Business Integration Planning During Due Diligence [PODCAST]
It might seem counter intuitive to think about integration before your M&A deal even closes. However, considering the future as you perform due diligence will make your negotiations go more smoothly and bring you a better outcome. It could even affect valuation of the company you are purchasing. In a recent episode of The Transaction Abstract, Joe Hellman talked with two M&A veterans about why integration matters and when to start planning it.Linda Bagley is a senior health care executive with extensive experience on the corporate side as CIO and on the operational side from the clinical aspect. She has worked on health care acquisitions of all sizes–from transactions involving a single center to more than 50 centers.
Kory Boyer is the M&A Practice Lead here at Redpath and Company. His career spans corporate development and M&A consulting and includes experiences with both acquisitions and divestitures ranging up to multi-billion dollars.
Listen to the full episode below or keep reading for highlights from their conversation.
Why Are We Talking About Integration?
Integration is the end result of every merger or acquisition—a new entity that combines functional and financial assets of two previously separate companies. How those assets are combined, and how well, determines the new venture’s success. Linda and Kory have the same advice: start early.
“The sooner you can start doing that integration planning, the better off your deal is going to look,” says Linda. You are looking for synergies, especially relating to technology and associates, and also potential risks or roadblocks that could divert the deal.
Kory explains that it is important to ask questions early and often throughout the process to help the integration side because that is where the details can get lost. And that is where you can lose value immediately, he warns.
As a buyer, you are not paying for those synergies, because the effect is long-term. Expected synergies are planned into your business case, so you should start seeing results in six months or a year as things come together. “You may give or take a little bit as the deal goes along,” Linda says, “but for the most part synergies should not be part of it.”
Looking for Synergies
The due diligence process shows you where synergies may be available. When you bring two groups together there is opportunity for cost savings, by eliminating duplication of effort or redundant assets. Think in terms of people, processes, and technology.
Each business has its own set of technology. When you are talking about integration, which technologies are you going to keep and which will go away? You can achieve cost savings through streamlining, reducing unneeded software licenses, etc. But there may also be opportunities. Kory points out that if one company is using Salesforce, for example, the new team could leverage this to drive greater efficiencies or capabilities.
Integration of associates also brings synergies, if handled well. Start talking with staff and putting together a plan for them as soon as possible to head off rumors and worries about “what will happen to me?” Specifically, consider how to blend cultures. The last thing you want is the dis-synergy that comes from losing key people.
There are revenue synergies to consider as well. Linda notes that, if you are merging with or acquiring a competitor, that competition will go away. Now you are able to forecast out your revenue as one larger group instead of competing for customers and market share in certain sectors. Conversely, Kory says, if the two companies have different products there is a massive opportunity that you need to understand and plan for. As a new entity, “you have one chance to make your first impression on that customer.”
Building Integration into Due Diligence
Obviously, if you hope to set synergies in motion on Day One, there is work to be done prior to close. Linda recommends doing as much work as possible as soon as possible. Kory also advises creating a timeline, because some of the questions may be taxing. You can categorize them into:
- Key priorities that are strategically important
- Key priorities that are financially important
Pull together your planning team. Involve as many people as you can. If confidentiality is an issue, at least gather a core group to start planning and gathering due diligence relative to potential synergies. Definitely include the heads of HR and IT because these are the top two areas where efficiencies are likely to exist. Each of them will have their own set of questions that must be answered as soon as possible.
Those answers will identify synergies, and the questions will lead to your integration plan. Altogether, this builds the business case from the buyer's perspective for what you will need to do Day One and moving forward.
Kory advises building the details operationally. Simply setting financial goals—cutting 10% of cost—does not work. You have to lay out the specific activities required to achieve that goal, and the more details you have, the better because then the integration team has something to execute against.
Deal Size Does Not Matter
The process of blending integration into due diligence always follows the same template, although the details, priorities, and extent of work involved may change. But get started right away. The longer you wait on everything the more value you could lose out on. Linda and Kory recommend that buyers aim to have a plan in place for the first 100 days, for every department, six weeks prior to closing.
Redpath and Company
Redpath and Company helps clients make more informed decisions that contribute to their financial well-being by providing proactive, innovative, and value-driven CPA and advisory services for closely-held businesses, private equity, government entities, and nonprofit organizations. Core commercial industries served include manufacturing and distribution; construction, real estate, and engineering; and technology. Areas of service expertise include audit and assurance; personal, business, and international tax; state and local tax; sales and use tax; and succession and estate planning. Redpath also guides clients throughout the entire business life cycle with performance optimization and process improvement; M&A advisory, including corporate and deal strategy, due diligence, financial modeling, and M&A integration; accounting and management outsourcing; and valuations. The firm was founded in 1971 and is 100% employee owned (ESOP). With offices located in St. Paul and White Bear Lake, Minnesota, the firm ranks as one of the top CPA and advisory firms in Minnesota. Redpath is a member of HLB International, a global network of independent advisory and accounting firms. For more information, visit www.redpathcpas.com.