Finishing strong: Aligning post-close integration and operations
The close of a utility merger typically caps a grueling nine- to 12-month process. But the hard work of integrating the two companies is just beginning. After a merger, management needs to balance the activities necessary to complete the integration with those that ensure smooth ongoing operations. This is no easy task, and underestimating these challenges can have unwelcome consequences. Hewing to the original intent of the pre-close integration process is management’s best chance to achieve the deal’s full, intended value.
Finishing strong Aligning post-close integration and operations
Dallas Tom Flaherty Senior Partner +1-214-746-6553 tom.flaherty @strategyand.pwc.com Donald Dawson Partner +1-214-746-6503 donald.dawson @strategyand.pwc.com Todd Jirovec Partner +1-214-746-6525 todd.jirovec @strategyand.pwc.com Earl Simpkins Partner +1-214-746-6571 earl.simpkins @strategyand.pwc.com
DC Joseph Vandenberg Partner +1-703-682-5710 joseph.vandenberg @strategyand.pwc.com
Munich Walter Wintersteller Partner +49-89-54525-540 walter.wintersteller @strategyand.pwc.com
About the authors
Tom Flaherty is a senior partner with Strategy& based in Dallas. He specializes in power and gas mergers and acquisitions, as well as strategy, operating model design, and performance improvement. Todd Jirovec is a partner with Strategy& based in Dallas. He specializes in corporate and business unit strategy and mergers and acquisitions for the utilities industry. David Mondrus was formerly a principal with Strategy&.
This report was originally published by Booz & Company in 2012.
The close of a utility merger typically caps a grueling nine- to 12-month process. But the hard work of integrating the two companies is just beginning. During the post-close period, executives need to put preclose ideas into action to realize the vision and value of the deal. What’s more, this integration needs to occur without unduly disrupting daily operations. Management needs to balance the activities necessary to complete the integration of the two companies with those that ensure smooth ongoing operations. This is no easy task, and underestimating these challenges can have unwelcome consequences. For one, the integration may fall short of expectations, with the new organization never attaining the full financial value of the deal. Second, if integration activities overwhelm and disrupt ongoing operations, business performance can suffer. Ultimately, success depends on sustained coordination and collaboration between the post-close integration and operations efforts. As other companies have come to learn, there are no second chances to execute an integration process. Management should constantly weigh the unique requirements of integration and operations without succumbing to deal fatigue and making suboptimal decisions, such as delaying or abandoning implementation initiatives set by the pre-close integration team. Hewing to the original intent of the pre-close integration process is management’s best chance to achieve the deal’s full, intended value.
Staying the course
A wave of utility mergers has washed over the industry during the past two years as more than a dozen companies have sought greater strategic and financial flexibility through some combination of strengthened balance sheets, increased liquidity, clearer portfolio coherence, and lower cost profiles. However, as compelling as these objectives may be, their attainment is not ensured and they make up only part of the merger’s proposed value. To extract the expected value from the deal, management needs to ensure that the combined company is also operationally successful — a process that depends on the persistent pursuit of merger objectives long after the official close date to create an integrated, cohesive company. It’s a process that literally takes years. Of course, no merger in any industry is easy, but utilities face an additional hurdle: an unpredictable, lengthy regulatory process. Because utility deals must seek federal and state agency approvals, the time period from a deal’s announcement to its close can be nine to 12 months, much longer than the three to four months typical for other industries. This often creates acute deal fatigue on the part of the integration team involved in the process. By the time the deal finally closes, team members are desperate to hand the baton off and get back to their “real” jobs. Once they close the deal, companies have two choices — keep the integration process intact or turn it over to operating management. Surprisingly, management often chooses to fully unwind the formal integration process and push responsibility for completion to line management. This decision limits the collective executive management team’s line of sight into integration progress and increases the risk of not attaining planned outcomes. The pre-close integration team cannot step away completely or prematurely. In reality, when the transaction closes, the hard work is just beginning. This is when the integration process goes from concept to implementation, when the picture imagined by the pre-close team must be made real and unforeseen complications need to be addressed. The handoff from pre-close planning to post-close integration and
By the time the deal finally closes, team members are desperate to hand the baton off and get back to their “real” jobs.
