Balancing Strategic and Financial Goals in Complex Business Integrations

Good day, and welcome to all CONNECT CFO Virtual Leadership Summit attendees. My name is Shelly Kalladanthyil, and I’m so glad you’ve joined my session after the deal. I’m happy to be a speaker at this year’s summit.

Today, I’m going to go over how companies can avoid common risks and pitfalls after a merger or acquisition is signed, and the integration process begins. Before we get into the agenda, let me tell you a little bit about myself. I am a Senior Director at American Water. I report to the President of American Water Resources Division. I have several teams overseeing the responsibility of business metrics and reporting. Also, I have the business performance team that is responsible for ensuring that our systems are supporting the business processes. I also have a team that oversees strategic evaluation of future initiatives.

I started my career at Deloitte. For seven years, I was a Consultant in the external audit practice. I served clients in the utility, manufacturing, and healthcare space. From there, I joined one of my clients [inaudible] as a leader in the accounting organization.

Over the course of the years, I’ve been part of multiple mergers and acquisitions. I’ve been on both sides of the deal, both as the acquiree, and the acquirer. I’ve also seen multiple facets of the deal. I’ve been responsible for the purchase accounting books and records, as well as full scale business integrations, including multiple offices across the country, 400 employees, and various systems coming together. So, I’ve seen a lot and learned a lot of lessons over the years. That really brings me to this topic today and why I want to share some of those lessons learned with you.

So, that brings us to the agenda. We’ll take a look at the M&A landscape. Then, we’ll hone in on three main topics: leadership alignment, inclusion, and governance. While on the surface, these topics sound like no brainers, is often the reason why businesses find themselves failing in their post deal transactions. So, we’ll hone in on each of these topics individually. I thought this was a timely topic in 2020.

We’ve seen our fair share of big name transactions with the likes of GrubHub, Uber, and Postmates. Also in the technology space, VM and Insight are now one. One of the drivers in the technology space is a lot of conversation around data protection. Some technology companies and other companies are seeing it as a way to protect their customers as well as leverage capabilities.

Despite some of these big name deals, we do have to talk about how the Coronavirus has impacted the M&A landscape. There’s a really interesting Accenture report that examines this very topic, and I’ll share some insights with you. According to the report, deal value is down by about 47% and deal count is down by about 12%, but not all sectors are seeing this contraction. The home and health sector and hospice sector in particular are seeing a surge in M&A activity. If you just compare Q3 of this year to Q2, there has been an increase of about 120% of deal counts. One of the driving factors for that is conversation around value based care outside of the hospital. So, we’re seeing that increase overall.

The pandemic has also made leaders think about the future of their businesses and companies, private or public. Majority of US companies will feel the impact of the post pandemic economy. There will be shifts in consumer buying power and behavior driven by unemployment and pressures on price. According to the World Bank, 71 million people could find themselves in extreme poverty across the world. Just next year, the mechanics in which we do business like Supply Chain have really changed. According to Harvard Business Review, many manufacturers have shifted to fewer suppliers to allow flexibility but are expanding the footprints in which they make their goods to allow for ease of delivery.

Dependency on foreign suppliers like China is also a huge factor. The ripple effect on the economy and to other industries, which could also make your business partners shift their own priorities. In light of just these few issues that you see on the left hand box on your screen, M&A becomes an option and a conversation across leadership across many companies. It becomes an option in the conversation going forward. How can divestitures or acquisitions allow a company to focus on key capabilities to leverage others?

According to reports, 40% of US online grocery orders were by first time online buyers. This is an example of how companies are leveraging capabilities of other companies, and how traditional brick and mortars are using technology more and more in this post pandemic economy. Analysts expect that the 2021, 2022 budget and planning process for many companies included this conversation. Mergers and acquisitions are sure to continue and even pop up in unexpected industries. But there is a common problem. According to Harvard Business Review, 70 to 90% of mergers and acquisitions actually fail.

Let’s pivot to some of the best practices that can maximize success after the deal is signed. First and foremost, leadership alignment and culture is paramount. When embarking on the integration process, goals need to be clearly defined and communicated. In the goal setting process, criteria needs to be set in which to evaluate strategic opportunities. It’s imperative that there is clear definition and documentation of these goals. From there, goals need to cascade down to managers, and directors, and so forth.

In many ways, this is not all too different from your annual planning process, but can be often overlooked in an individual transaction. Leaders are typically responsible for getting the deal signed. But when that milestone is achieved, the level of insight and oversight into transactions can come down. That’s where the failure can begin. It’s important that key managers stay engaged in your transaction. That creates an environment that will reduce the amount of misconception, rumors, and assumptions around those transactions. Tone at the top is essential.

Planning for resources. Mergers and acquisitions are a lot of work, and that is often underestimated. Completing that work is not always appropriately planned for, not to mention that existing business that you run on both sides of the deal often have to continue to run. There can be two issues. One, not enough resources, or two, poor allocation of those resources to the work that is needed. This can cause confusion, errors, misconceptions and mismetrics. A very concrete resource plan is essential. One way of doing this is actually creating an integration team, but that might require leaders to consider backfilling of resources and or reprioritizing initiatives.

Speaking of resources, that’s a good segue to the next topic—inclusion. Inclusion is another 2020 hot topic, given the events that have happened in the US. In this particular context, it’s more about ensuring that all business perspectives are being considered in a business integration. Whether it’s choosing systems, consolidating vendors, renegotiation of contracts, it’s really important that that integration team be cross functional. It’s diverse enough in thought leadership, so that you can ensure that your decisions that you make are fully rounded and have all aspects considered, especially when it comes to your customers. It’s important that anything that is communicated to your customers permeates to the back office and the operations, so that the message you’ve given to your customers matches what companies actually going to do.

Some integrations can be viewed as very narrow, either as a systems project, or as a people integration, but they very rarely are. That’s why inclusion and having such a cross functional team can be helpful. It creates also some transparency in the messaging. Those involved in that task force can then cascade that message down to their own teams. It’s a safeguard for bad decisions and it also helps to reinforce and permeate that overall message and goal alignment that we talked about previously throughout the organization.

The last topic is governance. It’s almost a four letter word that makes a lot of eyes roll, and I understand that. I know it seems like a chore, and one more thing that leaders often wonder what the purpose is, and doesn’t really bring value. Governance doesn’t have to be a check the box. Leaders like you can really leverage the governance process to be a safeguard and as a way to enhance the integration success. Governance can ensure that you are being challenged, that you are being reminded of the strategy that was aligned on, that you are being fiscally and operationally and legally responsible for a governance committee that does this for you.

Ensure that you have your bases covered from a cross functional perspective, and that you have recurring readings to complete readouts on financials, get approval on key decisions, and escalate the issues that you’re having a hard time thinking through. Particularly when your decisions can pick customers, it’s very important for all leaders to be aligned.

Another item that is often overlooked are the purchase accounting impacts, as you might expect, and how subsequent decisions can impact the P&L. It’s important that leaders outside of the finance and the accounting organization understand those impacts so that they can buy into the decisions that are being made. Again, that theme of alignment applies, and ensures that all groups in the business are on the same page.

Those are my top items to call out as best practices for achieving goals and staying on track with your vision for your business integration. I expect that many of you will be in this position next year or so dealing with your own transaction. I hope you can carry these tips with you. You can leave me a comment or a question as well. You can find me on LinkedIn. I hope you enjoyed this presentation and some of the key takeaways. Thanks for your time. Be safe and be well.