrill of a deal and, you know, all of those things that we all kind of know, if we've been involved in M and A, all of that is fun. You know, that's fun to do. It's fun to, you know, work on a project that gets something put together, right? As an acquisition, interacting with the other side, with multiple advisors and all of that stuff, that's Fun and exciting and people get hung up on that. And once I get done, there's kind of this inevitable letdown almost afterwards, like, okay, well, we're done. Now what? We're kind of moving on to the next thing. And I think the biggest problem in my view is that the lack of continuity between corporate development or business development team and the integration team. In companies where business development team has no touch to the integration and they're not measured on how the acquisition performs afterwards, they have no ability to influence and have participation in transaction post close. I think that's where you see a lot of tendencies for things to kind of fall apart. You just got to make sure that the business development team, integration team are connected in a meaningful way. They are partners and they are facilitating each other's activities throughout the entire length of the life cycle of a transaction from strategy until post merger integration so that, you know, again, the data gets transferred appropriately. There's a very, I would say, formalized handoff between the business development team and the integration team. And even better than that, it's possible have business development team continue to stay involved in integration in some ways so that they have the skin in the game from how the integration is going to perform.

The integration is hard and it's a lot of detail and it can require some tough actions, tough decisions, especially when you're trying to achieve cost synergies. So there can be probably more on the integration side where they feel like they've been past the buck. Especially if you're not engaging some of that integration team during the due diligence. Lots of people get brought in to do the integration that aren't part of the deal for lots of reasons. There can be some of that feeling like, well, I didn't get to pick these goals and these.

That's right.

Trying to achieve and it's getting dumped on me. Going back to the incentives can certainly help. It's like, yeah, we think these are achievable and here's some incentive to try to get it. And then I think also again, with a good IMO and a good steering committee structure where you can bring the business leaders back involved and say, well, your team was involved in the due diligence and they committed to this part of the deal. So now you got to step up and deliver it. But I think it basically gets down to doing deals is fun and exciting and the success of completing a deal and it's probably a much shorter time frame. Integration can tend to string out a little bit longer and it can feel More drudgery than the excitement of the deal.

Is integration actually difficult or is it the M and a process that's so taxing that by the time people get to this stage, they're too drained to even care?

I think it's some of both. Integration can be difficult and challenging, but sometimes deals can drag on and they can be tough to get to close. Sometimes you got to make a lot of concessions to get to the close. That can lead to some deal fatigue and just kind of wanting to move on. They've done the deal and they just want to be done with it and either go on to the next deal or just get back to their day to day responsibilities. And I think sometimes concerns about the buyer overpaying or the seller not getting as much as they wanted can create deal disappointment. And I think that disappointment can sometimes impact the enthusiasm for the integration tasks that have to follow.

I actually don't think that integration is that difficult per se. I mean, if you have the right. The right tools, the right structure, kind of the right team in place. I personally find it to be an exciting project in itself. Having been on both sides and again spent most of my career in doing the deals and acquisitions and divestitures. I actually have decided consciously to focus on integration because I think this is to me the more exciting and interesting part to actually bringing people together, kind of actually drawing kind of the blueprint of what the combined organization is going to look like developing and kind of capturing those synergies that were very interesting to look on paper. But how is it actually going to get done in practice and kind of getting to the bottom of that? To me, that's the exciting part. It's not easy by any means, but it's with the right structure, the right approach, the right level of enthusiasm, I think that you can bring to the project. I think it's actually even more fun than doing deals.

I think you just like disrupting things.

That may be. That may very well be the case.

And as someone who's done it for 15 years as well and had lots of opportunities to move off integration into something else, I too chose to just keep doing integrations. I find it really exciting and enjoy it all the time.

All right, you're both miswired people.

I like it though.

How do you go about identifying risk in an integration program?

