Whether organizations involved in merger and acquisition (M&A) activities have been fortunate to be among the 20 percent whose deal objectives for synergies were successfully met, or among the 80 percent that failed in that regard, one fact rings true for the CFO and his or her team: “There will be significant post-merger clean-up work to get the books and records stabilized.” The level of effort will be even greater if the books and records of the acquiring company or those of the target were in poor shape to begin with, or if either company faces the M&A event while in the midst of an ERP system change, a move to the cloud, a robotics implementation or some other technology initiative. Hence, we ask, “Why not plan for the expected?”
Here’s what finance departments are sure to encounter during an M&A event:
- Resources will be spread thin during the integration, resulting in cut corners, attrition of good staff due to burnout, and increased breaks in controls.
- Training the target’s accounting staff on the acquiring company’s systems and processes may go slower than expected and may not succeed in bringing them up to speed quickly enough.
- Change control will be focused, at best, on critical path milestones, not on Level 3 and Level 4 processes where controls are essential for operational efficiency.
- The acquirer’s best people will take their eyes off their current activities to address bigger issues, more than periodically, and rely on junior, less experienced staff for daily tasks.
- There will be stronger-than-usual seasonal strains on all resources during periodic events like the quarter-end, the holidays, spring break, summer vacations or other ebbs and swells that occur during the post-merger integration period.
- There will be resource-bleeding in-flight initiatives that go on even if common sense dictates they should be postponed or cancelled.
The situations described above are not the cause of post-acquisition pain but merely its symptoms. The root causes are insufficient integration readiness planning, urgency to meet articulated milestone dates, and underestimation of the scope and complexity of the deal accompanied by insufficient budgets and unrealistic time frames (e.g., many post-merger activities can go on for years). Add to these pressures the natural tendency of executives to push to realize the widely promoted wins as quickly as they can, and a picture of finance post-acquisition chaos emerges complete.
To avert the scenario above, finance and accounting leaders should first expect it, and second, be prepared for it.
Let us share a memorable real-life tale concerning the cutting of a dangerous corner in the interest of time: The acquirer pulled the balances from the acquired company’s books and loaded them to its ERP system, without understanding that not all transactions had been booked. The team had taken this approach to save time and trusted that the acquired company had cleaned up its books before the deal – even though they knew that the best (but much more protracted) practice is to import not just the balances but two-to-three years of the acquired company’s transaction details. And then the skeletons fell out of the closet.
The adage “you don’t know what you don’t know” has abundant applications in the world of mergers and acquisitions. Even if the acquired company has a track record of success and a great reputation, there are often, if not always, surprises in their books. Even if the acquired company’s team is receiving generous retention bonuses, many team members know their jobs will be going away. Their focus will naturally be on their own futures, and their work may suffer. There may be checks stuffed in drawers, un-updated balance sheet accounts, etc. The acquiring company might think it is experiencing a smooth process, when things are dreadfully wrong under the surface.
This is the type of situation when a company will want finance and accounting resources who have lived through an acquisition or several and know first-hand where the hazards are likely to be. These resources can pinpoint the trouble areas and rapidly plan and execute the work required to mitigate them.
An even better approach is to leverage the expertise of a partner who has been through enough mergers and acquisitions to have a post-merger integration playbook, and who can help mitigate the inevitable challenges of the integration period. Mergers and acquisitions go through a well-established lifecycle (described in Protiviti’s M&A Playbook), and with expertise and capabilities strategically deployed across the lifecycle and access to a pool of diverse operational skills, companies should be able to avoid most problems before they arise.
An ideal finance and accounting integration team should have the resources and capabilities to perform the following:
- Provide specialized resources to assist with integration readiness planning and confirmation due diligence
- Have a documented understanding of the target’s finance and accounting talent, processes, systems and vendors
- Provide backfill support for back-office operations
- Deploy software tools for analysis and project management efficiency
- Have representation on the Change Control Board during integration
- Provide review and approval of the business-as-usual transition plan
- Conduct a “lessons learned” workshop to pull out key insights from the integration and update the M&A continuous learning database
Finally, a best practice is to have an ongoing relationship with an M&A partner firm before they are needed. Ideally, the firm should be acquainted with the organization’s operations and culture in advance of urgent demands. This is especially true in the post-integration stage, when key resources may have already departed, taking institutional knowledge with them. We will address the turnover challenge in a subsequent blog post.
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