How to Execute a Balanced M&A Integration

Importance of balanced integration

Balance in integration is really important because you purchased this company for a reason. You made the decision to invest significant portions of your capital into acquiring this business. 

You need to make sure that you're integrating in a manner that will achieve success, allowing you to realize your business case, financial targets, and strategic rationale without adversely impacting your core or heritage business.

So, how do you balance it so that you're achieving both sides of the coin, so to speak? If you don't, and you just go full bore on the integration without considering the impact and timing of these decisions, you will break something. You will either break the business you acquired, or you will break something in your core business, putting you in recovery mode.

Side effects of a forceful integration

It was a past life, not in Progress. I realized as the lead responsible for this acquisition, a big part of my job was to stand in front of the bus because the company we had acquired was so unique and different in their operating model and how they did things.

It became a major distraction with the number of people from the core business who wanted to introduce these new methods into different parts of the business. 

A big part of my job was to stand in front of that bus and say, we need to slow it down or prioritize, or we will not realize the core reasons why we did this. Instead of our return on investment within the set timeframe in our business case, we will extend that, impacting our return on capital.

This created frustration with employees, partners, and customers because we were distracting the acquired team from both executing the integration and continuing to manage and drive the business and service customers. 

We managed to course-correct quickly, but we were constantly trying to make up for that. We couldn't stop the bus completely, but it was about balancing and managing priorities, timing, and impact, all going back to why a balanced integration is important.

The acquisition proceeded, though it was challenging because the acquired business operated so differently from our heritage business. They had already migrated to SaaS, while we were still on-prem. 

This required significant transformation in our core business to integrate and adopt a subscription model. It highlighted that our operating model was not flexible or agile enough, necessitating significant changes.

When to involve the integration lead

From the time I get involved, this is something I'm pretty passionate about. You asked why I decided to come to Progress. In talking to Jeremy and having worked with him before, we were philosophically aligned. 

I believe, as the integration lead, I should be involved from the get-go. By this, I mean how Jeremy and my colleague Alex are sourcing and working with the business on strategy to understand markets and adjacent markets.

Once we've identified a potential target and we're having initial management meetings to determine if it could be viable, that's when I believe I should be involved. I'm a bystander, observing, learning, and listening. I don't drive the process or own it, but I do ask questions. 

This approach ensures I'm never behind the eight ball when we move forward and formally kick off diligence with a cross-functional team. Although Alex owns the diligence process, my involvement helps support our functional teams as they put an operational lens on the business.

To do diligence well, you need to understand how to operationalize the business, which feeds into your preliminary integration plan. You need to come out of diligence with an initial integration plan and understand your starting point. Plans change, but having a stake in the ground early on helps me support our cross-functional teams as they go through diligence.

We don’t have approval to close a deal without a preliminary integration plan. Every organization I've ever worked with or for, whether as an employee or consultant doing M&A, has objectives during diligence. While not the only objective, nor the primary one, red flags and financial aspects are critical. Does the deal make sense? Can you make it work financially? These are crucial questions.

However, you can't address these unless you put an operational lens on the business. Financial viability requires a baseline business case and a model that understands this. 

How do you do that without evaluating how to integrate the business, how they align organizationally, and what the priorities would be? You need this viewpoint coming out of diligence to validate a solid financial plan and business case.

When it comes to information, you always have to prioritize. There are times when you have to decide to punt on something and wait for either the period between sign and close or if it's a simultaneous sign and close.

With experience, you know what can wait and what is essential. For instance, if getting certain data and information becomes a showstopper, particularly in a competitive process, you need to be flexible. The seller is looking at the lowest common denominator, providing what they need to for all buyers in the process. Prioritizing and adjusting accordingly is crucial.

Information crucial to integration planning

Obviously, you need to get their financials and understand the customer base. Thankfully, we have a great team for that. I'm quite proud of our team at Progress and to be part of it. We also need a lot on the people front. 

When push comes to shove, it comes down to your financials, legal aspects, and people. You need to understand the workforce, which includes not just employees but also contractors, as they are a core part of many businesses today.

You need to look at this holistically, doing your analysis to understand implications, potential liabilities, and risks. This helps you get a vision of alignment, fit, redundancies, and opportunities. You must also understand the technology, the quality of the code, the stickiness of the product, and development practices. 

