Getting a Grip on Potential Integration Risks

Mark Herndon headshot
By Mark Herndon
Chairman, M&A Leadership Council
Jun 1, 2017

“Integration begins with due diligence.” This key principle for success has been thoroughly vetted and proved time and again. But just what kind of early integration assessment and planning can and should be done during the actual due diligence process itself?

First, let’s start with the assumption that your organization is on the vanguard of M&A best practices, and as such, you already routinely conduct a thorough due diligence of every aspect of the potential target company you are evaluating. Far beyond the historical and traditional due diligence approach of primarily evaluating only operations, contracts, financials and legal risks, you have now incorporated the complete range of strategically essential areas into your standard due diligence process and playbook. For example:

  • You have developed a comprehensive, end-to-end M&A process workflow that runs seamlessly from strategy and readiness, to target identification/qualification and due diligence, then continues with the various phases of integration and concludes with long-term value capture. (See Getting Operational Cut-Over Right)
  • You use an organized and coordinated “rapid results” type of project management approach for due diligence. (See Do You Know the DMO?)
  • And, finally, you have an effective approach in place for conducting a solid cultural, talent and organizational due diligence to help you get at conclusions confirming potential strategic fit or possible cultural flashpoints to avoid (See Pre-Deal Cultural Due Diligence). 

"Once these valuable insights are distilled and validated, take action!"

Now you are ready for the next step: developing the Integration Risk Assessment. To really add value to the deal-side discussions and pre-integration planning, the Integration Risk Assessment has to be more than a vague listing of possible concerns. It’s got to mean something and be actionable. Getting this type of valuable insight typically requires active involvement by the principal deal sponsor and integration leader, as well as corporate development, legal and your respective function leaders.  

Additionally, there needs to be access to the target company staff and key deal team.  Every function should analyze in detail any potential  “go/no-go” or “deal-break” findings, as well as any findings that need to be addressed by reps and warranties, modifiers to price or terms, or side-bar agreements.  

Finally, each diligence team must identify specific integration issues and opportunities from their findings. No decisions, actions or recommendations are specifically required at this point, and in fact, may not be possible yet, unless obvious conclusions can be made based on the deal’s strategic intent or anticipated “concept of post-closing operations.”

From these combined inputs, corporate development, the deal sponsor and the integration leader can now get clarity on the Integration Risk Assessment. There’s no single “best” format or approach, but we typically see at least some aspects of most, if not all, of the following major categories of potential integration risk factors in almost every deal.

  • Business stabilization and continuity risks: This category often includes near-term customer defection or talent-flight issues along with other post-announcement competitive responses or internal distraction.
  • Customer and go-to-market risks: Included here are aspects related to defining and delivering on the core customer value-proposition of the deal; integrating and optimizing the sales organization; and other brand / market positioning issues.
  • Technology and systems risks: Ideally, diligence here needs to get beyond infrastructure and applications to produce a view of the target company’s enterprise and data architecture, among other factors, to enable you to assess the full risks and opportunities for rationalization.
  • Personal impact and role risks: Think “me issues” here, but take those obvious concerns down to the level of real impact on leaders and staff and their day-to-day authorities, reporting relationships, job requirements, and overall “employment value-proposition.”
  • Organizational and cultural flashpoint risks:  In particular, watch potential nationalistic biases; widely divergent organizational models, decision styles and communication expectations. Not to mention those emotionally or historically significant flashpoints. (See Caution Ahead – Cultural Flashpoints).
  • Business process and employment conversion risks: Included here are the requirements of complex operational cut-overs and employment, legal, tax and entity considerations, particularly with multi-country operations outside your established geographies.
  • Change management capability & readiness risks:  Believe it or not, your prior track record as an acquirer/integrator comes into play here, as does the prior M&A experiences of the target company. If those have gone well, you can focus attention in this area on leadership and change skills. If not, prepare to deal with a lot of historical concerns and baggage before the target team sees you as credible and trustworthy.

One last important point. Once these valuable insights are distilled and validated, take action! Review these risks against the previously identified synergies, deal objectives and milestones. Adjust or amend expectations, resource requirements, budgets or timelines accordingly. Weight them in terms of likelihood and potential impact to the business as a means of prioritizing valuable time and efforts during the transaction and pre-announcement integration planning phases. Identify specific actions, project assignments or processes that can be put in place ASAP to resolve or mitigate them. Add key discussion items to your Game Day Integration Strategy Framework planning and to each integration task force charter as appropriate. Finally, incorporate them into your integration tracking and metrics to ensure proper focus and accountability.

Help your team learn the secrets of successful serial acquirers. Join us for an executive training hosted by the M&A Leadership Council. The only organization of its kind, the Council brings together industry experts from world-class firms like BDO, Willis Towers Watson and M&A Partners to share real-world insights and best practices. 

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