M&A – The Integration Management Office Explained

So, you have just completed signing the Purchase & Sale agreement on the big acquisition that is going to change your company and enable your strategic initiatives. Deal done! Check that off your to-do list!  Major objective completed for the year! Not quite so fast. Now the hard work begins.  Now you need to integrate the companies, business units, or assets acquired.  The success of the deal will not be evident until two years down the line. For some companies, it is “Now what?”  What do I do next? If you had followed our playbook, you would have planned for a post-merger integration very early in your acquisition process.  A key component of that plan would have been to clearly define an Integration Management Office (IMO) to execute that plan.

Companies use Project Management Offices (PMOs) for all sorts of projects.  Examples are bringing a new plant online, adding a production line, or an ERP implementation.  But M&A transactions are far more complex than any standalone project.  As PwC partners Gregg Nahass and Chris Cook point out in their October 16, 2017, article How IMOs can up the ante to deliver successful integrations, “The dependencies an IMO handles can be mindboggling in their complexity.” The Importance of an IMO cannot be overstated when it comes to the outcome of a merger or acquisition. Typically, the CEO of the newly formed organization creates a steering committee that oversees the IMO and receives frequent progress reports. We suggest that updates be delivered every two weeks to ensure that the steering committee can swiftly address any problems.

The IMO is a dedicated cross-functional team established to oversee and manage the integration process. Its primary objective is to ensure the smooth and successful integration of two or more organizations into a unified and cohesive entity. Choosing the right IMO leader is crucial. It is important to designate someone who is skilled in M&A integrations and has a track record of success. They should possess strategic thinking, confidence, and the ability to make tough choices when needed. If you are new to M&A, consider selecting one of your top performers. Establish clear governance structures, roles, and responsibilities within the IMO to ensure effective decision-making and coordination.  Additional considerations are the budget allocated for the IMO, any need for external expertise, the physical space required (often referred to as a “war room”), the necessary technology and tools, training for the IMO team members, and the expected timeline for the integration process.

Often the IMO is set up as a separate cost center to capture integration-related costs and act as a central hub for integration activities, providing strategic guidance, coordination, and support. It brings together representatives from various functional areas, such as finance, operations, HR, IT, legal, sales, and marketing, to work collaboratively on the identified workstreams, ensuring the transaction achieves its strategic objectives, maximizes value creation, minimizes disruptions, achieves synergies, and realizes the anticipated benefits of the deal.

The expected deliverables of an IMO may differ depending on the deal’s particular requirements and objectives. The key mindset to think about is the “future state.” What is the future state you are working towards which might not be achieved within the timeframe of an IMO? There are a number of common deliverables that an IMO concentrates on during the integration process:

1. Integration Strategy and Plan: The IMO is responsible for developing an integration strategy and creating a comprehensive integration plan. This includes defining the objectives, scope, and timelines of the integration, as well as outlining the key tasks, milestones, and dependencies.
2. Governance and Organizational Structure: The IMO establishes clear governance structures and defines roles and responsibilities within the integration team. It ensures effective decision-making, escalation processes, and coordination among various functional areas and stakeholders involved in the integration.
3. Communication and Change Management: The IMO develops a robust communication plan to keep all stakeholders informed about the integration progress. This includes creating internal and external communication materials, conducting town hall meetings, and providing regular updates. The IMO also focuses on change management, addressing employee concerns, and ensuring a smooth transition for employees of both organizations.
4. Cultural Integration: An important deliverable for the IMO is to address cultural integration between the merging entities. This involves assessing cultural differences, developing strategies to bridge gaps, fostering collaboration and teamwork, and creating an inclusive culture that supports the merged organization’s objectives.
5. Synergy Identification and Realization: If following our best practices playbook, we would expect to have identified the relevant synergies prior to close. The IMO, therefore, becomes the operational engine to achieve those synergies. This includes validating cost-saving opportunities, revenue enhancement possibilities, operational efficiencies, and cross-selling potential. The IMO tracks and reports on the realization of these synergies over time, ensuring that the intended value of the transaction is achieved.
6. Operational Integration: The IMO focuses on the operational aspects of the integration, such as integrating IT systems and infrastructure, consolidating processes, optimizing supply chains, and aligning operational policies and procedures. It ensures the smooth integration of operations to minimize disruptions and maintain business continuity.
7. Risk Management: The IMO identifies integration-related risks and develops risk mitigation strategies. This includes assessing the impact of potential risks on the integration process, implementing appropriate controls, and monitoring risks throughout the integration timeline.
8. Post-Merger Evaluation: Once the integration is complete, the IMO conducts a post-merger evaluation to assess the success of the integration process and identify any lessons learned. This evaluation helps in refining integration strategies for future M&A transactions. We call it a post-mortem in our playbook.