alignment with operations has to be well-timed and smooth. The quality of this handoff sets the stage for the coordination between post-close integration and operations that is necessary to capture the deal’s full value and support ongoing business performance. This close collaboration continues, in parallel, long after the transaction officially closes. In fact, a premature declaration of success and poor handoff from the pre-close integration team leads to the four deadly sins of integration (see Exhibit 1, next page): a lack of full implementation follow-through; a willingness to settle for easy outcomes, rather than stretch for results; a premature transfer of full responsibility to the business areas; and a reversion back to separate, rather than common, operations. Avoiding these deadly sins takes management discipline, along with a keen appreciation for both the level of complexity remaining in the integration and the always looming potential for failure. A lack of discipline is a frequent root cause of an integration unraveling. Postclose, management can easily get distracted by day-to-day operations while integration momentum ebbs, with the process devolving to the point where people settle for easy outcomes and don’t stretch for optimal results. Senior leaders must be a bulwark against this backsliding. Their words and actions should consistently highlight the importance of the post-close integration process to maintain a disciplined management mind-set.
Exhibit 1 The four deadly sins of integration
Disconnect between planning expectations and post-close operational owner execution
Inability or unwillingness to meet planning targets
Willingness to settle
Failure to bring the separate companies into full alignment
Transfer of signiﬁcant and complex responsibilities occurs too soon
Beyond the close
Aligning post-close integration with ongoing operations is far more demanding than most companies anticipate, and it takes years to complete. Consider the environment in which pre-close planning occurs: Management has not been named, differences between the companies are not fully understood, and operating priorities are not yet defined. An environment with so many unknowns is hardly ideal for shaping and standing up a new organization. What’s more, when pre-close integration planning is under way, all business areas are focused on day-to-day operations; their engagement with and understanding of integration planning philosophies, assumptions, and outcomes are limited. Furthermore, legal and regulatory constraints make some communication and joint execution between the merging companies difficult, if not impermissible. During the pre-close integration process, the merging companies focus on three primary objectives: ensuring readiness for required Day One activities; framing the future organizational and process parameters of the combined business (such as operating model shaping, organization design, process revision, staffing selection, technology platform); and positioning the business to capture identified sources of value. These objectives drive the planning and execution to prepare the combined business for operating as a single entity once the close occurs. They also create the framework for consolidation of the two companies and set the tone for how post-close operating priorities are established. This planning process is intense, and understandably, there is much relief once the deal closes. After all, multiple teams have been engaged for months, and thousands of hours have been spent. However, much work remains to be done. Post-close integration extends beyond the “conceptual” alignment of where and how to integrate the organizations to the actual “physical” consolidation. On the day the transaction closes, the company has a road map for how it wants to integrate. But it can’t get to this end state immediately. Assimilating the affected organizations takes many months. In the meantime, management still needs to effectively operate the business and maintain performance.
Indeed, the effort to get ready for Day One of the merged entity pales in comparison to what is to come after the transaction officially closes. Legal Day One encompasses mandatory activities ensuring that all financial ownership, enterprise governance, regulatory compliance, corporate structure, and market communications activities are completed when the transaction closes. Though they are critical, the number of these legal Day One activities is far exceeded by those relating to operational integration. Across the business, there are multiple operational Day Ones that unfold during the first several months. They address areas such as process design implementation, technology application conversion, benefit plan alignment, staff resource relocation, and asset separation and divestment. Some of these are “long lead” activities and require advance preparation time and a schedule for finalization that can extend for years beyond the close, resulting in staggered, multiple Day Ones. These activities shape the core operating model and define a set of near-term priorities for the integration. A major challenge for management is aligning these integration priorities with operational priorities, given that each has a distinctly different focus (see Exhibit 2, next page). Post-close integration activities are temporary and targeted. Teams drive toward accomplishing specified tasks that are, by definition, project oriented (that is, focused on near-term outcomes). Meanwhile, on the operations side, management is focused on ongoing performance and executing against the business plan, as post-close integration goes on in parallel. These operations activities are comprehensive and continuous and are executed outside the post-close integration process. Management needs to constantly weigh the unique requirements of integration and operations without succumbing to deal fatigue and making suboptimal decisions, such as delaying or abandoning implementation initiatives set by the pre-close integration team. If they cannot balance these priorities, the combined company runs the serious risk of never fully achieving the intended value of the merger from a process execution and operations performance perspective. As other companies have come to learn, there are no second chances to execute an integration process.