Do they align with yours? What effort is needed to transform or migrate to your methodology? These factors affect the timing and how long it will take to realize your return on investment.

Culture is another big piece, and it is hard to get at during diligence. Thankfully, we have a great team focused on organizational effectiveness. However, everyone working on the acquisition, especially during diligence, owns culture. 

It is not just an HR function. Understanding culture helps mitigate risks and manage major differences. It's crucial for building relationships and establishing credibility with all stakeholders, including customers, partners, vendors, and the workforce.

Understanding their internal operations, customer engagement, and partner and vendor interactions is vital. If you don't grasp these cultural elements, you can't ensure a strong start and establish the necessary relationships and credibility.

Integration lead’s role during diligence

So, my role during diligence is to examine the business operationally and work with cross-functional teams. This involves bringing together preliminary work streams that are cross-functional in nature and starting to align them. Interdependencies and alignment are key factors that can make or break an acquisition's success.

If we only look at things in silos by function without sharing information or collaborating on our findings, it can impact the operations of the business or the integration process and timeline. We're doing this in parallel with diligence, ensuring we don't disrupt the core priority of diligence, which is determining if we should do the deal. 

Are there red flags? Does the financial model meet our criteria? Does the strategic rationale make sense? Can we successfully go to market with a good story? These priorities are crucial, but they can't be addressed without simultaneously applying an operational lens to the business.

Balancing integration execution

The balance comes in as we get closer to the end of diligence and foresee a successful outcome. You're negotiating the terms of your agreement with the buyer, and once it looks promising, I start formally kicking off integration planning with our internal team. 

One great thing about Progress is the continuity from diligence to integration, which is a key success factor. If you switch out teams, you risk delays and misalignment as the integration team has to get up to speed and execute plans they didn't create.

I kick off integration by establishing the vision for the business with the executive sponsor. Every deal should have an executive sponsor, and ours always do. We define the operating vision and assumptions based on learnings from the cross-functional team. 

These assumptions might cover timing, headcount strategy, and product strategy. For example, if a product offering's customer base is declining and it's not being invested in, we may decide to end it.

We formally align the cross-functional team on these assumptions and priorities, ensuring everyone understands how this maps back to the strategic rationale. It's crucial that everyone knows what the others are doing and that we're all moving in the same direction. Each team works on their individual plans, often collaborating with counterparts in other functions due to interdependencies.

We then have a workshop to review these plans and determine the timeframe and impact. Integration often falls on the back office, covering systems, legal, financials, people, benefits, and payroll. However, it's important to align with the front office to ensure we achieve the strategic rationale within the timeline and balance both aspects.

Working with the seller

We ideally or typically start once we sign the deal. Prior to signing, we work independently as an internal team. After signing, assuming we can align with the seller on access to employees in the period between signing and closing, we re-kickoff integration planning. 

This involves joint integration planning, bringing together our internal integration leads for each function with their counterparts from the seller.

We review our baseline assumptions and objectives. However, we must balance what we share and how deep we go since they are not our employees yet. We are strict about not giving direction, operating the business, or advising on changes during this period. 

This is especially important for publicly traded companies, but generally, if they're not your employees yet, you shouldn't do that. This can be hard for the seller's employees to understand, especially if they haven't worked in a public company before.

We carefully manage this process, validating our assumptions and the integration plan because there's always something that comes up that wasn't discovered during diligence. 

For instance, you might plan to migrate all vendor contracts to a centralized repository within 30-60 days, only to find out the seller doesn't have a centralized repository. Such tactical or operational adjustments are manageable.

While there may be various unforeseen issues, ideally, they shouldn't be numerous or major red flags that impact your strategic rationale.

Realization versus timeline

You come out of diligence having validated your business case and strategic rationale, and you have a plan for integrating and operating the new business within your organization. How do you balance this with the timeline for execution?

Some tasks will be integration-related, while others will be natural business evolution, such as branding, go-to-market strategy, marketing programs, and aligning sales models. For instance, maybe the acquired company currently lacks an inside sales team, but you see the potential for growth by introducing a BDR inside sales model.

You must prioritize integration responsibilities from the start, ensuring all legal and statutory requirements are met. Addressing employee concerns is crucial, as their primary question often is whether they will still have their jobs. They worry about job security, benefits, and how the acquisition affects personal plans like vacations or medical procedures.