To determine if an M&A transaction is meeting the expected Return on Investment (ROI) of the deal, the Integration Management Office (IMO) should track key metrics to assess the financial performance and value creation resulting from the integration. Some key metrics to consider are:

1. Financial Performance Metrics:
   • Revenue Growth: Monitor the combined company’s revenue growth compared to pre-merger projections or industry benchmarks.
   • Cost Synergies: Track the achievement of cost-saving targets and cost synergies identified during the integration planning.
   • Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): Measure the profitability of the combined entity compared to pre-merger expectations.
   • Operating Margin: Evaluate the operating margin to assess the efficiency and profitability of the merged organization.
2. Market Performance Metrics:
   • Market Share: Assess the combined company’s market share compared to competitors or industry benchmarks.
   • Customer Retention: Monitor customer retention rates to determine if the merger has had any adverse effects on customer relationships.
   • Customer Satisfaction: Measure customer satisfaction levels to ensure that service levels have been maintained or improved post-merger.
3. Employee Metrics:
   • Employee Retention: Track employee retention rates to assess the impact of the merger on workforce stability.
   • Employee Engagement: Measure employee engagement and satisfaction levels to ensure that the integration efforts are effectively managing the human aspect of the merger.
4. Integration Timelines:
   • Milestone Achievement: Monitor the achievement of integration milestones and timelines to ensure progress according to the integration plan.
   • Integration Costs: Track integration-related costs to ensure that they are within budget and in line with initial projections.
5. Customer and Supplier Metrics:
   • Customer and Supplier Relationships: Assess the impact on customer and supplier relationships by monitoring customer and supplier satisfaction levels and potential contract renewals or terminations.
6. Cultural Integration:
   • Cultural Alignment: Evaluate the success of cultural integration efforts by conducting surveys, interviews, or assessments to measure employee perception and cultural alignment.
7. Post-Merger Evaluation:
   • Integration Success Metrics: Conduct post-merger evaluations to assess the success of the integration process against predefined KPIs and objectives.

In order to ensure a successful integration, it is important to define metrics and establish baseline measurements beforehand. Continuously monitoring and analyzing these metrics throughout the process will provide valuable insights into the progress and success of the transaction. If the metrics start to show unfavorable trends, it is recommended to review and make necessary adjustments to integration strategies and plans. Software platforms like Monday.com, Dealroom, or similar products can be used to track the various post-merger integration streams and metrics.

Execution is key

The IMO is an excellent process to be utilized but it must be driven with skill, compassion and embrace collaboration. It is probably the most complex multi-departmental project in the corporate world. Post-acquisition integration is the biggest reason behind acquisitions failing to deliver their investment thesis. All five case studies below used an IMO but three failed due to weak execution and perhaps unrealistic expectations.

1. Success: ExxonMobil and Mobil (1999) Exxon and Mobil, two major oil companies, merged in 1999 to form ExxonMobil. They established an IMO which played a crucial role in managing the integration, including cultural alignment, organizational restructuring, and operational synergies. The merger was considered successful, resulting in the world’s largest publicly traded oil and gas company at that time.
2. Failed: AOL and Time Warner (2000) The merger of AOL (a leading internet service provider) and Time Warner (a media and entertainment company) in 2000 is often cited as one of the most prominent examples of a failed M&A transaction. The integration process faced numerous challenges, including cultural clashes, strategic conflicts, and failure to capitalize on synergies. The IMO’s effectiveness was questioned, as the merger resulted in the combined company posting a loss of $98.7 billion in 2002 and a subsequent separation of the companies.
3. Fell Short: Hewlett-Packard (HP) and Compaq (2002) In 2002, HP acquired Compaq, another leading computer hardware company. HP established an IMO to manage the integration process, which involved combining product lines, organizational structures, and cultures. Although the merger achieved some cost savings and market share gains, it fell short of the anticipated results. The integration faced difficulties in fully realizing synergies, and the merged company experienced leadership challenges and strategic missteps in the following years. HP posted a $2 Billion loss in the first full quarter with Compaq, cut 15,000 jobs, and lost half of its market value
4. Success: Disney and Pixar (2006) When Disney acquired Pixar, the animation studio behind successful films like Toy Story and Finding Nemo, an IMO was established to facilitate the integration. The IMO played a crucial role in aligning creative cultures, integrating operations, and capitalizing on synergies. The acquisition resulted in a successful collaboration between the two companies, with Pixar becoming a key component of Disney’s animation division and producing a series of highly successful films.
5. Fell Short: Microsoft and Nokia (2014) Microsoft’s acquisition of Nokia’s mobile phone business in 2014 aimed to strengthen its presence in the smartphone market. An IMO was set up to manage the integration process. However, the acquisition fell short of expectations as Microsoft struggled to compete effectively in the mobile market. The integration faced challenges related to cultural differences, product integration, and a rapidly changing mobile landscape, resulting in an “impairment charge” of $7.6 billion, or nearly the full amount it paid for the Finnish firm’s smartphone business and patents.

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Contact Ian@TPPBoston or Kevin@TPPBoston.com