As an integration professional, being involved in the transaction early, my ideal time to get into the integration program is around the time when they're thinking, here's the company we're going to buy. Even before Due diligence before the model being created. I want to be there very early on involved in the conversation, is this the right target for us? Let's assume that we've already decided that this is the right industry for us to be in and want to expand there. Here's a few targets that we're looking at as part of our inorganic growth strategy. I want to be there kind of taking a look at information that is available, whether the company is public or private. I want to be able to draw initial thoughts around what is our integration hypothesis going to look like? What are some of the potential risks and opportunities? I guess I would say with this particular target and being involved all throughout due diligence. What I've usually done in the past is typically, you know, how a due diligence is run. It's a very kind of strict functional discussion. Each person kind of dives into their specific functional area and comes up with risks and opportunities and they advise the deal team about, here's how much you should subtract for this risk or add for this opportunity. When they're developing the model, you know, I'd like to be there early on throughout this process and represent an integration function and start talking about here's what integration costs are going to look like for you so that they can include that in the model as well. And so that no one's is surprised that all of a sudden, oh, by the way, it's going to cost us XYZ to restructure this factory or to put signage on if we decided to change names and the branding strategy and all of that stuff. I don't want anybody to be shocked that as we close the transaction, then all of a sudden this cost of integration, these things are not cheap. So we want to make sure that we've included that in the model and the price that we paid for this target reflects that as well.

I agree. We had a practice of including in the deal proposal to senior management to get approval to move forward with the deal. We always had a section at the end that was, what's the integration look like? How long is it going to take? What are some of the things we're going to have to face? So they put that front and center to make senior management that's going to approve or not approve the deal going forward to understand that integration has to be thought about. But I think in some ways the way to identify risks in integration are by what they don't have. If you don't have a good integration structure, a good infrastructure set up for an integration, that to me is a big risk. If you don't have detailed integration plans with quantifiable milestones, goals, synergy targets, that to me is a red flag that there's a risk. Where you see some departments having detailed integration plans and you see a department that's got a kind of a light integration plan, you know, that to me is a risk. Have they not thought about it or do they really not have enough information to come up with a plan? Also, if you don't have a change management plan in place, that's a big flag. All these acquisitions involve people. People are always a risk factor. You never know what's going to happen. And so you need to think about that and have change management programs. I think if you're monitoring the base business of the acquired company and if you start seeing changes in the base business, I think that's a big red flag to look and see what's going on. Because if you lose the base business, it's really hard to catch it up and get those synergies if you've lost that base.

So I'm hearing a lot of different things. I hear the whole strategy aspect of it, alignment around it, just to make sure everyone's on the same page, costs, the people factor, making sure we got enough resources, the infrastructure is there, there's a change management approach that's thought out. Is there anything else that you would sort of immediately look for in terms of risk and integration program?

For me, I look to. And again, I'm dealing with smaller acquisitions where you're trying to decide whether the leadership of the acquired company is going to join post acquisition. Really understanding what that management team of the acquired company is thinking and what their plans are. Are they going to cash out and walk away and what is that going to do to your clients? You plan for them to lead the division. Are they the right people there? And if they are the right people, are they willing to stay having good conversations with the leadership team of the acquired company, sharing to the extent you can, what your strategy is. Are they bought into that strategy?

No, I agree. I think a lot of it revolves around people and I'll say the word people, culture. One of the things, and I think you Kissan had a dialogue on this topic about culture and does culture really matter? I think it matters, but I think it's something that you just need to address in my view. It's not anything that I would decide do or not do transaction based on the fact that cultures are different. My approach would be how do we address the differences and what do we put in place to ensure that both types of cultures are able to live side by side, if that's the way that we want to go? Or how do we incorporate these cultures together so that they can get merged and it's possible to do that as well. One example is, you know, one of the clients that is currently considering a couple of acquisitions and all I knew is the names of the companies and I just quickly went to their website just to understand what they do and the people. And so placed on the website where it says leadership, there's pictures of the company's leadership. Instead of saying what their titles are or kind of what their roles are, it just says what they like to do for fun and literally said so and so likes to go hiking and likes whitewater rafting and this person likes sewing and that person has four dogs. And to me that speaks volumes about the culture that they have and their face to the world of this company is this website and description of their leadership. But that's how they like to portray themselves through rather than to say they're CFO and they do this and that, that they are a person who has interests, who has outside of work activities and that's the most important thing to them. To me, this was a flag, not a red flag necessarily, but a flag to say I got to address this somehow because that's not the client and we just got to figure out how do we work through that.