It's important to strike a balance between immediate integration tasks and the overall business goals. An organization can only handle so much change at once. A well-integrated plan considers interdependencies, timing, and priorities. Determine what needs immediate attention versus what can be delayed to avoid distractions.

Additionally, develop an onboarding plan to manage employee expectations and communicate clearly. The goal is to balance integration without compromising business results, while also addressing necessary legal and compliance aspects.

What makes integration successful

It is. Something I'm incredibly passionate about is communication as one of the key pillars for a successful integration.

To me, one of the key pillars of an integration of an acquisition is communication at all levels. That's communication up to your leadership team, your steering committee, presumably you have one in place for this particular acquisition, your executive sponsor, managing expectations, and helping them understand why their vision can't always be achieved in the timeframe they would like.

Sometimes you have to make adjustments in your plan because they have solid business reasons. It's about having those open, two-way lines of communication. It's within your integration team cross-functionally, making sure all your interdependencies are aligned.

It's communicating to your customers, managing their expectations. First thing customers want to know is, how will their engagement change? Are their contacts, such as a customer success manager, going to remain? They want to know if the product roadmap they were shown will change and how that impacts their internal plans.

How do you communicate with partners and third-party channels? And then, of course, your workforce. I've mentioned it before and I'll stress it again because I really can't stress this enough. The reality is when you're in technology and particularly software, people are core to what you do. You can't develop your software, deploy it, sell it, market it, service it, or support it without people. 

So, making sure you have that open and transparent line with the workforce is critical. They may not always like what you say, but it doesn't mean you shouldn't say it. It doesn't mean you shouldn't share it. Avoiding communication or going silent is detrimental.

I'm sure you've witnessed this: companies start strong with communication, with a great day-one event, welcoming all the employees. Then there's silence. Employees have no idea what's happening, what's next, what their expectations are, and where to go from here. You have to maintain that communication drumbeat.

Tips for effective communication

You need a comprehensive communication plan that really hits all those stakeholder communities. A big part with leadership is making sure you have a steering committee in place and that you're meeting regularly with them, maintaining a strong cadence, and securing commitment from them.

I've worked with other companies where a steering committee starts strong. For the first month, all appropriate leaders and members attend every weekly meeting. But then, they deprioritize it in their minds, no longer seeing it as the shiny new thing. That doesn't happen at Progress. It's crucial to ensure they understand their role and the commitment required.

For vendors, partners, and customers, you need a strong communication channel and plan. What do you do at the acquisition sign-off? What do you do at the close? What's your message? How do you ensure they know where to go for questions or answers? 

As part of that, make sure you enable anyone internally facing these stakeholder communities to respond appropriately, with FAQs in place for clarity and channels for unanticipated questions.

And then on the workforce side, it's really about making sure you not only come out of the gate strong but also balance the message around why we did this acquisition and how they fit in. What do we see as key to success and how do we move forward? Keeping that communication channel open is crucial.

We've done things like maintaining a drumbeat, not just coming out strong with a day one or welcome event but also having targeted roadshows for different functions or geographies based on distribution. This allows people to ask questions unique to their function or geography. 

Helping them understand and learn about the organization is important, even if nothing is immediately changing. Never say "nothing will change" or "it's business as usual" because something will always change, whether integration-related or not. If you say nothing will change and something does, you'll lose credibility.

We host functional sessions, like open houses, where employees can learn about corporate development and other functions, ask targeted questions, and understand their roles. 

We also do monthly sessions to provide integration updates, inform employees about what’s happening and what’s next, and use these sessions as learning opportunities about our business.

A newsletter, or acquisition newsletter, is another effective tool. It covers integration and business news to keep the communication line open. Particularly in the first 12 months, it helps maintain the connection points and network that smaller companies might lose when integrated into a larger company.

When you do an acquisition, both the buyer and seller workforces are excited and anxious to learn about the capabilities and technology. These are technologists at heart, and they want to know what the capabilities are and how they might leverage that in their world. 

We'll do sessions around product demos, informational sessions, and provide resources on where they can get more information and downloads as internal employees. Everyone learns differently. Some need to hear things multiple times, some on a call, some need to read it. 

So we'll cover integration, but also include news on what's happening in the business. If you're acquiring a smaller company, they often have an internal network. They know if a key deal was won or if someone in product management had a great meeting with an analyst. As they get integrated into a larger company, they lose that network and those connection points. 

