Leading M&A with Integration

‍Text Version of the Interview

Leading M&A with Integration

Carlos Cesta: I'm more on the deal side, and to me, it means when you look at a deal and prepare your bid in a competitive setup, you gotta look at certain things that are intimately linked to the deal.

For me, it's a spiral project, wherein when you revisit one topic, you affect the other. If you divide to put an earnout, there are consequences, and it's going to change how you're going to integrate. For me, it means bringing the lead integrator, at that point, into the conversation with the deal sponsor.

There's a second point that more tactically means developing an integration strategy or plan with the seller. Discuss the points that might not end up on a merger agreement or anywhere else in the deal. At least you have some documentation of how you plan to integrate.

Javid Moosaji: For me, integration is two things. First, you have to make sure that at the core of all of the discussion, the strategic intent and goal are upfront and clear to both parties. 

Second, we have to make sure that the customers and the products are at the forefront of anything we're doing. That's what then drives the integration further down the road. 

When Does Integration Begin? 

Javid Moosaji: I think today, there's a trend where corporate development and a lot of integration guys tend to be formed as part of the same team. While that's great, there is still a little bit of a blurred line there. And my view is, integration should start at the targeting stage. 

Aside from having the right integration lead and the suitable skill set, they should come in a little bit earlier because they should understand and include some of the integration criteria and components into the targeting criteria and profiling of a particular client that you want to target or acquire. 

Bringing those integration criteria into the mix allows for a better valuation down the line, allowing you to prevent any risks and fall into pitfalls.

You don't want to end up in a situation where you've closed the deal, but as you're going through the integration, you're finding a lot of things. If you've got an experienced integration lead, they can come in a lot earlier in the process and help. 

Carlos Cesta: The best integration experience that I've ever had was when I brought the person into the weekly pipeline meetings to know what's in the pipeline and how we start thinking about it. 

Also, on the tactical side, the integration will be another diligence workstream when we start the deal. And as we begin making discoveries, those discoveries start feeding into what the integration plan is going to look like.

And that person's end product is not a diligence report but the integration plan itself. 

Integration Lead

Carlos Cesta: In the middle market, you can be a little bit more creative, and it needs someone that is almost like a COO type level. It can't be just a project manager. 

Project management is a big component of what that person's going to do, but that person has to have a high sense of commercial, operations, the economics of the business. 

Otherwise, if you're just a project manager, we'll be consulting with so many people in the process, and he is never going to be proactive in seeing the issues that are going to come up down the line, anticipate them, address them, and understand the ramifications of those.

It's a very hard profile to get, and a COO is the closest thing I can think of, but it has to be someone who has a lot of background in the business and understands how things work and navigate the politics of the structure.

Javid Moosaji: I agree with Carlos. It could also be GMs, and they should have the right gravitas, credibility, and they should be able to influence some of the thinking around how to bring two companies together. 

You're basically setting up a new business if you think about integration. You're combining two worlds with the hope of creating a new entity to deliver growth. So it requires a specific profile and certainly not just a project manager. 

I also think it's essential to bring some of the product and some salespeople a little bit earlier into the integration process. They may have some valuable insights by playing in the market space since they interact with customers and partners. 

Involving the Sales Team 

Javid Moosaji: It's important to distinguish where you are in the process and when you bring in the entire sales team; that's part of the integration. But if you're not at that stage, at least bring in the head of sales or product. 

If you're in targeting and due diligence, you bring limited heads of sales and heads of products into the mix so they can provide some insights into that process. Beyond that, after you've closed the deal and you've gone into the integration phase, then you tend to bring them a lot more into the mix.

Importance of Go-to-market 

Javid Moosaji: It's very critical. It's the first thing you should be doing. Because if you think about why we acquire a company, it's because we want inorganic growth. 

And you're going to do that by combining customers, products, or certain skill sets. Depending on the nature of the deal, you are combining customers and products in most cases. Therefore you need to start with that. 

If you don't start with - what type of customer am I serving? What's my customer base? Then you can't have the right discussions around - what systems are required, what people and skillsets, or processes need to be combined. 

So you often go into the operational elements, the mid and back-office integration topics around systems platforms without truly understanding what customer base you are serving. 

So in my mind, you should always start with go-to-market planning because that's part of your target operating model and your setup. You start with the customer, you start with the products, and then the rest of your organization's capabilities should align to that.

It's also fundamentally important to have go-to-market plans around integration at the forefront of any decision-making if you genuinely want to achieve customer success or customer value rate.

If you're buying a company that you just would need to bolt on because it's purely just a particular skillset, then you can have a fairly loose integration over there. And you can almost leave their sales teams and their go-to-market teams pretty much untouched because you want them to flourish on their own.

There are consequences of not prioritizing go-to-market like:

• Customer service levels dropping 
• Customer attrition, they're defecting. 
• You can see a bit of a blurred role and responsibilities within teams.
• People get confused about roles and responsibilities.
• Your customers get confused about what are you offering them
• Which brand are you? 

So you can destroy a lot of value. You confuse your internal stakeholders and partners. 

But there's a lot of complexity in combining a sales team. The sheer fact of putting two sales compensation plans together is a nightmare. So people tend to shy away from it and leave it further down the line. 

They tend to focus on more tangible things which can be easily measured from a KPI standpoint, whether it's combining offices, combining a couple of centers of excellence, or shifting people around.

That is why you should bring those difficult questions upfront and force yourselves as a combined team to answer them honestly. 

How to Hit Synergy Numbers?

