Let’s start by saying that we have always been strong advocates for building a post- merger integration (PMI) plan. We advise clients to build this plan as early as possible, and certainly before deal closing under most circumstances. A well-thought-out plan is the shortest path between communicating and accomplishing the vision behind an important merger or acquisition. But what happens when the assumptions underlying an integration plan are incorrect? What if we learn things after closing the deal that change our thoughts about how best to integrate the new business?
Most deal plans are built on the principle of “under-promise and over-deliver” on the financial objectives. So, if the new information is to the good, there’s little financial incentive to raise the issue, and management’s ability to control its destiny is increased. On the other hand, when the information is negative, often leaders prefer to manage their way through the issue, knowing they enjoy some leeway in their projections, or have the ability to make rebalancing changes within their overall business.
We’d like to propose, however, that focused pursuit of a plan in spite of its apparent limitations is not particularly virtuous or wise*, whether for family budgets or corporate strategies. It has often been apparent, within weeks or months of the deal closing celebration, that the assumptions developed during due diligence were not built on a solid foundation. We should keep this in mind in planning and executing post-merger integrations. (This is, unfortunately, an occupational hazard. HP’s acquisition of accounting-challenged Autonomy is one of a legion of examples.)
The headline-capturing misrepresentations in big deals gone bad are only the tip of a more innocent iceberg. We try to assess so many aspects of a business during due diligence that we occasionally miss a tree for the forest. Most integration leaders have at one time or other encountered information early in the post-close period that significantly challenged the deal assumptions. At the risk of stating the obvious, here are the main reasons that imperfect information becomes embedded in PMI plan.
• The time and resources available for due diligence gathering is invariably less than ideal.
• Topics requiring in-depth discussion to understand well – undocumented knowledge or cultural norms of behavior, for example – may be poorly understood because access to the seller’s leaders and managers often is severely restricted.
• Topics that are more easily analyzed using the buyer’s resources – financial pro formas and modeling of cost reduction efforts – get more attention than subjects requiring more of an investment, such as product/ market assessments or competitor analysis.
We expect that there will be gaps in the information. Yet, many companies are unwilling to alter the planned course to reflect the new knowledge.
Ignoring new information while staying the course leads to a misallocation of resources and missed opportunities to improve the business. We suggest that leaders reassess their integration plans at some point soon after closing – usually within about 30 to 45 days – and make sure that their plan represents the best overall outcome for the business. That may mean investing more in the first year in customer service or sales and less in cost cutting than was proposed in their original PMI plan. Or, it may mean holding back on some personnel changes until their knowledge becomes your knowledge.
So, go ahead and build that plan. And take the time to review it in the light of critical new information a month or two after closing.
* Publilius Syrus, who made his way in Rome with the art of the aphorism, lets us know that the sentiment has been around for a long time: “It is a bad plan that admits of no modification.” More recently, Prussian General Helmuth von Moltke is famous for observing that “no plan survives contact with the enemy.”