Exhibit 2 Competing merger priorities
“Fulﬁll merger commitments”
Sources of tension
“Run the business”
– Stand up the new organization – Build out the new operating platforms – Change the underlying execution processes – Position to capture the value – Drive required change management – Leadership focus – Resistance to change – Evolving business environment – Budget challenges
– Insulate the business from disruption – Preserve the focus on performance – Capture the identiﬁed synergies – Achieve the steady-state model – Execute against stated business strategies
The balancing act
Management’s paramount duty during the post-close integration process is to keep the business stable. Obviously, ongoing operations must continue whether the new company’s foundation is completely laid or not. The dilemma, of course, is that the integration process to lay this foundation is unavoidably intrusive. To assimilate the organizations, integration team members delve into myriad processes and systems. Routines are interrupted and altered, and long-standing approaches may be necessarily modified. These implementation activities require balancing so that the integration effort proceeds, but not in so intrusive a manner that business operations are destabilized. Since implementation cannot be disconnected from the reality of day-to-day business execution, management’s challenge is to harmonize these efforts. This is a tough balancing act. The post-close integration process focuses on five specific objectives: standing up the new organization, building out the new operating platforms, changing the underlying execution processes, positioning to capture the value, and driving required change management. These objectives frame the priorities for integration while also providing a link to the larger enterprise operating priorities. However, even though both integration and operations are driving toward a common end, in reality the integration team’s methods to achieve these objectives can create conflicts with operations. Often, these efforts appear to be at cross-purposes, requiring choices to be made rather than actions to be balanced. The integration team is focused on the detailed “wiring” needed to align the two companies and wants to complete a series of specified tasks and projects as rapidly as possible to accomplish change. Meanwhile, operations is focused on performance and wants to get through post-close integration with as little disruption as possible to keep daily operations stable and the highest priority of the business (see “Maintaining Business Momentum,” page 15). In other words, while the post-close integration focus is on enabling future execution, the focus of operations is squarely on day-today performance and producing results. The challenge is to position the post-close integration priorities in a manner that is consistent with the priorities of operations.
Conflict inevitably arises between the priorities of integration (implementation) and operations (performance), and aligning the two takes foresight and endurance on the part of leadership. Management should resist the temptation to rethink integration objectives or change the direction of the post-close integration process. Revisiting and revising prior decisions will, at a minimum, delay integration and could unravel the framework. In fact, the anticipated value from the deal is at risk if the integration does not achieve planned synergies and other improvements to operational performance. It’s worth repeating that companies learn the hard way that there is no better time than the present to get the implementation right. Ultimately, some conflict between integration and operations is inevitable. But senior executives can take several steps to mitigate conflicts and adverse consequences: • Closely manage the ongoing post-close integration process as if it were a fundamental element of ongoing business execution and not a separate undertaking. • Design the integration effort so that it aligns with business priorities and is not just geared toward hitting integration milestones and sticking to a schedule. • Leverage the integration process to improve the business, not just reshape it. • Give the integration effort the necessary resources to deliver expectations on schedule. • Take advantage of incremental changes, rather than wait for full “flash-cut” change. • Finally, keep the merger’s original intent top-of-mind and drive to achieve the original expectations.