That's kind of interesting approach is to look at the company and even sort of think about that ahead of time in terms of what some of those challenges or risks might come up. Talk about tools. What tools do you actually need to run a good integration program?

You got to have a good program management tool. Hopefully days are gone where we are just sharing Excel spreadsheets and just sending them around. And did you submit your submission yet or, you know, I got the wrong version, you know, like all of that stuff. Let's hope that that's all behind us at this point.

So live listeners sighing right now.

Yes, yes, exactly. I would highly recommend that the teams look at professional program management tools that are web based, that are cloud based, whatever it is. Ability to interact with the target company employees so they can get involved in the program management tool as well. Ability to communicate through that, having some sort of archive of conversations on a particular topic. So that's one area I certainly think that it'd be worthwhile for companies to invest in and kind of get, get really good at. I want to kind of caution people from going overly complex. I don't want the participants in the program to learn how to fly rockets, you know, necessarily. I want them to be able to just log into something. Things need to be super self explanatory. Maybe one quick training session and that should be that. I want to make sure that people kind of are thinking about that. And then beyond that there is obviously other tools that I would call them tools. But workshops is a tool that I use a lot before close and after close, where we would get both companies together to the extent that's allowed by, by law, you know, without gun jumping and other things prior to close and start doing collaborative work, thinking through what does our day one is going to look like when we get there. I want to make sure that I'm always incorporating the opinion and kind of the input from the acquired company because they're the ones that know their people, their tools, their processes better than any one of us would. So those are the kinds of tools you know, I like using as well.

There's a lot of tools out there. If your company has program management tools they're already using that everyone's familiar with, then I suggest sticking with that as opposed to going something brand new. But I am kind of old school. I have used Excel and still use it sometimes, but kind of graduated to Microsoft Project and I like using that one. But there's a whole host of them out there. A lot of times consulting companies will bring you their tool if you hire them and it's kind of like their loss leader and pretty much all of them have it. Bcg, Pritchett and then a lot of serial acquirers have created internally their own tools and then turn around and say, hey, let's sell this and make some money and pay for our IMO office. So IBM has their MA accelerator and it actually is pretty good. I've used that one. Oracle is another one. The tool is just that. It's only going to go so far. If you don't have the right people and the right integration structure set up. So again, the steering committee, an integration leader that has the right authority, it's not going to do any good to put someone in charge of the integration who doesn't either have the explicit or at least implicit authority to lead that effort. Because most of the people that are going to be working on the integration aren't going to be direct reports to that integration leader, just like they're not direct reports to the project manager. You need a strong leader in that role. And someone who has the respect of the organization and is going to listen to them when he says no, we need to do it this way or you need to speed up, your need to slow down. If everybody's just going to ignore the integration leader, then you know, all the tools in the world aren't going to help much.

True, true.

I'm already getting asked what cloud based program management tools would you recommend? Question along that lines too. Is it. I've seen a few firms actually shifted to start using this, especially most recently with the virtualized M and A process. Have you guys adopted chat tools or tried using a chat tool in conjunction with the project management tool?

I have not yet. We largely use the tools, software type tools to manage work plans and kind of track performance of work plans and then track synergies. So that's really has been kind of the place where I've used it. My objective is actually to evolve beyond that and find something that's hopefully one all encompassing tool that would have the capability of chat as well.

I noticed that with a few of the prep calls that we're doing for our conference with some of the larger Google, Microsoft, Cisco, companies that are actively still doing deals this environment, they are actually utilizing chat tools as a means to really facilitate that communication as they do everything virtual. You know the other thing too, I guess just kind of jumping over the day one aspect. When we talk about day one, can you walk through that whole process and how it sets the tone for the future success or demise of the business? Love to hear your experience on that.