Carlos Cesta: One of the tricks is to test the synergies early on, even as early as a week before signing an LOI and starting diligence. 

Spend time with management and dive deep into the value drivers. It can save a lot of money because you find out that you were wrong about the thesis in many cases.

Another trick is designing the integration plan together with the seller. Not only that this makes sure that there are no surprises later, but this also helps to test the chemistry between the seller and your team. 

This is where they can touch on the more sensitive topics because deals can break at the point of disagreements on these sensitive issues.

Javid Moosaji: Identify those synergies very early in the process and make sure that the integration team is accountable for that along with the business. It is not just the responsibility of the integration lead to go and measure and identify synergies, it has to be the wider business.  

From an organization standpoint, include some integration KPIs into the overall business scorecard, which would trickle down into employees. 

By this, you're ensuring that the broader organization and the people across the organization are also brought in some of those synergies and contribute in some way shape, or form.

Bridging Disagreements

Javid Moosaji: When disagreements happen, you must go back to the original objective of the acquisition. Why is the seller selling, or why is the buyer buying. 

It is easy to forget the deal rationale after closing the deal. You are often dealing with egos and passion and remembering the objective of the deal helps bridge that gap.

But having said that, we should never really shy away from disagreement. As long as it's for the common good, it helps get the common goal. It's important to listen to the parties giving a slightly different opinion. And they may have a valid reason, particularly from the acquired and target companies. 

Pitfalls on Cross Border Deals

Carlos Cesta: You need boots on the ground first and foremost when it comes to integration. Whoever your integration leader is, you need someone in the business in that country or region to facilitate or be a part of the integration team as well. 

I think culturally, it's a very different approach in terms of pitfalls. Emotional intelligence plays a lot into this, and you need to make them feel they're part of the deal and bring them along.  

You can't just force your way of doing things on them. Having someone in the region will help you get a deep sense of empathy and know how things work there. 

Javid Moosaji: For me, it is the obvious one around legal and regulatory environments. 

When you combine teams and try to achieve cost synergies, doing that in the Nordic countries versus in Europe versus Germany, Italy, France, and Spain is very different. 

A good example is in France and Italy, labor laws are quite favorable to the employees. Trying to make redundancies will take a long time, impacting your integration timeline. Similarly, for some of the compliance and then regulation requirements. 

The other one is around the people's culture. Combining two cultures is always hard, but customer and market behaviors also change. 

Blind Spots on Integration

Carlos Cesta: I was thinking about culture, especially when we're making acquisitions in the media space where innovation is very fast. You're acquiring companies with a millennial generation Z workforce, and the management is probably general gen X / Boomers. That can be a challenge.

I have never seen different cultures kill a deal. We always think we can handle it, but I've seen deals not work because of culture. 

Javid Moosaji: For my experience, I have always been burnt by the complexity of platforms and systems. We get a view of that during due diligence, but we don't get a true picture. 

It's important to have people who understand the product, the market, and what systems are required. Quite often, you are left with multiple legacy systems that you cannot integrate. It takes a long time, and you end up losing momentum because you want to do business as usual.

So you have to understand how systems truly support your customers and your products, and can you really migrate into another system. 

Levels of Integration

Javid Moosaji: The reality is, the people who are very military and forced integration suffered in the short term, but they were better for it in the long run. The downside of having multiple systems is you can't truly have a very good go-to-market strategy.

You will always face problems with certain customer sets and on one system versus the other. Therefore your go-to-market becomes a lot more complex, and you can't have a really solid strategy around the go-to-market if you have to play with multiple systems. 

Especially in this day and age where everything is moving towards digital fastly, understanding your consumer's systems and platforms is critical. You have to move them onto one. 

If you don't have a solid go-to-market plan and the rest of your areas tend to fall apart. So I would not encourage people just to put a bandaid on systems. Make some harsh and radical decisions upfront. And that will give you dividends further down the line.  

The consequences I've seen companies today were struggling with that, and they can't meet customer needs with that.

Carlos Cesta: As it relates to the deal side, that issue gets even more amplified if you have an earnout in place and want to force your systems into the target company. 

It's going to be very disruptive to the deal team because you are now estimating a cost that will affect the P&L of the business.  

So you have to be careful about how you're thinking about structuring the whole deal because people are going to be unhappy.

When Does Integration End?

Javid Moosaji: It goes back to the original KPIs around integration that we're set at the forefront. If you've got some core integration milestones and KPIs, once you've achieved those, then you can officially say integration is over, and then you transition that into either a business as usual or into some form of a transformation stage. 

Carlos Cesta: When your synergy is achieved, if they aren't, they become a workout, and the workout is also probably the integrated person. So, those things don't happen naturally for an extensive period.

Keeping M&A Teams Engaged

Javid Moosaji: One way is to include something in their scorecard and include something in their personal objectives linked to the acquired or the combined company.

That's one way to keep engagement because touching on cultural integration cannot be done in a hundred days, and in some cases, it can't even be done in two years. 

Carlos Cesta: It also depends on the scale of the company. If it's a small company, you can do that. 

I've always thought about creating a bench of integration people but never been able to do. Someone who has experience in the business can integrate a business and take a leadership position in that company. 

I think it's an excellent opportunity for rising stars, and this would keep them engaged and incentivized aside from money. 

Time Limit on Integration Planning 

Carlos Cesta: If it's a competitive process and you have an exclusivity time limit, you're compromising it. This affects how you are going to price the deal. The risks increase since you have less time planning, and you pay less for the deal.