According to Bain M&A could account for 50% of revenue growth in banking and financial services in the years ahead, an increase from the already high 35% rate. As the M&A environment remains hot, traditional banks are facing increasing disruption from private equity firms and digital-native banks.
Success of M&A deals often comes down to three areas in my experience; management of leadership egos, an ability to integrate at least two cultures together, and an ability to learn from past experience so investors understand the challenges an integration can bring. These challenges aren’t often taught at business school, so leaders have to quickly learn from experience to navigate through them.
Manage egos to make integration work
A well-developed ego is of course necessary to make a deal happen in the first place – it requires a big, brave, and bold personality. But to make the integration work that well-developed ego needs to be reined in.
When it comes to determining future leadership roles, both sides jostle for position with the buy side working out the roles they want in the newly enlarged business. One CEO I worked with proudly declared ‘let’s get our retaliation in first, we won’t have anyone from that side on our Executive team’.
So how do you best manage egos?
- Communications must be clear. I led a merger once where the CEO assured everyone it was a merger of equals, but then quickly changed language and behaviour to a takeover. If the intention is to take over a company, be clear on that from the beginning.
- Engage the acquired organisation with kindness and respect. Operating with kindness and respect leads to a culture of generosity in an organisation where people are willing to go the extra mile for each other. This can have a multiplier effect particularly now as workforces are more fragmented.
- Ensure the integration team remains independent. In your integration team you need people who don’t take ‘sides’ and will work objectively to get to the right answer. It’s worth spending time to hire smart people with the confidence to speak up and do the right thing. Getting them on board early and well before day one ensures you can plan accordingly.
- Rein in those who can’t keep their ego in check. When executives can’t put their egos in check, then it’s best to reassign these people to roles as far away from the integration action as possible.
Prioritise the integration of two or more cultures
Most organisations are made up of a corporate culture and many sub-cultures often at a function, service, or geographic level, and sometimes even down to a team level. In a merger when you assume you’re bringing together two cultures it’s often significantly more than that – you’re bringing together people with very different sets of values, behaviours, leadership styles, mindsets, and policies. The integration challenge is winning the hearts and minds of all employees and giving them a compelling vision to buy into.
To integrate multiple cultures together:-
- Diagnose current cultures, including subcultures to understand the baseline you’re working from. Then define the future end state culture. Even if you’re adopting the buyers culture find one or two cultural characteristics from the organisation you’re acquiring.
- Stabilise leadership roles. Settling leadership roles quickly to identify who can then help stabilise the rest of the organisation is an important step. It might also provide the opportunity to make changes in the leadership positions that aren’t necessarily related to the deal. In a context where change is already expected, there are opportunities to look at teams and departments who might be underperforming or could use a shakeup and position the move as part of the broader integration process.
- Invest time in building great relationships with the organisation being acquired. This can pay dividends later on and will ensure the transition is seamless. Too often, leadership teams turn inwards, let their ego dominate and fail to build relationships with their new colleagues. The best integrations ensure the leadership teams of both organisations come together through the integration process to talk about joint objectives, make plans and start to work together.
- Get day one right. The first big milestone of any merger or acquisition is ‘day one’ and having in place a clear blueprint, that everybody agrees with, for how you are going to operate. Every detail is important and needs to be communicated and understood appropriately. Getting ‘day one’ right is an important step in creating momentum and credibility in the organisation, so it’s one worth really investing time and energy in.
- Find symbols of change to introduce new ways of working can help smooth the integration process. To support the implementation and adoption of the integration plan, it’s important to ensure that the integration is at the forefront of colleagues’ minds. The best way to do this is through a steady cadence of visible acts of change or “symbols of change.” These will introduce the new way of doing things – for example, sharing success stories, leadership being visible at key customer sites or co-creating a new vision, mission, and values together. Every conversation around the integration with both parties needs to demonstrate the new culture.
Learn from past experience
In mergers and acquisitions, nothing quite beats past experience. Coupled with this there is often a sense of mystery and intrigue surrounding mergers and acquisitions which can lead people to throw everything they’ve learned out the window. Like any programme of change capturing lessons learned should be an on-going effort. This mindset should be strongly encouraged by the Integration Director from day one. By not learning from failures, we are inclined to repeat similar patterns. By not maximising on deal and integration successes, we potentially miss opportunities to implement good practices to successfully complete existing and future integration work.
To best learn from past experience: –
- Lay out the rationale. Determine why are we doing this, and how does it fit within our business and strategy going forward? Then it’s about setting out the steps of the integration because there’s always going to be disruption in the process, and it often comes from external forces like competitor moves or customer needs changing. Most importantly, make sure people are prepared, that they know their roles and what delivery is supposed to look like. Once you have that, more than half the battle is already won.
- Manage your reputation. Unfortunately, reputation is built on the last bad transaction that you’ve executed or failed to do. Really understand the acquirer’s ethos in terms of who they are and how do they work. Are they honest people with integrity? Is this an organisation that has a genuine culture? Of course, a lot of M&A is about EPS (earnings-per-share) growth and other tangible factors, but people and cultural factors are also critical.
- Ask what an activist investor would focus on. If management is not open to a different perspective, it’s never a good thing. It’s best in the long run not to underestimate how inciteful an activist investor or outsider can be. They can often have an outside perspective and have visibility to a wider range of strategies being deployed across the market.
Whether the initial market reaction to a deal is positive or negative, leaders should maximise their efforts to explain a deal’s value to the board, to increase transparency in communications with investors, and to execute the integration correctly. Directors need to understand the value-creation thesis and how the company will pursue it and this needs to be communicated to investors with a realistic account of when value is realised and what it really takes to achieve it.