Inside Post-M&A Integration: A Conversation With Paul Swaney On Key Challenges & Lessons Learned
To close out our post-merger integration series, we had the opportunity to sit down with our founding partner and Managing Director, Paul W. Swaney III. In this conversation we discussed a tumultuous integration experience between two major entities, that, for all intents and purposes, should have worked on paper. Paul gave us the background on why the merger occurred, what some of the major issues were, and why having a robust plan before execution is critical for a merger’s success.
Bo: Paul, thank you for sitting down with us today. As you know, we have been articulating what are the steps to leading a successful merger over the past 8 weeks. I understand you have extensive experience in this area, including both successes and failures. You mentioned the other day, that led to this interview, a particularly tough failed merger between two large entities. To hop right into it, can you give us some background and looking back, what initially sparked the idea or the need for a merger between these two companies, given their distinct positions in the market?
Paul: So, the company had the idea of taking on a services business that was highly successful, highly profitable and merging it with a product business. Then, basically they could just add a couple extra pages to the back of the service business sales reps’ catalog, and vice versa, and then cross sell across both business units with the thesis that they could vertically integrate between the two businesses.
B: It sounds like there was some product and service fit, from an external perspective. In terms of strategic alignment, can you expand on how the strengths of both companies were envisaged to complement each other?
P: The thought process was that you have a captive customer base, and they must get replacement equipment somewhere. So, the thought was if you could buy a refurbishment business, the customer’s natural bias would be to go to the same providers - mostly due to overarching trends of supplier consolidation, etc. Similar combinations had worked since the global financial crisis.
B: Makes sense. Of course, one of the most intangible yet significant challenges in a merger is aligning organizational cultures. How did the cultures of the two companies differ, and what steps were taken to ensure smooth cultural integration?
P: The two businesses had polar-opposite cultures; Company A, the service business, had what I would call an extremely process driven mindset, very disciplined GDP-growth plus, highly focused on servicing their core customers. The type of mindset that is slightly over indexing to servicing customers, but under the assumption that slow and steady wins the race. Whereas, Company B was a lot more entrepreneurial, and centering on spearfishing new large accounts. The classic big wins, big accounts, big sales mentality. So naturally, the culture conflict of merging these two businesses together was identified in diligence as a potentially large friction point.
B: It sounds like some of our tools here at Swaney could have provided some impact. Given our 11-step PMI process, were there specific stages that required more attention or presented unique challenges when integrating these two entities?
P: Balancing the two elements of the cultural assessment and harmonizing the organizational structure was a bit of a delicate tight rope walk, mainly because of the differences in the organizational cultures. This was specifically identified during the diligence process, but the team put their best foot forward to be competitive. The team wanted to focus on preserving what made each of the respective companies good. Essentially, the thought was after closing the transaction, NewCo could just combine the two names and we’d be off to the races.
Conversely, for me it’s simple, in mergers you need to have one company swallow the other company and set the workflow and strategic vision up that way. I believe the “merger of equals” paradigm doesn't tend to yield the results that I think people are looking for in the long run. In my opinion, the best mergers were the pharmaceutical mergers of the 2000s, like when Pfizer swallowed Wyeth. From day one and within 90 days, the Wyeth signs and Wyeth uniforms were all gone.
B: That is a poignant example, and I think begs the questions of execution once the deal is made and the merger really begins. In the process of actualizing the merger's intent, how important was the role of continuous monitoring and adjustments? Were there instances where the original blueprint had to be significantly tweaked?
P: In the context of this merger, the moderation and adjustment were not done very well. Which was a critical miss; monitoring and adjusting is so important in a merger that it cannot be overstated. What happened in this case with this newly merged entity is the over-covering of the lagging portion of business, and focus being taken away from the stable services side.
Even when that was identified, the reaction was too slow. To me, identifying a critical error and correcting it is one of the most difficult things you can do, especially when that means shifting major focus back over to the core business that will be sustainable. It would have been much easier had proper monitoring metrics been put in place to better head off this issue sooner.
B: Interesting, so these issues started to appear over time. Or, at least, grew from small to large. After the merger, it's evident that the union between the companies faced some challenges that led to its ultimate setback. Can you shed light on the key issues that arose, and the attempts made to address them?
P: The cultural challenges predicted between the two different styles of operating evidently became larger than anticipated, you know, within six months after the merger. Multiple executives were swapped out (and some just resigned), multiple board directors were replaced and unfortunately the necessary changes were not acted upon fast enough. The key issues here were speed of execution and focus on the proper businesses or proper areas of business that could return to profitability. Everyone at the time was doing surface level, incremental change and believing that was sufficient. In hindsight, this was a time where you need to be decisive and remove sections of the dying business swiftly vs. softly and gently tweaking some things.
B: Hindsight can certainly be 20/20, especially where decisiveness is concerned. I think that alludes back to your earlier point about monitoring and adjusting as early as possible. To that point, drawing from this experience, what advice would you give to other leaders considering a similar venture?
