Three critical factors for an M&A transaction

By Karen Thomas Bland, founder of Seven Transformations

According to Bain, mergers and acquisitions could account for 50% of banking and financial services revenue growth in the coming years, an increase from the already high rate of 35%. While the M&A environment remains hot, traditional banks are facing increasing disruption from private equity firms and digital native banks.

In my experience, successful M&A transactions often boil down to three areas; ego management of leaders, an ability to integrate at least two cultures together and an ability to learn from past experience so that investors understand the challenges that an integration can bring. These challenges aren’t often taught in business schools, so leaders must learn quickly from experience to overcome them.

Managing egos to make integration work

A well-developed ego is of course necessary to make a deal in the first place – it requires a big, brave and bold personality. But for integration to work, this well-developed ego must be brought under control.

When it comes to determining future leadership roles, both sides scramble to position themselves, with the buy side defining the roles it wants in the newly expanded company. A CEO I worked with proudly said “Let’s start our retaliation first, we won’t have anyone from that side in our management team”.

So how do you best deal with egos?

  • Communications must be clear. I once ran a merger where the CEO assured everyone it was a merger of equals, but then quickly changed the language and behavior to a takeover. If the intention is to take over a business, be clear from the start.
  • Engage the acquired organization with kindness and respect. Working with kindness and respect leads to a culture of generosity in an organization where people are willing to go the extra mile for each other. This can have a multiplier effect, especially now that the workforce is more fragmented.
  • Ensure that the integration team remains independent. On your onboarding team, you need people who don’t take sides and work objectively to find the right answer. It’s worth spending time hiring smart people with the confidence to speak up and do the right thing. Incorporating them early and well before day one allows you to plan accordingly.
  • Hold back those who cannot control their ego. When executives cannot control their egos, it is best to reassign these people to roles as far removed from the onboarding action as possible.

Prioritize the integration of two or more cultures

Most organizations are made up of a corporate culture and many sub-cultures often at the function, department or geography level, and sometimes even at the team level. In a merger, when you assume you are bringing two cultures together, it is often much more than that – you are bringing together people with very different sets of values, behaviors, leadership styles, mindsets and policies. different. The challenge of onboarding is to win the hearts and minds of all employees and give them a compelling vision to buy into.

To integrate several cultures together:-

  • Diagnose current cultures, including subcultures to understand the baseline from which you are working. Then define the future culture of the end state. Even if you’re adopting the buyers’ culture, find a cultural characteristic or two of the organization you’re acquiring.
  • Stabilize leadership roles. Quickly settling leadership roles to identify who can then help stabilize the rest of the organization is an important step. It could also provide an opportunity to make changes to leadership positions that are not necessarily tied to the agreement. In a context where change is already expected, there are opportunities to look at teams and departments that might be underperforming or that could use a shake-up and position the move as part of a larger onboarding process. .
  • Invest time in building a good relationship with the acquired organization. This can pay dividends later and will ensure a seamless transition. Too often, leadership teams become inward looking, let their egos rule, and fail to build relationships with their new colleagues. The best integrations ensure that leadership teams from both organizations come together throughout the integration process to talk about common goals, develop plans, and start working together.
  • Get the good day one. The first big step in any merger or acquisition is “day one” and having a clear plan in place that everyone agrees on for how you’re going to operate. Every detail is important and must be communicated and understood appropriately. Getting the “first day” right is an important step in building momentum and credibility in the organization, so it’s definitely worth investing time and energy into.
  • Find symbols of change to introduce new ways of working can help ease the onboarding process. To support the implementation and adoption of the integration plan, it is important to ensure that integration is at the heart of the concerns of colleagues. The best way to do this is to adopt a regular cadence of visible acts of change or ‘symbols of change’. These will showcase the new way of doing things – for example, sharing success stories, being visible on key customer sites or co-creating a new vision, mission and values ​​together. Every conversation around integration with both parties should demonstrate the new culture.

Learn from past experience

In mergers and acquisitions, nothing beats past experience. On top of that, there’s often a sense of mystery and intrigue around mergers and acquisitions that can cause people to throw everything they’ve learned out the window. Like any change program, capturing lessons learned should be an ongoing effort. This mindset should be strongly encouraged by the integration manager from day one. By not learning from failures, we are prone to repeating similar patterns. By not maximizing the success of agreements and integrations, we potentially miss opportunities to implement best practices to drive existing and future integration work.

To better learn from past experience:-

  • State the rationale. Determine why we do this and how does this fit into our business and strategy going forward? Then it comes down to defining the stages of integration because there will always be disruptions in the process, and this often comes from external forces like competitor moves or changing customer needs. Most importantly, make sure people are prepared, know their roles, and what the delivery is supposed to look like. Once you have that, more than half the battle is already won.
  • Manage your reputation. Unfortunately, reputation is built on the last bad trade you made or failed to make. Really understand the acquirer’s philosophy in terms of who they are and how they operate. Are they honest people with integrity? Is it an organization that has a real culture? Of course, a lot of M&A is about EPS (earnings per share) growth and other tangible factors, but human and cultural factors are also key.
  • Ask what an activist investor would focus on. If management isn’t open to a different perspective, that’s never a good thing. It’s best in the long run not to underestimate how incentivizing an activist investor or outsider can be. They can often have an outside perspective and have visibility into a wider range of strategies deployed in the market.

Whether the initial market reaction to a transaction is positive or negative, executives must maximize their efforts to explain the value of a transaction to the board of directors, increase transparency in investor communications, and properly execute the integration. Directors need to understand the value creation thesis and how the company will pursue it. This needs to be communicated to investors with a realistic account of when value is realized and what it really takes to get there.

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