The Final SEC Clawback Rules: Insights, Best Practices, and More
Embark’s Post-Merger Integration Checklist & Best Practices
Imagine trying to put together a jigsaw puzzle on the back of a speeding flatbed truck. On a blustery day. And through rough terrain. Doesn’t bode well for your chances of successfully completing that puzzle, right?
But that’s essentially what companies are doing without a post-merger integration (PMI) roadmap heading into an M&A transaction. With so many different pieces involved – operations, company culture, Human Resources, accounting and finance functions, and so much more – fitting them all together doesn’t happen overnight.
But it’s those last two pieces we singled out – accounting and finance – where Embark can make your life considerably easier when you’re looking a business transaction in the face. In fact, we’ve created an entire post-merger integration checklist to ensure your transaction lives up to your expectations and propels the new business forward. And we’re going to backstop our checklist with insights on essential topics like:
- The benefits of using a PMI checklist
- Defining post-merger integration
- The roles and activities involved
- Critical PMI decisions
- Creating a post-merger integration framework and methodology
Mergers and acquisitions already involve enough risk without stepping on your own foot. Embark’s checklist – along with our insights from the M&A trenches – are going to prevent that from happening. In other words, we’re here to ensure the accounting and finance side of your integration is nothing but clear skies and smooth roads.
What Is a Post-Merger Integration Checklist?
As you're about to see, our jigsaw puzzle metaphor hits the nail on the head. Because between the seemingly countless different groups and responsibilities involved in the post-merger or post-acquisition process, it really can feel like you're staring at a million-piece puzzle.
And since no two integrations are alike, a particular sequence or course of action that works well for one integration might not be a good fit for another. But that’s why a checklist is often more beneficial than a rigid template, providing flexibility while still ensuring you address all of the necessary areas as you go.
To that point, we encourage you to use our accompanying PMI checklist as a foundation for your own integration process. Now, should you proceed in the exact sequence that we’ve laid out in our checklist? Or any M&A due diligence checklist, for that matter? Not necessarily. Rather than taking it as gospel, our advice is to use the checklist as a general guide rather than an absolute. So on that note, let's take a closer look at the PMI process and all the moving parts and issues our checklist will help you keep straight.
What Is Post-Merger Integration?
Let’s begin with the obvious – the M&A process is complex, sometimes making you feel like you’re trying to squeeze the proverbial square peg into a round hole. And since, once again, transactions are never one-size-fits-all, there’s always some degree of flying blind involved.
You don’t have to look very far for examples of combinations that never lived up to their potential. Nor do you have to spend much time on the interwebs to discover the majority of M&A activity ends in failure, 70% to 90% according to an oft-quoted, landmark study from HBR.
But failure is a subjective term for both mergers and acquisitions, not necessarily indicating a deal turns into a financial Hindenburg. In the case of post-acquisition integration, if we assume an acquiring company and target company want to form a new organization that’s greater than the sum of its parts, then failure could very well be an instance where 1+1 never equals more than two. And as the statistics indicate, it often equals less than it.
So why do so many transactions fail to capture the potential synergies between two companies? Well, that’s where an M&A integration plan enters the frame, with ineffective PMI accounting for a significant portion of that splashy failure rate, along with regulation, the economy, and other factors.
But while business leaders can’t control regulations or the state of the economy, they absolutely can control the amount of preparation, due diligence, and strategy they devote before, during, and after a deal closes. And that’s why PMI is such a critical piece to the M&A strategy puzzle:
PMI is the process of developing a game plan leadership can follow to combine and rearrange the different parts involved in a transaction, all to maximize efficiencies and create new value.
Sounds relatively straightforward, right? Well, it is. At least in theory. However, too many companies take a haphazard, uninformed, or insufficient approach to merger or acquisition integration, particularly when it comes to accounting and finance.
Who Is Responsible for M&A Integration? What Does it Involve?
It shouldn’t come as a surprise that data is at the heart of an effective integration strategy. Because ultimately, a business combination is a massive investment decision based on financial statements and operations. Therefore, as you’re developing a playbook to successfully integrate the entities according to our checklist, due diligence provides an essential foundation.
We recommend beginning these different activities as soon as possible because things can and do pop up. There’s already more than enough on everyone’s plates without unwanted surprises further stretching time, resources, and patience.
The Due Diligence Process and Key PMI Decisions
Integration planning begins by collecting the data and information you’ll need to successfully integrate the companies on the back end of the transaction. Both sides will have a laundry list of requests for files from the other entity, particularly financial statements. From there, each team will scour through that data, looking at the results of operations, balance sheets, income statements, and any other relevant financial information.
The goal of this initial step is for each party to determine if the other entity is what they think it is. Are there any financial skeletons hiding in a closet? Or information that might turn into an unpleasant surprise further down the road, inhibiting value creation?
From an operational perspective, you’re also trying to get a better picture of what the integrated legal entity will look like by addressing certain critical issues.
- What components and systems are involved in the combination?
- Who and what is involved in combining those components, systems, and workstreams?
- What are the intermediate steps needed to run the two companies and roll them into one business model?
- What and when is the convergence for the entities?
Granted, there are obviously certain aspects of this initial step that don’t necessarily fall exclusively on the accounting and finance side of things. So, in addition to more traditional due diligence activities, you’re also mapping out a general course of action based on org charts, span of control, and relevant operations and efficiency measures.
Establishing a Post-Merger Integration Framework and Communication Plan
At this early stage, there’s an announced deal with a set price. Due diligence then begins to determine whether that price is correct or not, running parallel with discovery conversations amongst leadership.