We try to keep that line of communication open by sharing news in a newsletter, making it available not just to the acquired team but also to the workforce of Progress or other companies I've worked in.

Creating and refining M&A Playbooks

We have a pretty robust playbook across the organization, including functional team playbooks. We refine these playbooks with every deal. We review what worked well, identify opportunities for improvement, and incorporate new successful practices.

Another thing I'm incredibly proud of, and which Progress did before I joined, is conducting retrospectives on every acquisition. We even do this for deals we chose not to move forward with to learn what worked well and where we can improve. This continuous loop around M&A readiness is something we take seriously.

The thing I'm most proud of is that we follow through on these retrospectives. Many companies say they'll do this, collect the learnings, and then let it fall to the bottom of their list. At Progress, we actually follow through and execute on the priorities we establish.

Ensuring a positive employee experience

"Capturing employees' hearts and minds." It's true. If you start out behind, you are constantly trying to recoup and recover. How do you capture hearts and minds from the start? That begins with the signing. If you have a signed-to-close period, it starts when you immediately announce the deal.

Part of it is helping them understand the vision. Why is this a good thing? 

In software, most employees are passionate about the capability and the solution they provide to customers, how they service and support customers, and the impact they have on the business.

How do you maintain and enhance that passion by being part of Progress? Being part of a larger ecosystem with a broader geography that we can leverage. How do you do that?

It's also about them as individuals and sharing why Progress is a good place to be. What does that mean for them? It comes down to treating them with respect, not just saying things, but following through. This gets back to being consistently transparent and as open as possible in your communications.

Sometimes you can't be fully transparent because you don't know the answer yet, and that's okay. Tell them that. Set an expectation on when you believe you'll have the answer, but never set timelines that you don't follow through on. Eroding that credibility is harmful. If you follow through, are consistent, and treat people fairly and with respect, that builds goodwill.

Then, their eyes open up to the strategic vision and why this is a good thing. This applies to all employees, whether they stick around for the long-term vision of the organization or not. Helping everyone see that they will be treated with fairness and respect carries a lot of weight across the integration process and overall employee engagement. 

How do you build that so that as you integrate them in, they become proud of Progress? It really themes up into building trust and you got to start that out of the gate. You won’t establish it out of the gate, but you need to start that and keep following through, and every step of the way, you’ve built more and more.

Working with different leadership styles

Friction does come up, and internally, we have a way of working through it. We've built tight relationships within our core M&A team, whether they sit in CorpDev or not. Most of them have day jobs too, but we have strong relationships and ways of working through that friction.

I believe the best approach is openness and transparency. If I have a frustration or sense I'm frustrating someone else, I'll bring it up. I'll have a one-on-one conversation to clear the air and work through it.

For the acquired team, the first step is bringing them in and helping them understand the vision and why it’s that way. Many companies communicate the what but not the why. You have to explain why a change is being made, what factored into the decision, and how it’s being approached. 

People may not always like the answers, but they appreciate and respect that you're explaining it to them, which helps them move forward. Bringing in the acquired team, explaining decisions, and validating their feedback is crucial.

Even if it doesn't change the plan, most people appreciate that you listened and considered their input. If there's continuous disagreement, you need to make a decision.

I'll give you an example from prior to Progress. I did an acquisition where the CEO and founder of the business, a private company, did not agree with our operating model. When we closed the deal, they were responsible for the commission payouts as part of the closing conditions, including terms for deals closed prior to the acquisition.

I had a couple of salespeople come to me because they were told they wouldn't be paid commissions on deals they had successfully closed. This decision was incorrect geographically and short-sighted in terms of its impact. We were talking about $1,000 per individual, and there were two of them.

I tried to talk to the CEO, the leader of the acquired team, but he fundamentally disagreed and refused to pay. I decided to use my budget to pay these individuals. The CEO objected, but I insisted because the decision was creating a distraction and was unfair.

By paying the commissions, I gained immense goodwill with those individuals, their peers, and the rest of the organization. It spread quickly, not because I wanted recognition, but because it was the right thing to do and eliminated an unnecessary distraction.

Until you have that conversation, and particularly, so much is done over like instant messaging or email, you lose part of the messaging in just the written word. So when it's clear there's a disagreement or it doesn't appear there's alignment, have a conversation. Don't just hide behind the written word. 