P: The biggest thing is you can't omit steps in the process, and just because something looks good on Excel or presents nicely in a business school case study format does not mean it will pencil out in the real world. The cultural aspect cannot be underestimated here; I much prefer building a tuck-in acquisition machine on a leveraged buyout versus doing a transformative and fundamentally changing the business.
Also, you must always come back to what does the organizational structure looks like. Are you going to integrate, federate, or innovate? Personally, if we are executive a transformative, I tend to federate for the first 12 to 18 months and then bring the rest of the business on slowly. A lot of times in the context of private equity investment, you start running up against shot clock, but it's much better to have an independent business unit running successfully versus force fitting something together when the management just doesn't have the capacity to integrate the business.
B: What I am hearing you say is that it takes a different level of analysis outside of the spreadsheets and numbers; a more human-centric look at the business from all angles. Doing so will help you form a cohesive plan prior to executing the merger. Which makes a lot of sense when you put it that way. However, as we wrap up, what's the one major learning or takeaway from this merger that you believe would be instrumental in shaping future strategic decisions for the Swaney Group?
P: Exactly. I’ve seen over a hundred different acquisitions and mergers: some transformative, some incremental, or tuck-in. I've always had a hypothesis about what it takes to lead a successful merger and integration or carve out, and these experiences of seeing the wins and the losses help me put down on paper very, very clearly what needs to happen. You can't skip any of these [11 PMI] steps.
From an integration planning perspective, you've got to be planning during diligence exactly what you are going to do after execution, and it needs to be relatively rigid plan. From a PMI team perspective, you need to know who is going to lead these things and you need to overstaff resources because it will be an add-back later. If your integration cannot support a proper PMI team, then it's not worth doing. Currently, we've got rising interest rates; right now, might not be the best time to use your delayed draw term loan to swallow up a business because it's available.
Simply put, clearly have integration goals, make sure that make sure that you know exactly what you need to do and when you need to do it and then call the integration done when it's done. A lot of times integrations are allowed to linger for two years and it’s always a negative, at some point you need to call an end date.
I would also harp on communicating effectively. I cannot stress this enough, and it is a better forum to talk about this in an interview here than in one of our previous articles. The length and width of the productivity drop associated with a merger, particularly for the sales team, is inversely proportional to the amount of communication you give internally. You must get communication across as many media platforms as possible; you must message it across, you know, town halls, newsletters and supervisor communications.
You should pull together your key leaders, your key contributors, your sales team and get them comfortable with the notion that they have homes in the new organizations. Concurrently, if you are going to rationalize some parts of the business, do that as quickly as possible and then make sure everybody understands the mentality and perspective.
From an organizational structure and cultural assessment standpoint, make sure this is focused on and done well. This doesn't need to be static, right, you can go step one, two, three, etc. In as far as organizational structure and culture goes, pick specific things you want to preserve from company A and Company B, and things you want stop or adjust as you start and continue as you progress. Really lean into specific cultural interventions; this is a time that those off site, ‘UN’ boondoggles are most valuable, if only because you get your senior team to start talking. Kill the cell phones, get everybody in the room, go out have a nice dinner, plan the goals, play in the future, get everybody know each other’s kids’ names and families’ names and that way that you can prevent a ‘Lord of the Flies’ situation across the merged functions.
From a systems and processes integration perspective, again, I go back to the thought “do you want to integrate, do you want to federate, or do you want to innovate?” Make sure you've made a detailed list of all the critical processes for each team (and that goes for IT as well!), as well as what you want to preserve, what you want to get rid of and what you want to get that is or will be new.
One of the more critical, and often overlooked aspects, is retaining key talent. People need to be challenged and incentivized, so the dynamic environment of a merger has the unique value proposition of acting as a leadership forge. You can give a select individual a step up in the new team, and you basically get around six months in a controlled environment to pressure test their leadership skills. This is a great way to see who's going to make it in the new organization, in a bigger organization and an organization that could potentially be more demanding since you're changing the culture.
And then the last major thing I want to mention is monitoring and adjusting. Make sure that the steering committee and the steering team do not lose interest after three months. My go-to timeline is a year; you should be monitoring and adjusting this for a year, and it should be weekly to biweekly check-ins for the first three to six months at a minimum. These challenges are going to bubble up to you in six or nine months without constant monitoring and adjustment, and once the results show up in EBITDA it's about nine – twelve months to fix it.
B: This has been incredibly insightful, and I think it is important to reiterate how the key points made in our conversation have been learned through successes, and even more importantly, failures. To me, it really highlights the need for a cohesive plan early on; the next step would be to hold a framework, much like the 11 step SGOS PMI process, that gives you a robust starting point. Thank you again, Paul, for your time and lending us some of your experiences.
P: Of course, I hope I added some value today.
*We encourage you to explore our PMI series of articles over the past 8 weeks for further insights into a complex process such as M&A. In the coming weeks, we will start a new series, focused on the office of the CFO and tools for success*