Therefore, you’ll need open communications and reporting from day one between the companies, both of which are essential in developing an ongoing strategy and establishing milestones to guide the combination as it progresses. Although we’ll take a deeper dive into some of these points shortly, leadership will have a specific to-do list in these early stages to create a PMI framework, including:
- Establishing communication channels across teams
- Creating and appointing particular people to a steering committee, integration teams, and a project management office
- Engaging with experienced third parties to assist and guide the integration
- Defining the desired end state, assigning PMI targets, goals, and relevant metrics
Now, we’re not saying you must check off all of these boxes – or any others from our checklist – within a couple of weeks or otherwise doom the transaction to failure. Instead, you’re laying the groundwork you’ll need to build on as things progress. So on that note, let’s take a closer look at some of these items.
Communication Across Teams
Communication must flow both vertically and horizontally throughout an integration. Starting at the top, the steering committee should meet regularly, perhaps biweekly, to discuss any issues and, most importantly, maintain a dialogue with the heads of the different integration teams – finance, accounting, IT, and others.
It’s important to continually level set from this elevation, understand the constraints and expectations, and convey that critical information to integration team leaders. Companies often find it useful to place external experts on a steering committee, perhaps someone from a trusted consulting group or another partner, to bring new perspectives and angles to the conversation.
From there, those team leaders can flesh out those issues with more nuanced discussions with the members of each integration team. This doesn’t have to be an elaborate process, maybe just brief touchpoints tracked in an Excel spreadsheet or even huddles twice a week where the leaders and team members can address things like:
- Goals and priorities
- Timelines and upcoming tasks
- Pain points, bottlenecks, and other inefficiencies
- Ways to improve
Speaking of integration teams, there will be some notable differences between the two companies, even if they appear to be similar from a distance. And those differences typically account for gaps in responsibilities and accountabilities that, if not addressed, can really throw a wrench into a successful combination.
But that’s why integration teams are so essential – they allow leaders and managers from each company to look across the table toward their equivalents and note any similarities and differences that could create inefficiencies in the combined entity.
From discovery and kickoff meetings to ongoing discussions between the companies, integration teams address everything from high-level topics like overarching objectives to the more nuanced points of an operating model. As such, you want a healthy mixture of perspectives on the teams, from top executives and stakeholders to due diligence folks, HR, and change management experts.
The integration alone is a full-time job. For the individuals on the integration teams, putting together the countless moving parts between the two entities will more than likely account for over half of their time. And since everyone else involved still has their daily tasks and responsibilities, there just isn’t enough time in the day to address the seemingly endless needs of a business combination.
But that’s precisely why so many companies use third parties throughout the process. Ideally, you want to partner with a group that understands what’s involved in a successful post-merger integration and has the requisite skills and knowledge needed to get the combined business to the preferred end state. Put another way, you’re looking for experts with hands-on, boots-on-the-ground experience to assist you with:
- Bridging the gap between due diligence and the Quality of Earnings (QofE)
- Serving as a liaison for accounting records integration between systems
- Transitioning between different systems when needed, including CRMs
- Integrating and mapping system processes, including monthly reporting, inventory reports, and financial statements
Quite frankly, it’s difficult to imagine an integration progressing efficiently and effectively without outside expertise providing support. Think about it – you're playing referee amongst the different groups, assuming portions of the workload, identifying information technology issues, and addressing organizational structure needs like talent gaps, redundancies, potential layoffs, and retention strategies. Therefore, engaging with the right partner is an invaluable failsafe against an integration going sideways.
Aside from outside help with accounting and finance, a change management expert is another area where a third party could be worth its weight in gold. Remember, PMI isn’t just about balance sheets, month-end reports, and CRM systems. It’s also about creating a cohesive culture across the entities involved, where buy-in and engagement will play essential roles in your success.
Creating a Project Management Organization
Every major initiative a company takes on will have designated project management in some capacity. PMI is no different on that front, where an integration management office provides critical oversight of the entire process and ensures operations continue as smoothly as possible by:
- Backfilling responsibilities for the managers, supervisors, and leadership positions participating in the integration teams
- Establishing and maintaining integration mapping and timelines
- Monitoring deliverables critical to the PMI
The PMO typically consists of a group of people with a single project manager who can be either external or internal to the company. That individual is managing all of the individuals now taking part in the PMO.
Also, since the PMO sits at a convergence between the steering committee and integration teams, the PMO leader should be a great communicator and facilitator across the different departments. Suffice it to say, it’s not an easy job, so choose your PMO leader wisely.
Defining the End State
Every journey needs an endpoint. Otherwise, you’re just aimlessly drifting toward an ill-defined destination, and there’s nothing efficient about that. In a post-merger integration, you want to define your desired outcomes and then establish KPIs of some sort – call them goals, objectives, or actual metrics – to gauge your success.
These KPIs should include designated dates of completion to keep you on track, as well as the impact they’ll have on operations. For instance, you might have 120 accountants between the two entities but only need 85 for the combined operations. Therefore, you’ll want to establish a timeline for the consolidation while also quantifying the benefits involved – an improved monthly close, recording and data quality, etc.
Suffice it to say, with so much going on throughout the M&A, a tool like our checklist is critical to your success. Still, with so much that can go sideways during a deal, it's essential you keep one crucial notion at the top of your collective mind as you proceed – understand your limitations.
Remember, both the post-acquisition and post-merger integration processes will inevitably stretch your finite resources, making your choice of outside parties to use throughout your PMI critical to your success. But that’s why Embark exists – to help you reach your goals, improve your decision-making, and make life easier along the way. So download our checklist, make it your own, and roll those sleeves up because there's plenty of work ahead.