Executing pre-close homework is the most critical factor to a successful merger or acquisition for manufacturers and distributors (M&D). Private equity investors and strategic acquirers know the financial risk of a failed investment is much greater than the transaction costs incurred to perform adequate discovery and pre-close planning, so it is beneficial for M&D companies considering acquisitions to review experiences from successful transactions on a consistent basis.
We recommend several pre-close steps for M&D acquirers to allow a prosperous integration, in hopes of circumventing the unforeseen technology, operational, or business costs that often block companies from achieving their investment goal and generating the intended return.
To set the right tone for your pre-close phase, your first assignment is to define the overall strategy for both the acquisition and integration phases.
Choosing an Acquisition and Integration Approach
Defining an acquisition approach will help protect assets and generate a better ROI later on. Acquisitions are frequently a means to achieve an organization’s strategic objectives, especially in the increasingly competitive M&D market. Therefore, growth through acquisition can be pursued for an array of reasons, such as geographic expansion, beating out competition, or filling a gap in product, services, or prices. The operational integration conducted post-close should lead to cost reductions in several key areas of M&D including the supply chain, manufacturing or service operations, back-office, and distribution functions.
Early on, the acquirer should clearly state which strategic assets, such as core competency and expertise, production capability or customer base, should be leveraged and protected in order to generate the greatest return. It is important to hammer out the details in an “investment thesis” to ensure that all involved parties understand the principal reason for the acquisition. Acquirers can then validate the transaction’s intent during the diligence phase.
Next, determine an integration approach that highlights the key areas of concentration. Drafting a general outline will help gauge the amount of effort required for integration; this then focuses the evaluation scope used during diligence. For example, a collaborative approach that allows experts from both organizations to combine practices is appropriate for “merger of equals” transactions. A more direct method, however, is better suited for smaller-scale, add-on acquisitions.
The investment thesis is the foundation of the integration approach regardless of the transaction type. If the thesis shows that significant cost savings can be achieved, then the best tactic is one that detects and capitalizes on expense-saving opportunities. A strategy that enables relationships and cross-selling will better support a proposal that deems the distribution network and cross-sales as primary sources of profitability. Additionally, any anticipated earn-out clauses should be closely monitored so they are parallel with the integration approach.
Establishing a strong diligence foundation
After defining your acquisition and integration strategies, M&D companies can shift into the pre-integration, operational and IT diligence phases with the prescribed fundamentals in place. With any major project, success begins with having the right talent.
Particularly for businesses that aren’t “repeat acquirers,” trying to realize all of your goals can be challenging even when multiple collaboration opportunities exist. Building diligence and integration teams with cross-functional industry and operational expertise may help combat common obstacles such as organizational know-how, resource capacity, and M&A leadership.
Manufacturing operations are central to M&D organizations and need be reviewed closely during the due diligence evaluation; however, something like a third-party warehouse location may not require a closer look. No matter what the main offering is, your diligence plan needs to be angled towards the primary value drivers and sources of risk within the transaction, as dictated by the initial integration vision. Adopting a plan that identifies collaboration potential beyond these areas is also smart in case unexpected risks surface.
Another must-do task is to identify closeted critical business issues or risks, thereby minimizing their potential negative financial impact. Doing so requires selecting employees and advisors to evaluate all functional and technical areas that will be affected during the integration.
Executing operational diligence
Performing targeted operational diligence is essential to understand what you’re acquiring. This step influences the strength of your integration approach, and helps identify any operational post-close risks. In addition to providing insight into the target organization’s trading partners or overall supply chain, the operations review gives a glimpse into their business processes and M&D capabilities.
A substantial process review allows the acquirer to identify the target’s best practices, resources, similarities, and improvement areas, regardless of whether the plan dictates total integration or upholds separate facilities. Operational diligence helps to piece together integration cost estimates along with revenue enhancement and cost take-out opportunities.
This review can be performed both at a qualitative and quantitative level, but the accessibility and time to close will determine the ability to conduct a full quantitative analysis, which can be difficult to realize without sufficient data. Still, the qualitative opinion can be validated with evidence gathered through meetings with subject matter experts, management and supervisors in all departments. This context can still identify cost takeout potential, estimate integration expenses, and plan post-close initiative priorities.
Perform IT Diligence
Investing in comprehensive IT diligence is often overlooked, despite how much it increases your chance of realizing integration goals. Information technology enables core processes and aids in providing timely and accurate data for manufacturers and distributors, even though they are not always considered “high-tech.” Mobility, online marketing, social media, e-commerce portals, and data analytics are all examples of key technologies that should be reviewed during this phase.
While completely combining infrastructure is not necessarily the main goal of integration, creating joint visibility into sales and marketing activities, producing combined financials and identifying sourcing and procurement commonality are all substantial elements of the post-integrated enterprise. Technology integration steps including data migration, systems consolidation, and establishing shared business applications and infrastructure should be completed in this phase as well.
Also extremely vital to M&D operations are planning and execution systems. These include the front-end engineering tools and product configuration applications that are fundamental to running the company’s operations, and forecasting, planning, and scheduling software (which warrant review and even enhancement with ERP modules or commercial packages). Additionally, warehouse management systems, quality assurance and transportation solutions should be evaluated.
Finally, allot a significant amount of time to (frequently glossed over) physical infrastructure exercises, such as consolidating phone systems, networks, data centers and email. Omitting any of these IT diligence discovery and planning steps can stand in the way of realizing the transaction’s overall goals outlined in the initial investment thesis
Streamline the integration workflow
The next step toward a successful M&A outcome is initiating pre-close integration planning. Due to the typical length of M&D supply chains and their broad distribution networks, this planning should be done well in advance, with clear outlines for “Day-1” direction stakeholder expectations. This pre-close planning streamlines internal and external communication timing, especially Day-1 communications, which are essential to a lucrative integration. Establishing an organizational communication flow and integration management structure are the top priorities during this phase.
The first tasks are to finalize the integration management office (IMO) and assign roles such as integration steering committee members, workstream team leaders, and IMO director. Having a clear contract that explains the approach, scope, deliverables, resources, and timeline expectations will offer more visibility into the integration process.
Each workstream must complete financial planning and analysis to further detect and obtain cost-saving or revenue-enhancing opportunities. The IMO will be responsible for consolidating the workstream targets (confirming there is no overlooked synergy potential), setting the integration budget and managing anticipated costs. In addition to these Day-1 duties, the IMO should map out a 100-Day plan that accounts for key assurance among the teams. This plan will lend transparency into the resources, tasks, milestones, deliverables and timing for each team.
Withholding any of these steps or best practices may leave your M&A integration program susceptible to larger risks, but with a precise plan of action, evaluation, and discovery, a successful transition is easier to accomplish. Completing these pre-close activities will propel your organization towards a profitable post-close integration effort that capitalizes on all of the opportunities anticipated in your original investment thesis.
About the Authors
Tom Ewers is senior director of the Minneapolis office with the management and technology firm West Monroe Partners. He is responsible for expanding the firm’s M&A advisory services into key local industries – particularly healthcare, manufacturing and distribution, and private equity – throughout Minnesota and the upper Midwest as well as coordinating services for national and international clients with operations in that region. Roland Wilson is a director in the firm’s M&D practice. He has more than 20 years’ experience in industry and business consulting. He focuses on helping clients achieve post-merger integration synergies and/or business transformation objectives. Visit West Monroe Partners at http://westmonroepartners.com.