A visible priority
To keep the post-close integration on track, management needs to ensure that the integration process remains visible and a clear priority within the organization, from the executive team on down. There are two aspects to this visibility. The first is to embed postclose integration oversight into the existing governance model. Since capturing the integration’s intended value is critical to the business, it’s logical that senior leadership should directly and continuously monitor the integration’s financial and operational progress through its normal oversight agenda, just as it does other important aspects of running the business. The idea is to work within the established governance structure, not create a new framework for post-close integration oversight that distances the executive team from this process and obscures the line of sight. For instance, the senior leadership team should not simply assign oversight to a steering committee that exists outside the formal governance model. The danger with this approach is that the integration subtly becomes viewed as a second-tier task and executives assume that the integration is on track unless told otherwise. Senior leadership cannot afford to allow this to happen. This team needs to take collective ownership of integration oversight and progress and share accountability for results. Another way to ensure visibility is to put an existing member of the senior leadership team in charge of integration oversight and monitoring. Again, the idea is to work within the established governance structure. In other words, the post-close integration process should be recognized as within the normal responsibilities of the full senior leadership team. Attaining deal value is part of operating the business, so integration oversight should be a visible part of this team’s agenda. By naming a senior executive in charge of post-close integration execution, a company sends a powerful message both internally and externally that it is committed to achieving the desired merger
Since capturing the integration’s intended value is critical to the business, senior leaders should directly monitor its progress.
outcomes. Of course, this executive can’t go it alone and will need help from other executives. These individuals should also naturally be drawn from the company’s senior leadership — line of business executives as well as other functional heads to give the integration enterprise-wide clout. To help it with its work, this team will leverage a comprehensive implementation road map designed by the pre-close integration team that highlights major execution tasks and risks, the interdependencies among business areas, and the overall complexity of the migration plan. Such a plan should help establish roles, responsibilities, and decision rights. The broader senior leadership team itself does not necessarily need to act as a formal steering committee, but rather as a body that regularly meets for other purposes and includes integration on its agenda. Again, the point is to avoid creating a new structure in the organization to handle integration issues, instead making integration oversight a natural part of the existing structure and fostering ownership of the integration effort broadly within the senior leadership team. Recall that one of the “four deadly sins” is devolving the full responsibility for the integration to the business areas too soon. When decision rights are handed over to lower management prematurely, the senior leadership team loses focus on the integration and assumes that it is on track. But as noted before, the business areas are focused on operations and performance. They’re fighting too many fires every day to stay focused on the integration; pretty soon, nobody’s really paying attention and the integration gets lost in the swirl of daily events and forgotten. Two years later, senior leadership realizes that the chance to capture all the operational advantages promoted by the pre-close team has been permanently lost. Thus, maintaining the integration’s visibility in the executive suite for a sustained period of time is critical to achieving desired outcomes. With oversight a normal part of the senior leadership team’s agenda, the integration can continue in parallel with the rest of the business operations for as long as is necessary to ensure that the company captures the merger’s ultimate value.
Maintaining business momentum
The business faces the formidable task of executing normal operations while post-close integration is in progress. This requires balancing a range of objectives to ensure that the business areas maintain their focus and momentum. Insulate the business from disruption. The primary objective is to not allow post-close integration to displace normal operating protocols, since that might undermine ongoing operations. Avoid making integration overly intrusive, and maintain the right degree of separation from operations. Preserve the focus on performance. Postclose integration completion may be job 1A, but maintaining service delivery standards is still job 1. Stick to existing operating plans, and make executing day-to-day business and achieving performance targets the highest priorities. Capture the identified synergies. Fulfilling the original vision for the combined company depends on delivering the anticipated synergies from the merger. Sustain this effort through its conclusion, even when the early results are encouraging and seem to indicate the need for a lighter hand. Achieve the steady-state model. Adhere to the plan, and finish the tasks and projects associated with getting to the planned end state. This achievement will enable the new company to turn its attention to enhancing the business position — not just shrinking it. Execute against the stated business strategies. No organization can remain internally focused for very long without losing market momentum. The merging companies need to move from an integration focus to the strategic direction envisioned for the combined company so it can begin to build a competitive advantage.