I am a big believer that day one is absolutely the most crucial day and most important thing to get right on the integration program. It is something that truly does set the tone. There's so much uncertainty around integration program for all the stakeholders involved, including employees, customers, suppliers, investors, you know, whatever that day one has to be. That one day where people kind of take a sigh of relief and like all right, it's not going to be that bad, you know, or I now understand what they're trying to do. Yes, I do agree with the strategy and I do actually think it's going to be worthwhile and I think it's the right thing to do for the corporation. Things that I have seen in the past that work very well is kind of a very robust focus on all around stakeholder communication. We spent inordinate amount of effort on making sure that day one goes well. So the types of things that happen is a letter or email communication to customers or vendors and employees. However, most impactful way to handle things. And I would recommend to have a very robust day. One, we usually have it like minute by minute. So senior leaders would get on the phone with some of the most customers and make that phone call that says you just saw a press release, you are our most important client. This is what it means for you, this is what changes for you, this is what doesn't change for you. So I think that very personal handholding through this process for your most important clients and your most important suppliers I would say is of utmost importance as well for employees. A lot of times we try to make it into a big celebration all around the world. We would deploy our senior leaders to hold town halls or all hands meetings again, that consistently communicate the same message throughout the whole organization. The objective there is to kind of do away with the rumor mill, right? Because in the absence of communication, the rumor mill will fill that gap for you very quickly and it's not going to be what you actually want them to think. So you got to dissuade any of those kinds of conversations as quickly as possible. You got to make sure that business continuity is probably the most important thing. If you get everything else wrong, get the business continuity right. What that means to me is make sure that the trains run on time. On that day one, nothing falls apart. Employees get paid, customers get sent invoices, vendors get paid. Employees that are traveling are able to swipe their credit card, you know, they're able to call on, you know, conference call lines. Whatever is happening for both companies, products get shipped, supplies get received. All of those things have to happen. I think one of the stories I like to tell around this is when I was doing Goodrich acquisition at utc, we had a war room. And during that same time frame, there was a big merger between two airlines. That merger did not go well. I guess they just had that day. One in particular did not go well at all. So there was a Wall Street Journal article that basically described kind of the issues that they were running into. And basically their communication software collapsed and there were flyers all over the world that couldn't call in and adjust their reservations. People were stranded, planes couldn't take off. Like it was just a nightmare, literally. We cut out that article from Wall Street Journal and put it on our wall in our war room. And that was the guiding kind of light of. We said, we've got to make sure that this does not happen for us. So what we did is we actually had developed a very specific kind of use cases around each individual functional area. We've challenged them to and say, hey, what could go Wrong on day one for your function? Tell me top 10 things that can go wrong and what is your course of action to A, fix it and B, make sure that doesn't happen. Those I think were very, very successful exercises. We actually ran them as like a war gaming type of scenario. Not all transactions are going to need to get this intense. I mean this was obviously a very large, massive acquisition, but some form of preparing what can go wrong on day one. I would highly recommend thinking that through.

I agree with everything. Day one is one of these things where you can get it really wrong. But it's never gonna be great and set the tone and it's gonna ensure the success of the acquisition. But it can certainly make the future days a lot harder. You know, first impressions can be very lasting impressions for good or bad. So if you make a bad impression on day one, it's going to be tough to get that over. I think it's important to set the tone for the acquired organization as well as the acquirer's organization. I think one mistake I've seen companies make so many times is they come in and they're talking to the acquirer staff and they say, oh, we bought you because you're a great company. You're doing everything perfect. We're not going to change a thing. You know, the next day everything changes. So no matter what, something is going to change, whether it's who sends their paychecks, whatever it is, something's going to change. So it's never a good idea to say nothing is going to change. Recognizing that people are important and communicate to them. People aren't going to remember a lot of what you say at those initial meetings. So you don't want to overload them with too much important information. You want to keep it high level and you want to expect to have to repeat the information a lot. So it's communicate, communicate and then communicate some more. One of the other things we would always do is a master comprehensive Q and A and then we would break it up for each group so that everybody was saying the same thing. That's another area where companies can really hurt their credibility. If one group of people hear one statement and another group hear something dramatically different, that creates mistrust and all kinds of problems there.

Those are some good tips. I like the perspective of the Q and A. Then also like Lena mentioned, that sort of inversion or pre mortem approach when you can sort of map out everything that's going how is integrated or probably Integration impacted. When there's a revenue or margin based earnout for 12 to 24 months after.

Closing, it almost guarantees the lawsuit because there's going to be changes. So unless you plan to just let the company run as it was before, the sellers are going to claim that whatever you changed is the reason why they didn't achieve their targets. So either you plan to pay them out regardless or you plan to let them run without interference. Otherwise those earn outs are just lawyers waiting to start a lawsuit on.