I've also experienced that where I've had folks from the seller that are passive aggressive, and then they just hide behind an email and you try to get them on a phone or in a call to have the conversation, and they just hide behind the written word. There's so much that gets lost from both vantage points.  You need to talk things out sometimes. It really is an alignment playbook.

Measuring integration success

There is no silver bullet for success. Some might argue the silver bullet is achieving your return on investment within the expected timeframe, meeting your business case, financial targets, top-line revenue, operating margins, and customer retention.

You need to track and report on these quantifiable measures frequently to identify any necessary course corrections early. From a financial perspective, it's crucial to monitor these metrics to avoid falling into an irrecoverable situation.

In addition to financial measures, employee engagement is vital. Are your employees engaged? Is there unwanted voluntary attrition? Are critical employees for the success of the integration or long-term vision exiting prematurely? If so, why? Is it happening in specific geographies or functions?

Another measure of success is the effectiveness of your integration activities. It's not just about checking boxes. For instance, if you enable the workforce on how to get information, like benefits and policies, are they using the systems effectively? Are they still asking one-off questions? This helps determine the effectiveness of your integration efforts.

Customer satisfaction is also essential. Monitor customer satisfaction scores, NPS scores, and other related metrics.

There's no single measure of success. During the integration process, you need to look at the health of the business as well. If integration efforts compromise the health of the business, adjustments are necessary. 

Our goal is to support the business in developing, marketing, selling, servicing, and supporting our customers and offerings. If integration activities adversely impact these areas, we need to reconsider our approach.

Biggest challenges when executing an integration

The biggest challenge is timing. Your goal is to integrate as quickly as possible with speed and efficiency. How do you achieve this balance? That is probably the biggest challenge. Another challenge is managing conflicting priorities.

Most people who work on integration, not just at Progress but in many companies, don't belong to dedicated integration teams. How do you balance conflicting priorities and manage expectations?

Sometimes you need to readjust and deprioritize internal initiatives to focus on integration. These decisions must be conscious and informed, and they need to be communicated consistently. It's crucial to have a solid communication channel that ensures everyone receives the same message.

We all know what it's like to be told one thing while someone else hears something slightly different. Ensuring consistent communication and informed decision-making is vital. As I always say, not making a decision is making a decision in itself.

Logging decisions is an issue and we're not perfect at it. We're making improvements.  One of my goals for M&A readiness is to enhance our decision-logging process. We've used simple methods like an Excel tracker for acquisitions, documenting key decisions, the date they were made, and ensuring key people have access. 

While not widely adopted yet, these practices become core to the operating model over time. There's room for improvement, but we're taking steps in the right direction.

What is vendor rationalization?

Vendor rationalization is tough. Every company struggles with this. Vendor rationalization is one aspect, making sure you understand who all the vendors are and how they align with your vendors. 

For example, you may have two CRM systems. Do you both use the same systems? You have development tools and cloud hosting services like AWS or Microsoft Azure. How do you rationalize this? What's the plan?

You need to look at contract terms and conduct a cost-benefit analysis for getting out of certain contracts on either side. It's not always about eliminating the acquired team's contracts; sometimes they have better-negotiated terms. 

You need to figure out which vendors to consolidate, whether to merge agreements or bring them under yours, and which ones to terminate and in what timeframe. To do this, you must understand the exit criteria for each contract. Can you only exit at the time of renewal? Do you need to provide notification 60 or 90 days in advance, or will it automatically renew? 

All these factors need to be considered and prioritized to execute effectively. There's also a legal aspect to consider. You need to understand the entity structure and the legal implications of where their contracts are held. Depending on their structure and how you do things, you may need to move all contracts to an entity within your structure. 

You need to determine the timeframe for this migration and take necessary actions, which might involve consolidation, termination, or simply notifying the parties about the changes. You might also need to change paperwork and manage other logistical details.

And we're doing some things to continually enhance and improve upon it. One thing is, we're bringing in our procurement team, which is responsible for vendor agreements. The business plays a key role because procurement doesn't decide whether we need a vendor or how we use them. We're now including procurement in the process.

You can't get all your vendor contracts during diligence, nor should that be a priority. But you want to understand which ones are material and which will have a major impact.

Even though these contracts may not influence your decision to proceed with a deal, having an understanding and building a repository of information to guide this process is key. Doing this earlier and not treating it as an afterthought is crucial, so we're starting to do that.

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