To understand if merger integration is capturing intended synergies and value, senior leadership needs to develop a performance scorecard across two broad outcomes: a financial category, which focuses on external commitments through metrics such as synergies capture and working capital improvement, and a nonfinancial category, which focuses on internal performance through metrics such as impacts to the workforce and progress against milestones. Financial outcomes are, in particular, often poorly tracked. They frequently are simply assumed to have occurred because they were offset against the original budget. But without the capability to understand merger-specific financial results, financial success may be difficult to pinpoint and the value of the merger hard to demonstrate. Maybe the company did reduce expenses as the planned budget called for, but did that savings come from integration synergies or because the company simply did not spend the original monies it had budgeted? Often the answer is unclear. If senior leadership wants to ensure the confidence of stakeholders, it cannot permit any confusion about meeting its commitments or its expected financial outcomes. For instance, after the transaction closes, management’s attention immediately turns to delivering on first-year earnings commitments because Wall Street and shareholders are paying close attention. But sustaining their confidence takes more than achieving stated earnings goals; management also needs to confirm that they have achieved the goals from the merger itself, not just those obtained from conducting business as usual. Making this distinction clearly takes well-defined, closely monitored financial metrics focused on a few key merger outcomes. To state the obvious, proving the value of the merger depends on management’s ability to measure whether tangible value has actually been realized or if the true situation is masked by other business outcomes that may provide a misleading sense of security. Whatever metrics are chosen, it’s critical that they align with traditional business area performance metrics so management can work toward
If merger-specific results are not understood, financial success may be difficult to pinpoint and the value of the merger hard to demonstrate.
the broad overall expectations of the merger and not just toward individual integration targets. To optimize post-close integration and business area operations, management needs to be able to view results and understand progress individually by source — from both integration and operations — not just as a single, fungible dimension. They must have the insight to distinguish actual accomplishment. Once these metrics are in place, management still needs to maintain the organization’s focus on performance. As noted earlier, one way to keep the integration visible is to make it part of the regular leadership agenda. Companies might also link individual executive incentive plans to achieving expected results. Sharing the risks and rewards of the integration through incentives is a powerful way to align senior management accountability around merger objectives, and it’s another way the company can demonstrate its commitment to capturing the deal’s value. Generally speaking, these incentives should continue for however long it takes to realize outcomes through steady-state operations. Another strategy for keeping the organization focused on integration objectives is ongoing formal and informal communications after the official close date. These communications should consistently reinforce the strategic themes of the merger and how these themes relate to the new operating model. Ultimately, integration depends on the workforce’s full alignment with the strategic objectives of the new company. Change leadership and cultural assimilation cannot be accomplished without a disciplined communications strategy.
Minimizing outcome risk
A merger’s success is far from ensured when the transaction closes; indeed, there is still significant “outcome risk” that management has to overcome during the post-close integration period. But the risks of failure can be avoided if management recognizes that integration success cannot be taken for granted. For starters, the senior leadership team needs to facilitate a smooth transition from pre-close integration planning to post-close integration execution, and then begin coordinating the integration effort with ongoing operations. This coordination is not always easy. As noted earlier, the integration process is geared to accomplish a list of tasks quickly, while operations wants to minimize disruptions from integration in order to maintain daily performance. Balancing these priorities takes not only adroit management but also endurance, since the post-close period can continue for two or three years. Trade-offs are inevitable along the way. The key to making the correct trade-offs is establishing the right overall priorities for the business and understanding what is being gained and what is being forgone by the enterprise each time a trade-off must be made. As management wrestles with these issues, it must guard against the temptation to second-guess the pre-close integration team’s decisions and objectives. Following the original pre-close integration plan provides management’s best chance to align integration and operating objectives into a cohesive whole. Given this complexity and the high stakes, senior leadership needs to remain directly engaged in the integration effort. To keep the integration visible and top-of-mind, oversight should be on the executive team’s regular agenda and spearheaded by one of the existing executive team members. Oversight should not be delegated down the organization or devolved prematurely to the business areas; management in these areas invariably gets distracted by day-to-day activities, the merger priorities are forgotten, and the value is permanently lost.
Management sometimes convinces itself that it can delay some objective and fix it later at a more convenient time. But this is a false hope. In reality, it’s impossible to revisit a failed integration. Management must get it right the first time, or the value will be permanently lost.
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This report was originally published by Booz & Company in 2012.
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