Due diligence is handled in a workmanlike fashion. The two companies move down two paths simultaneously. First, they want to make sure they uncover anything that would stand in the way of doing the deal. Is the accounting sound? Are the assets and capabilities they would acquire of the quality they expect? What is the culture of the target and how well would it fit? Are there any employment contracts or other obligations pending? Companies blinded by the desire to complete a deal may well be stung later if they fail to complete their objective due diligence.
Nevertheless, the second path is the heart of pre-merger planning. The companies need to collect the data that will allow them to measure exactly the source of value from the transaction. What additional revenue can they expect? Where will they be able to cut costs? What capabilities will they acquire (expected and unexpected) on which they can build? What will they sell off? When will this all happen? How much will it cost to complete?
The best companies plan at a very detailed level in this step. They know what value is there and when they will get it. They build the cash flows and timing into a model that helps them value the deal. Then, that model becomes the action plan and scorecard for the post-merger integration. Additionally, this helps them take action quickly after the close. Several of the top performers in the "Best Deals" study reported setting detailed plans in this step that were then used as tight guidelines during integration. While they admitted that it was rare that they achieved their exact plan, they were very clear in stating that without the plan they would never have achieved their goals.
Capturing Value from Different Sources
Value capture can be derived from several key sources, and depending upon the circumstances of the merger, some will be more valuable than others. As an example, the following areas are generally useful to consider when identifying sources of value:
- New products, service offerings, markets, customer segments, distribution channels
- Enhanced market presence, market capture
- Enhanced product development efficiency (leveraged R&D, internal best practices)
- Combined technologies or capabilities
- Leveraged sales force
- Increased capture of the value chain
- Integrated supply chain
- Leverage procurement volume (product and non-product)
- Production footprint optimization
- Facility optimization
- Vertical integration, de-integration
- Distribution channel optimization
- Sales force optimization
- Headquarters consolidation
- Support function consolidation (human resources, finance, I.T.)
- Financial value (balance sheet items, taxes, etc.)
- Optimized programs and policies (e.g., benefits programs)
- Rationalization and/or elimination of special programs, projects, etc.
- Additional alliances or relationships.
In addition to considering the full range of value options, successful companies know how to use the pre-merger process to speed value capture. This allows them to improve cash flow, stem investors' and other stakeholders' fears and move on with the other elements of the plan to achieve their vision. One company, for example, used a secure intranet system housed by a third party to begin defining and collecting benchmarking information about the two companies before the close of the deal. By working together to define the benchmarks, the two sides built trust. By using the secure intranet connection to collect and store data, they were able to move after the close with speed and decisiveness.
After the Deal, the Real Work Begins
In our "Making Post-Merger Integration Work" study we tested more than 100 post-merger activities and sifted through them to identify the 60 best-practice elements that statistically explain why the successful companies succeed. Success was achieved when companies brought together the three dimensions of achieving lasting change: vision, architecture and leadership. (See Exhibit VII.)