Integration Planning: The key to managing risk and securing value

The importance of integration planning in managing risk and securing value when conducting transactions cannot be over-emphasised. This is particularly true in the case of emerging market and cross-border transactions.

In the current environment of record-breaking M&A volumes, increased deal complexity, intense stakeholder scrutiny and a heightened focus on managing transactional risk, organisations need to be clear on how they intend to extract value from a transaction, how it will operate on a daily basis, and how risk issues will be addressed.  A clearly defined post-transaction integration strategy will proactively address these issues.  

Increasingly, organisations are realising the importance of post-transaction integration and are putting necessary integration plans in place early on in the transaction.  Integration plans aim to align the transaction with the organisations vision and strategic objectives, identify value sources, mitigate transactional risks and more importantly, clearly understand how the transaction fits in the organisations operational strategy.  

To effectively manage integration risk whilst simultaneously realising full value from a transaction, a well thought out integration strategy needs to be designed and implemented.  Integration strategy becomes more significant in a cross-border transaction, and more importantly, in emerging economies. There are two reasons for this. First, the growth in M&A values in many emerging markets has surpassed the growth in global transaction value. In China alone, M&A value was up 40% in 2006, while triple-digit growth has been recorded in a number of emerging markets. Secondly, emerging markets havent had the same amount of investor focus previously, and familiarity with the market and understanding of its unique challenges, is often a challenge.

As investing organisations turn their attention to international opportunities to achieve high growth and competitive advantages, successful transactions are increasingly being achieved in non-traditional markets. But the perceived risks involved in conducting transactions in unfamiliar markets as well as the disappointing track records of many deals are issues many organisations struggle to come to grips with.

To ensure the correct alignment of transactions with strategic imperatives, leading organisations identify and quantify transaction value drivers and risks by conducting a comprehensive due diligence process and opportunity analysis at the outset. This process clearly defines targets and measures, identifies potential risks and works towards a clear understanding of how to realise value from the deal.

It is crucial for organisations to focus on the need for integration and change early on in the transaction. Throughout the lifecycle of a  transaction, leading organisations take a holistic, multi-disciplinary view, taking into account, among other things, business objectives,  organisational structures and policies, facilities, systems and IT infrastructures, financial and operational reporting, people and cultural constraints, diversity issues, market reaction, as well as time and resource considerations, and begin to work toward addressing key integration issues.  

Another critical area to conducting the transaction is the area of leadership.  Leadership needs to be identified and empowered early on in the transaction and this is especially the case for a foreign acquirer.  Priorities through the transaction process need to be guided and managed by this appointed leadership and will need to stay focused on completing priority initiatives post-close. Leadership also plays a critical role in mitigating critical risks, such as retaining key talent, in the face of increased uncertainly which often accompanies such transactions, as well as communicating a clear and consistent message and maintaining relationships, both with external stakeholders, as well as internal ones, namely staff.

Leadership also plays a crucial role in aligning the two organisational cultures into one and ensuring sufficient change capability is present to embed the planned changes, without disruption to day-to-day operations.

Turning attention to potential loss of value, the outcomes of a transaction may fall short of targeted goals for various reasons.  Lack of experience with a product, process, market, culture, country or industry might distort the identification of transaction value and is often the case for cross-border transactions.  Another area resulting in value loss is that of synergy opportunities being overlooked.  Risk external to the organisation in a foreign market may also hamper the realisation of transaction value for example, lack of knowledge around the target market, consumer base and competitors. Effective integration planning will ensure transaction risk is mitigated, while the overall transaction results in value and the areas of unidentified value are addressed.

South African M&A volumes are reflective of global M&A activity and as the country begins to take its place on the global transaction stage, it is crucial for foreign organisations/investors to keep in mind how important integration planning is when considering a transaction in South Africa. According to Ernst & Young's 'Review of M&A Activity for 2006', South Africa recorded a combined disclosed deal value of R284 billion for 2006 compared to R269 billion in 2005.

The following points should be kept in mind when contemplating transactions in South Africa:

* Ensure the transaction's strategic objectives and integration plans are aligned
* Assign transaction and integration process leadership early on
* Pay significant attention to integration planning
* Conduct a comprehensive opportunity analysis at the outset
* Clearly identify and establish value outcomes
* Identify and prioritise risks
* Communicate clearly and lead change

With global M&A volumes heading towards an all-time high, the importance of transactions, and more specifically, cross-border transactions, to an organisation's growth strategy cannot be underestimated.   However, the rate of transaction failure and the percentage of organisations unable to manage transaction risk is still relatively high.  This failure rate is often symptomatic of inadequate integration planning.  To harness transactional risk and to reap the full benefits and value of a transaction, and in particular, a cross-border transaction, it is crucial to consider integration issues throughout the transaction cycle and not at deal closure.  

By Dave Thayser, Director for Transaction Advisory Services at Ernst & Young