Made in heaven? Making a success of post-merger integration

Even the most promising mergers can fail if proper attention is not given to the integration process. George Bull, head of the professional practices group at accounting firm Baker Tilly, discusses the pitfalls and how to avoid them.

The benefits of a successful merger are many and varied. Merging with another firm allows critical mass to be acquired immediately, thereby creating a platform to strengthen presence within certain markets or sectors. It also enables two firms to diversify their range of business offerings, boost their presence in certain geographic locations and recruit individuals en masse.

However, while a merger is undertaken to drive both growth and profit, poor execution can lead to the venture ending in failure. The merged firm may indeed be substantially larger, have firm expertise that is collectively far superior and offer a broader range of services in more locations. Yet, despite this, the resulting organisation may find its growth stunted and profitability reduced, its identity confused and – worst of all – that it has no clear strategy and direction.

Pre merger

This article aims to look at the importance of a robust and carefully considered integration plan, which is essential if the two firms are to become one successful unit. However, before looking at the numerous areas that this plan should address, a word of mention should be given to the pre-merger planning procedure, for no matter how comprehensive the integration procedure post-merger, firms that are not fundamentally compatible will never properly fuse. Even prior to formal due diligence, running various checks at an early stage will confirm that the two firms are able to merge, both on a business and cultural level.

The potential merger partner should be thoroughly researched to establish that both firms share the same business dynamic and common business goals.

Firms should have a clear vision of how they will integrate and what synergies are shared between the two firms. One of the main causes of merger failure is a lack of synergy between organisations and a poor business fit.

Having established a strong business match, due diligence should be carried out to ensure that the target is financially and structurally sound, including an assessment of financial performance as well as other aspects, such as staffing levels, organisational structure, systems and procedures employed, and client base.

In-depth financial checks on the ‘other side’ are essential because a firm may boast a sterling reputation and sound historical performance, but it could be harbouring any number of hidden extras such as onerous leases, annuity or pension payments to former partners. Unearthing such flaws and inconsistencies once the merger has already taken place can be enough to throw the entire venture off course.

A surprising number of firms neglect to perform the necessary due diligence on the firm with which they intend to merge, with some failing to perform due diligence at all. This is a mistake.

The scope of the financial due diligence will depend on the size of the respective firms, but should typically involve an assessment of the following:

A review of financial processes, including billing performance by partner/director, comparing actual to budget on a monthly and year-to-date basis;
The firm’s debt control and cash collection: this will extend to the payment of suppliers and handling any client money;
The firm’s risk-management processes;
The firm’s assets and exposure to various liabilities;
Recovery rates on client work: the amounts of time charged, billed and recovered, and all-important indicators of whether sound, firm-wide procedures are in place.

A thorough assessment of the firm’s financial health will soon sniff out those firms looking to merge for the wrong reasons. Those that are attempting to mask poor profit performance or other financial problems will soon be exposed when their finances are analysed.

Three key ingredients

A botched merger is often marked by a failure to effectively blend three fundamental elements of the two firms: the business offerings; people; and the different offices spread across a variety of locations. Regardless of how potentially attractive a merger may appear, it will not be a success unless these three elements are carefully and thoroughly integrated. A stringent integration plan must therefore be put in place to ensure processes run smoothly, both during the merger itself and in the aftermath.

Blending the business offerings

Strategic fit is key. Prior to the merger, careful assessment of the business on both ‘sides’ should establish that their offerings complement each other. However, the actual integration of the two businesses must be carefully engineered, which requires corresponding departments to be moulded into one group. Two departments in areas as diverse as property, litigation, corporate finance or family law must be welded into one. It is often the case that the merging firms will have similar service offerings and that the departments will be comparable in their structure. In theory, the bringing together of two corresponding groups should be a simple operation.

Nonetheless, certain issues must be addressed, most notably establishing clear leadership for each department. Ideally a lead figure from one of the two firms should be chosen and complemented with an equal number of partners, managers, directors and support staff from both firms. Reorganising partners and staff within the new unified department is arguably one of the most effective ways to enhance integration and break down barriers. If carefully undertaken, joining common areas of expertise should produce a form of hybrid vigour, generating new vitality in merged departments. However, nothing will be achieved without patience and flexibility.

It may be that certain client services are not common to both firms, in which case the simple amalgamation of departments is not possible. If the merger was undertaken to diversify offerings, service lines that were particular to only one firm may remain and be built upon in the future. However, not all existing service lines may have a place in the firm’s strategy and certain services may be discontinued. This will require the reallocation, or possibly the departure, of partners and staff.

Location

Given that a desire to increase presence in certain locations is a common motive for a merger, the integration plan must also address the new geographical structure of the merged firm. While geographical expansion is a valid and workable objective for the venture, a failed merger is commonly characterised by a firm that has been over-ambitious in pinning flags on the map, but failed to actually integrate the different offices. The tell-tale sign is that the banner of the new name spreads across the firm as a whole, yet each office effectively operates as before, with the individual units both characterised and at the same time separated by clear geographical boundaries. Wherever possible, partners and staff should be deployed throughout the new locations and regular firm-wide meetings held in different offices. Bringing together representatives from across the entire firm enables each office to see their function as part of the complete picture. This encourages the replacements of old mindsets and helps offices address their role within the merged firm.

