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Greater Than the Sum of its Parts: Keys to Post-Merger Integration
by Francisco Colon Transaction Advisory Leader Welcome to the Cannabis M&A Field Guide from MGO. In this series, our practice leaders and service providers provide guidance for navigating M&A deals in this new phase of the quickly expanding industries of cannabis, hemp, and related products and services. Reporting from the front-lines, our team members are structuring deals, implementing best practices, and magnifying synergies to protect investments and accrete value during post-deal integration. Our guidance on market realities takes into consideration sound accounting principles and financial responsibility to help operators and investors navigate the M&A process, facilitate successful transactions, and maximize value. ~ Imagine a row of dominoes: every block between the first and last must be positioned perfectly, or else the last domino never falls. Think of M&A transactions in a similar way. The integration of the two entities is both the ultimate goal, and the final phase. But every step between beginning and end must be aligned to facilitate that final result. If there is a failure or distraction at any stage, the whole venture can fail. This analogy is important because, all too often, we see the integration phase of an M&A deal treated as an afterthought. When, in fact, it is as important as any other stage, and the considerations of integration should play a role throughout the M&A process. Many cannabis and hemp industry M&A deals are driven by the desire to become vertically integrated, which in some cases, means an entirely distinct business unit will be brought into the fold (e.g., a retailer acquires cultivation/manufacturing facilities). The greater the fundamental differences between Acquirer and Target company, the greater the task of integration. As always, early planning and focused communication represent the only proven and viable path forward. Integration planning is unique to every organization, and every M&A deal. In the following we will provide the broad strokes of considerations that both sides of the transaction should have in mind throughout the M&A process.
Integration Basics: Big Picture GoalsOn its face, integration is simple: two companies are coming together to form a combined entity. When structured and executed properly, the ultimate goal can, and should be, making the final entity greater than the sum of its parts. To achieve this, both parties should focus on four key goals: 1. Maintain Momentum – Acquirer and Target company must not allow the M&A deal to significantly disrupt existing operations. Focus should be on a smooth transition that does not interrupt either party so the whole enterprise gains momentum. 2. Build On Each Other – Synergies and opportunities for value creation are typically the drivers of an M&A deal. Never lose focus on these dynamics and lean into them throughout the integration process. 3. Align Cultures and Optimize Organizational Structure – Often culture integration is an afterthought. However, the deal is just the beginning step, what comes after is integration of two different company styles. Establishing shared values and vision will translate into common organizational goals and ultimately faster success. 4. Leverage Efficiencies to Move Forward – The Acquirer is making the deal for a reason, focus on these strategic and tactical advantages to start maximizing value at the onset.
Dedicated and Early Integration Process PlanningThe first step for ensuring a successful integration is to create a dedicated integration team that will devise a road map for delivering the synergies and efficiencies that were identified, and drove, the M&A deal. The team, as well as the road map, should be focused on delivering the expected value and transformational opportunities. The road map should describe key activities and decisions throughout essential stages: pre-acquisition; first day following acquisition; weekly goals and metrics; 100 day goals, etc. This road map should address the following:
- Sustaining ongoing operations for both the acquiring and acquired entities;
- Satisfying existing customers and business relationships;
- Identifying the critical decisions that must be made and including when they must be made;
- Steps toward retaining essential employees;
- Maintaining labor relations and productivity;
- Integrating distinct corporate cultures
- Organizing the processes for delivering the expected value to shareholders.
Managing and Avoiding Personnel IssuesA certain amount of personnel turn-over can be expected following any M&A deal. A lack of communication can cause distrust and dismay among Target company staff, and even among the Acquirer’s ranks. That is why a proactive approach to integrating the Human Resources (HR) function, and managing personnel, must be a high priority during the integration process. The adjustments that occur in an acquisition can be significant, including changes in leadership styles, decision-making practices, organizational structure, and reporting relationships. All of these modifications can disrupt productivity, negatively impact morale, and decrease employee engagement. To help prevent these negative consequences, an HR integration plan must be established in advance and should include the following steps:
- Form a dedicated HR integration team — A component of the integration team should be solely responsible for managing personnel issues. They should be focused on mitigating cultural differences, directly and regularly communicating the change process, and retaining and motivating key employees.
- Communicate upcoming events to all affected employees — Rumors spread rapidly and employees are often anxious due to the perceived job insecurity and uncertainty of their position in the acquiring company. Head off any cancerous rumors by communicating upfront with employees about the upcoming changes due to the acquisition.
- Address employee concerns regarding retention — The HR integration team must examine the employment contracts of all staff for “change of control” clauses as well as employee stock options. They should then develop and communicate a plan to address these concerns.
- Assessing corporate culture — The HR integration team must anticipate cultural challenges and take steps to integrate the two cultures. For example, one company may be driven by a sales mentality while another may be focused on innovation. Also, decisions in one company may be top-down while the other may be used to more participative decision-making. An integrated culture approach should be considered to mitigate the shock effect of the merger on the Target company’s staff.
- Blend HR policies and procedures — This task can be resource and time-intensive, and include stages of legal review. But it is important to make sure all staff of the new entity understand the employee handbook, their benefits, and all other HR functions. Areas of focus include updating and communicating performance management procedures, training and development opportunities, and developing a shared intranet site.
- Generate a strategy for continuance of benefits — A major point of concern for staff of the Target company will be changes to benefits. In the due diligence stage, the Target company’s benefit packages should be assessed and a pre-integration plan must be put into place that limits disruption of employee health and retirement benefits.
Making systems and processes oneOne of the most essential and challenging segments of the integration process will be coordinating and implementing system changes. Particularly, in regard to Information Technology. Technology is pervasive, touching virtually all aspects of a company’s operations, and many of these functions are mission-critical. Because IT is the common denominator among all corporate departments, successful integration is critical to the success of the entire operation. The following are the key steps to take when integrating IT functions:
- Form an IT Steering Committee – Like the HR integration team, you should also designate a sub-group of professionals focused solely ensuring the integration of all IT operations.
- Align corporate governance – Internal controls are essential in any industry, and cannabis and hemp are no exception. The Acquirer will have their own systems in place and the relative strength and compatibility of the Target company’s own system should be a focus of the due diligence process. The next step will be to combine or update the new entity’s policies, practices, and functions.
- Implement applications and data system – In an ideal environment, the Acquirer and the resulting entity from the M&A deal will share a core information system. Achieving this will require a period of aligning processes and controls and consolidating and eliminating redundant functionality and platforms.
- IT organization and structure – Key IT functions and responsibilities will need to be combined, assigned, and reorganized to support the mission, vision, and strategy of the combined organization.
- Establish security and privacy rules – The new, combined IT environment will need clearly defined policies, standards, and responsibilities for ensuring appropriate handling and protection of company data across the organization.