I agree. I mean I try to as much as possible now putting my corp dev hat on to not get involved in earn out type of scenarios because of what Tim just said. I mean our lawyers never like it, it never ends well for various reasons and you know, hope to never have to get involved in those.

You're right. I mean those are always sticky. I think we got to have a whole session just about earnouts probably.

Yeah.

These two questions are related how to set up a budget for the integration project and what are the best tools to accompany these projects. And then also related is which costs need to be covered included for the integration.

What we've done is we have a list or I guess I should say compilations of actual costs that have happened on various integration programs on various sizes and complexity. And we have developed a tool that basically kind of rates a particular transaction based on size and complexity and how many locations, how many people, how many countries are involved. And it kind of gives out this convoluted rating system for each individual transaction. And based on that we are able to draw on the similar type of transactions, actual cost data and do kind of an estimation based on that as to based on this type of sets of metrics about this company that we're about to acquire. Considering size, complexity and other things. Here's the type of cost that we have seen in the past from actual transactions and we're able to prorate it or impute it onto kind of this upcoming transaction. And it gives you a, you're never going to get it perfectly right, but it gives you a kind of an order of magnitude as include this type of number in the model so that again and that would be your integration budget after the transaction closes.

I've relied a lot on the due diligence team. So being part of the due diligence team and doing some of the integration planning during due diligence, laying out what that high level integration plan looks like and then using the integration leads from the various functional groups to say okay, what's it going to take for your team to deliver on that integration and then build a financial model from the ground up, trying to understand that you're limited to a year or two years where you can capitalize those expenses as part of the acquisition costs. The challenge always is that usually the numbers you get are a little or a lot inflated. And so there's some brow beating to go back and say, really that's what it's going to cost to connect the websites. Are you sure? I think my son could do it for pennies compared to what you're telling me you need. So a lot of brow beating to try to get some realistic numbers.

It's interesting, it's almost another topic right there. It's just how you calculate integration costs and sort of maybe even sharing some experiences around that. Another question is how do you best deal with personal egos and integration? Example person A was in charge of X and now is reporting to a new person in charge of X, et cetera.

That's a real challenge, especially when the acquired company is a lot smaller than the company acquiring them. You get this issue of we were big fish in a little pond and now we're looking to be little fish in a very big pond. And it can be really hard, especially when the acquired company is giving everybody C level titles or senior VPs or VP titles. They get moved in and then they're told, well, you're really now like a manager or director. That can be real challenging. And I think that's some of the issues that the HR diligence has to address when they're interviewing the senior leadership about the fact of what role they might be interested in post closing. But my experience, particularly with the owners has not been good. I lobby hard to put the owner under consulting agreement for three months or something. And my argument is you can always hire them back as an employee if they work out. But putting them on a consulting agreement from the beginning makes it much easier to push the person out if they become problematic. But it's really hard for owners to let go and accept a new role within a larger organization.

You know, just to add a little plug for the conference. One of the segments with Atlassian also as the CEO of the company that they acquired last year. So it's sort of picturing a good case of an integration that actually went well. We'll pick up some of the things that they did to sort of help facilitate that, which a lot of it was related to transparency really early on and giving them a clear picture of what that integration is going to look like other question I have is can you comment on either best practices or risks involved in integration in the context of transition service agreements or other divestiture scenarios? What elements of these either help or hurt integration teams or programs?

We would typically have a separate work stream that would be related to a managing the transition service agreement activities. And very specifically, how do we get off of the transition services. I mean, these things are never really intended to either have the seller make money off of or ideally, you know, not to pay them a lot more for doing that work. It's never an ideal situation where you having to go for some services to a completely third party and the level of service, you probably won't get to be very stellar. I would put forward a specific work stream that is around how do we quickly and kind of efficiently get off the transition services? And each functional area as part of their work plan needs to incorporate in there. Here's the steps I'm taking to make sure that now, you know, I'm as quickly as possible, I can now start performing the services ourselves.