A merger may result in a firm with more offices than the management structure can successfully handle. To resolve this, a firm may organise itself as departments that operate across the entire firm. This effectively transfers responsibility from the office managing partners to the department heads, although often one sees a ‘management matrix’ with local offices and departmental elements.

People

A firm may appear to be perfectly integrated from the outside. However, it is the people who make or break the venture. They will bring the two firms together and drive the post-merger performance. As partners give direction to the process, it is essential that the two strands of partners are successfully integrated if the merger is going to succeed. The alignment of partners should be a clear part of the integration plan.

Careful integration is particularly important where partner roles are to change in the new structure. This is a sensitive process and should be handled with great care to ensure partners move to a specialism suited to their respective skills and experience. The realignment of partners is a procedure that is comparable to the recruitment process, with careful assessment of a partner’s attributes, client experience, level of seniority and growth potential, which have to be matched with the chosen area of work. This is important both for the business, to ensure that skills are best utilised, and also for the partner who is being given a new function in an unfamiliar context.

All mergers will inevitably involve a degree of reshuffling, a process that if not handled diplomatically and delicately can lead to disgruntled partners. This in turn can develop into resistance to the merger or have a draining effect on morale. Such sentiments can quickly permeate throughout the partner base and down through the rest of the firm, ultimately having a serious impact on the merger’s success.

Whether partners are relocated to reflect the new service lines or the new geographical structure, the integration plan must be laid out well in advance of the merger taking place. So that all partners are clear about their role, this plan must be supported by strong and timely communication.

Unexpected or unwelcome announcements made during the merger process or, worse, post-merger can have an unsettling effect and knock the merger off course.

Team meetings and firm-wide updates, although time consuming and at times exhausting, should be conducted on a regular basis so that everyone is clear about their new role. Strong and frequent communication dramatically boosts the chances of operations running smoothly from day one. Meetings should be intertwined with informal events so that partners also have the opportunity to mix socially.

Aligned culture

While great care must be taken to integrate partners within the merged departments and across the new locations, it is also vital that the partners themselves are committed to the integration process. While they may fully grasp the firm’s new business strategy, its position in the marketplace and its new geographical structure, they must also fully buy into the culture of the new firm. In practical terms, this means supporting the venture, being absolutely convinced of its merits and being prepared to drive its potential for success. Partners are often guilty of openly professing their support, but privately not being in favour of the merger. Only if there are strong grounds for believing that the two firms will be realistically able to work as one, should merger prospects be considered. Will the merger sceptics concede and be open to work as part of a new extended partnership? Or are they the type of partner who will always refer to themselves as an ‘ex’ of the previous firm, while persisting to view its merged counterpart as the ‘other side’? If the merger is to succeed, time may have to be spent supporting the unshakeable sceptics. Not only must the culture of the unified firm be clear from the outset, but partners must also show unstinting support for and clear understanding of the merged firm that they represent. Clients will pick up on any lack of harmonisation and find this unsettling, soon to abandon the firm if their concerns are not addressed.

The integration team should be aware that there may be some conscious resistance from partners to integrating with their new peers, bearing in mind that mergers often occur between firms of similar size and that the two may previously have been direct competitors. Integration between age-old rivals now being forced to eat at the same table can be a challenge. Any latent rivalry must be eliminated if the merger is to succeed.

The integration team

Clearly, the process of integration presents a wide range of business and cultural issues. Firms would be well advised to appoint a merger or integration team, which will be constituted from key players of each firm to guide the business through this period. All aspects of partnership integration, from both a business and cultural point of view, must be backed by clear leadership, so the integration team should be formed at an early stage. The team should consist of partners from both sides and must be carefully selected – bringing together two leadership teams opens up the prospect of egos clashing and it is vital to assess the personalities of key players. It is crucial that they are able not only to gel, but that they are happy to share the limelight.

Protocol and training

Having aligned the two businesses, assessed partner skills and positioned them in the merged structure, there are numerous practical issues to address, which will have an immediate impact on everyday operations.

Each firm will have their own administrative practices and procedures. Establishing a single system for the new firm, and training partners and staff accordingly, is a core part of the integration process. Procedures such as filing and maintaining working papers should be agreed. Consistent methods for billing are also vital – this includes debt recoverability, raising fee notes and cash collection. The two firms will also have different IT systems, one of which should be retained and the necessary training programmes instigated. A detailed plan of new protocols and training should be drawn up and followed closely to ensure minimum disruption to partners and staff in the newly formed organisation. A key function of the integration team is to ensure the smooth integration of new, agreed systems and to provide necessary training. Attention to detail is one hallmark of a successful merger.

George Bull is head of the professional practices group at accounting firm Baker Tilly. For more information, contact Teresa Corcoran at teresa.corcoran@bakertilly.co.uk