This is part 5 of the five-part series “Compliance, Diligence, and M&A” with Tom Fox and the FCPA Compliance Report. During the series, Tom was joined by K2 Integrity experts Hannah Coleman and Tom Pannell for a discussion on due diligence’s role in the M&A process, and how it can create a more successful environment for integration. Listen to the series from the beginning.
Integrating Systems and Processes
The hard work of integrating the companies involved in a merger or acquisition should begin as soon as possible—even before the deal closes. The acquiring business should establish a resourced integration team staffed with experienced employees, as this is critical to a transaction’s long-term success. Equally important, the integration team must have supportive senior management to drive the integration, focusing not just on synergies, but also on actually helping the new acquired entity integrate into the acquirer. It is a lot less costly to do the work upfront than to have to remediate issues down the road.
One area where companies need to move quickly is in the integration of policies, procedures, and internal controls. With all the changes that need to be made, some companies are inclined to give an acquired entity a pass in the first year. However, that can prove to be a big mistake. Executives only need to look at the recent SAP trade compliance enforcement action to see that a lackadaisical attitude on integration can lead to a huge financial penalty. In the anti-corruption arena, for example, a company has only 18 months to fully integrate the acquired company into its compliance regime under Department of Justice (DOJ) guidance.
During this integration phase, it is also important to clear or remediate any red flags that appeared in pre-acquisition due diligence. The red flags may concern legal, financial, IT, reputational, or other matters. From clearing red flags, the integration team should move on to monitoring the newly acquired entity, with the monitoring program customized to the acquirer’s integration approach. For example, if the subsidiaries are 100 percent on the company’s financial and accounting systems, a lot can be done remotely. However, if those systems have only partially integrated, an in-person team needs to follow up on the activity.”
Cultural Integration
Culture clashes are a big reason M&As fail. As people are the lifeblood of any organization, cultural integration should be a primary focus of the integration process. When bringing businesses together, leadership should spend time discovering what the similarities are between the two operations, as well as understanding what the differences are and how these will be bridged. The key is the involvement of middle management, as they will be the ones who are crunched between senior leadership’s vision for the future and the teams doing the work. Their motivations and the way they work needs to be understood and embraced and brought into the integration process. An “us versus them” attitude can be toxic to the deal, causing talent to leave or, even worse, take your critical assets with them.
Interestingly, it is not only in international acquisitions where this problem occurs; it can be seen when different geographies and different cultures within the same country try to meld. It can be operations in New York versus Pittsburgh versus Houston—they all have different styles of work that can lead to a culture clash in the way business is done. Addressing these kinds of challenges upfront is critical to a deal’s success.
Due Diligence in M&As
In conclusion, it is important for companies to keep in mind three things concerning due diligence’s role in the M&A process, and how it can create a more successful environment for integration. First, although it is tempting, companies should not skip due diligence just because it seems like it may slow things down in a fast-moving environment. The risks that are incurred by not conducting thorough diligence can really come back to create major problems down the road. Second, the job of an investigator is to gather as much relevant information as possible. Knowing information upfront does not necessarily kill a deal, but it prepares the acquiring company for outcomes that it may not be expecting. This additional information can help it plan to deal with these issues when they pop up. Third, quickly follow up on potential issues during integration, as an ounce of prevention is worth a pound of cure. Coming to an understanding of what could be problematic down the road can make the difference between success and failure.
Interested in learning more? Listen to the series from the beginning.