I think one thing as the seller you have to keep in mind is what's going to happen to your own staff. So there's going to be staff that are clearly associated with divested assets and it's clear they're going to go with the divested assets. But there's going to be a group of people that really aren't part of the divested assets, aren't going to go with the divested assets. The buyer doesn't want them or they're just not critical to it. But it's not clear what's going to happen to their roles. Or maybe it's clear that their roles are going to go away. After the transition services, those folks immediately start looking for other positions within the company so that they know they have a role. So you really have to think through that and potentially offer some retention bonuses to those people that are in that gray area or have those conversations with them that you know, you can apply for a role but you can't take it until the transition services are done. It can become really tricky. But if all those people that are required to execute transition services start leaving, then you become in breach of your transition services agreement. If your resources that were supposed to execute the transition services start leaving.

Very good. What are some of the steps we can take to improve the integration process as well as the mindset around integration?

As we talked about all through this is start integration planning early, make sure there's a good integration program structure, make sure you have detailed integration plans to remember that people are the most important thing and they're also the most unpredictable. Have a good change management plan, be honest with people and communicate, communicate, communicate.

I completely agree with everything you just said. Those are kind of important things. First and foremost, acknowledge that it's not just going to be something that you can do in addition to everything else you're doing. You got to have to dedicate time and effort. You're going to have to put in structure, you're going to have to dedicate certain amount of resources. Not every person needs to be dedicated to this project, but certain amount of resources have to be fully dedicated and you know, get that leadership, team support and guidance. Make sure that by actions and not just words, they are communicating their dedication and their kind of support for this project.

What's the craziest thing you've seen in M and A?

I've dealt with a lot of small companies where the owner is the leader. They don't always appreciate my coming in as the senior representative of the acquiring organization and then start calling some of the shots. So had to deal with some bad actors and some of the things I've done with is unplugging my microphone. When I was giving a speech at a trade show, locking us out of the offices, one said he was keeping a dossier on me. And then the most outrageous, I think was the former owner came to their corporate offices and went to the receptionist and said, I'm looking for Tim. Pain in the ass.

That's really good. Mine is not necessarily, I guess maybe the craziest, but it was the most surprising for me where it had to change my approach of how I was going to handle something going forward. And it had to do with culture, I guess I would say. We were in the process of acquiring a company and we were getting ready for the first joint workshop that we were going to meet with individuals from the acquired company and we were kind of dry running our presentations of we were going to share, here's what our company does, here's what their company does, and here's the purpose of this and kind of the strategy behind this acquisition. And so as we kind of laid out, here's what a company is and here's our financials and revenue, profitability, you know, all that stuff. The CFO of the acquired company said, yeah, we never ever share our financials with our employees. We just don't do that. We are a private equity owned firm. Our employees have no idea how big the company is from revenue standpoint. They have no idea of profitability. They've never been given targets to achieve from financial performance standpoint. I was surprised that we didn't know that until then. And also it surprised me and kind of changed my mindset. My thought immediately went, my God, like we are a company that is so driven by financial metrics and recognition and otherwise. We're so focused on accountability and each person in line leadership knows what they're responsible for to deliver by quarter, by month, by year. And this company has none of that. No one cares what numbers are and how do they motivate people to perform. And so I had to basically devise a completely different way of thinking. How we going to incorporate this part of their culture into how we manage ultimately the combined organization? It was just something that our jaw kind of dropped to the floor like, interesting. Not bad, but interesting. So it's something that we had to deal with.

Wow, that's crazy. Hey, I really appreciate this conversation. Before we close things out, you guys have any shout outs or any plugs to put in?

Sure. I moved from corporate employee to consultant and I'm enjoying it very much. And if anyone wants to follow up with additional questions or conversation, happy to entertain it.

I would say the same thing. Majority of my experience is from a corporate point of view. Just recently moved to the consulting side, but in the back of my mind, every time I'm having a conversation, I am able to put myself in the shoes of a person who is purchasing consulting services and I can kind of see through the BS of that type of a conversation from a client point of view. Yeah. If anyone wants to continue to have the conversation, check us out at Virtus Partners, you know, on the Internet and link me in on your LinkedIn and we can have a further conversation.

That's what makes you guys dangerous. Going from that sort of in house perspective into a consulting role. And everybody I've connected to in that regard has always brought this unique set of skills with them that they can apply to the next company. Well, with that I appreciate everybody's time.

Thanks very much.

Thanks a lot.

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