Acquisition and integration – frequent headaches I.

Acquisition and integration – frequent headaches I.

„You either succeed or learn” says the popular statement after Nelson Mandela. As mistakes and failures are part of the learning process, but nobody likes them, it is easy to agree, though there might be some question marks when it comes to the price tag…

Not surprisingly, majority of the attention in an acquisition transaction is given to the elements such as the purchase price, liabilities, indemnities, etc. However, there are some other issues that might not seem that much of a hassle at first glance, but are capable of providing the long term impression of a failure, if things go wrong in practice. What are these?

Transitional service agreements. Sound boring and below-the-line issues despite covering all such contracts as IT infrastructure, telecommunication, car lease, HR related services, accounting, cleaning, etc., not to mention energy supply, security, marketing and communication, etc.

Do not overemphasise the importance…”, „…do not get lost in the details…”, „…we will have plenty of time to fix it…”, „…concentrate on the important things….” Do these comments sound familiar? Or, have you ever said any of those? Have you ever thought about: how much is ‚plenty’ or ‚enough’? Or, how relative ‚important’ is?

We had the honour both to observe some companies where integration process had been going on, as part of our engagement to “make some order” after an unsuccessful internal trial-and-error attempt and to listen to executive people literally regret not to be more careful before.  Why?

Nature of acquisitions. Acquisition transactions are conducted by either external service providers, or by dedicated internal experts, or a combination of these. Such experts are usually kept separated from the ‚business as usual’, not to „disturb” the operation, the core activity of the acquirer.  It also means that the acquisition team might have hardly any knowledge on operational things, and those working in the operation or involved in the core activity of the acquirer might have hardly any knowledge on how their responsibilities would be affected. Why do not they get involved into the process then?

Contradictions of involvement. Some acquirers think that they do involve the right experts. Some try to avoid operational experts to dominate the acquisition team, others to avoid providing early warning for people who might be affected and thus might have different interests (or they perceive so).

Who is right? Difficult to answer, as all of them and none of them at the same time.

As long as humans are involved, they tend to have their own agenda, regardless of the transaction perimeters, which together with the natural imperfections of information availability, can turn out to be detrimental. Provided that executives are less likely to have a degree in psychology besides their core profession, the most reasonable choice seems to be to postpone the integration and the change management issues until the acquisition is completed, which will trigger a kind of a consolidation request internally, by its nature. But is this really the right way?

Transition forever. Hopefully, by now, the impression has been made how easy it is to get lost in integration related difficulties and stress, and lose sight of the original agenda: to fix certain services to support the core activity and the operation of a company. Transition service agreements have their role in the process.  Proper agreements can help a lot, while the inadequate ones or the complete lack of them would lead to an impression of failure, as mentioned before. But how to make the right decision?

Nature of integrations. Takeovers, such as acquisitions, are all different but all following some patterns. In a situation, where the issue is purely the change of control, and services are needed in the form and content as previously, the exercise is relatively easy. You “just” have to have the right checklist to go through and sort out all those issues related to such clauses in the existing contract portfolio. Needless to say, but boxes on this checklist have to be ticked before signing, to avoid surprises e.g. in connection with insurance and banking services, etc.

More consideration is needed once related party services are concerned (either to be replaced by another related party, this time the one related to the new shareholder, or by a third party). 

Usually, two dimensions are the most important: time span and service content, which are interlinked. In case of a necessary review of the service content, more time is needed, to avoid less carefully considered decisions. However, staying in a contract with a different content than needed (and consequently with different pricing) longer, might also be painful. Needless to say again, that in certain cases, where compulsory contracts are concerned, the existence and continuity of them is crucial. What is the solution? How to cope with this?

Right expertise at the right place in the right time. We have come back to the original question of availability and involvement of the respective experts. Provided that services are the same as products in the sense of being means of performing an activity, we must not go further than with some commonly used examples. If you happen to be a regional representative, driving around on the daily basis, possession of a suitable car seems to be a rational decision, while to be a farmer having daily routine activities on the fields and an occasional need to go the town, a taxi or rent a car might be the reasonable solution. In case of living in a house with a garden, buying a lawnmower seems to be rational, although buying a special woodcutter machine for the unexpected case of your largest tree being hit by thunder, and you becoming obliged to cut it to avoid accidents, might be unreasonable. You might not be able to use it without the necessary practice, anyway…

Simply applying the analogy for the external consulting services, the conclusion is self-explanatory: in case of being an enterprise with an aggressive growth strategy, mainly through acquisitions, having an internal expert team might pay out, while looking at an investment or divestment decision rather as a one-off issue, buying the necessary expertise might be the right decision. But what if there are some investment opportunities under consideration, notwithstanding that in total would not be classified as a huge amount?

Consideration and calculation. Sounds simple, nevertheless, when it comes to the associated figures, the reliable sources become key. Disclosed price lists and memories of friends and business partners might be a kind of a reference, in case we are sure that we compare apples to apples. Should the slightest ambiguity appear, it might be better to turn to professionals, who may not only help us to find the right references, but also to think over what exactly we would need to calculate.

Trusted adviser. Instead of entering into the long discussion about consulting and advisory being art or rather science, here are some questions that almost surely cross your mind: who should I trust, how to find the right one, how can I judge the outcome of the services, etc.? Choosing a consultant or an adviser should not be more difficult than buying a car or the aforementioned gardening instruments. Of course, you can always follow the commercials coming to you wherever you go, however, it might tell more about the financials of the service provider than anything else, and you might draw conclusions on the price tag when it comes to buying their services. You usually think over what you want, and how much energy, effort, and other resources to invest into achieving it. After this, you usually search for some seemingly relevant opportunities and compare them. You take note of the price, features, delivery times, outlook, reliability, opinions of others, ask the sales personnel, take a test period, etc., but finally your gut feeling helps you to make the right decision.

Why not to follow this procedure when looking for an advisor? There is no reason… Take some time to browse around on the market, check the offered services, track record, take impressions, approach them, ask for an appointment and meet them. Those, who are really professional, will certainly find time for a personal meeting as well, because they know that first impressions, working chemistry might be the key to trust, once professionality and business ethics has been proven on the relevant field of expertise. 

The headaches. Hopefully, by now, an impression has been provided on the complexity of the integration related issues, and you expect details with regard to the particular service areas, where such headaches might be expected. As was mentioned already, all transactions are different, such as the business entities affected, but it does not mean that some examples or case studies are not worth being considered. The more information and experience gathered, even if not own ones, the better chance to make the right decisions, when become necessary.

We decided to start a series, and go a bit deeper into those questions where experience of others might be helpful for those who are just about to face similar situations.

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